Distribution law in Ukraine

Сommercial Agency Agreements are regulated by Chapter 31 of the Commercial Code of Ukraine.

Are there any formal requirements on concluding Agency Agreements?

An Agency Agreement must be executed in writing. Usually, it is executed as a single document signed by the authorised representatives of the parties and stamped by their corporate seals (although affixing a corporate seal on a contract is not obligatory under Ukrainian law, it is usual commercial practice that serves as an additional protection against falsification). Also, it may be concluded not necessarily in the form of a single document signed by the parties, but also by means of exchange of letters, faxes, etc.

At the same time, there are certain cases, where agency relations are deemed to exist without a formalised written Agency Agreement, in particular:

• if the Commercial Agent concludes business transaction(s) on behalf of the Principal in absence or in excess of its powers, and the Commercial Agent notifies such business transaction(s) to the Principal, and
• the Principal does not reject such business transaction(s) (this is deemed to constitute the Principal’s approval of such business transaction(s)).

If an Agency Agreement is entered into between a Ukrainian and a non-Ukrainian counterparty, it is often executed as a bilingual document, in Ukrainian and in the other party’s original language or in English, with indication which language prevails in case of discrepancies.

Are there any specific information obligations on concluding Agency Agreements?

There are no specific information obligations on concluding Agency Agreements.

Are there any specific pitfalls which need to be borne in mind when concluding Agency Agreements?

An Agency Agreement lacking any of the essential conditions provided by the Commercial Code is deemed as non-concluded. The essential conditions are the following:

• scope, sphere and nature of agency services;
• procedure of provision of agency services;
• amount of commission of the Commercial Agent and conditions of its payment;
• parties’ rights and obligations;
• term of the agreement;
• liability of the parties in case of breach of contractual obligations;
• and any other conditions agreed between the parties.

In addition to the essential conditions listed above, the law requires the parties to agree on the territory limiting the Commercial Agent’s authority to act under the agreement. If the territorial scope is not specified in the agreement, the Commercial Agent is deemed to have authorization within the territory of Ukraine.

An Agency Agreement should also contain conditions of the form of the document (e.g. power of attorney) issued by the Principal to confirm authorities of the Commercial Agent.

Are the parties free to agree on the scope of the Commercial Agency?

The Principal and the Commercial Agent are free to agree on the scope of the Commercial Agency. An Agency Agreement must in any event contain all essential conditions listed above.

Ukrainian law differentiates between non-exclusive and exclusive Agency Agreements. In non-exclusive Agency Agreements, the Principal may appoint other Commercial Agents (subject to notification of the previous Commercial Agent(s)), as well as the Commercial Agent may act on behalf of other Principal(s), unless the interests of the Principals represented by the same Commercial Agent are controversial. In case of exclusive Agency Agreements, the Commercial Agent is not allowed to act on behalf and for the benefit of other Principals within the scope and term of the Agency Agreement.

The Regulation of Antimonopoly Committee of Ukraine (“AMCU”) on vertical restraints (AMCU Regulation No. 10-рп of 12 October 2017) sets forth that Agency Agreements do not constitute vertical concerted practices, and therefore are not subject to prior antitrust clearance, provided that the Commercial Agent undertakes no or only insignificant commercial and/or financial risks. At the same time, Agency Agreements may constitute vertical concerted practices and may require prior antitrust clearance, if at least one of the below conditions is met:

• the Commercial Agent contributes to the costs relating to the supply/purchase of contractual goods (except for transport costs, provided that the costs are covered by the Principal);
• the Commercial Agent undertakes the Principal’s costs for advertising;
• the Commercial Agent maintains at its own cost or risk stocks of the contractual goods of the Principal (unless the Commercial Agent is liable for loss or damage of stocks);
• the Commercial Agent undertakes responsibility for post-sale repairs or warranty maintenance of goods at own expense;
• the Commercial Agent makes market-specific investments in equipment, premises or training of personnel (unless these costs are fully reimbursed by the Principal);
• the Commercial Agent undertakes responsibility towards third parties for damages caused to consumers by contractual goods (unless it is liable for defects as the Commercial Agent under statutory provisions);
• the Commercial Agent undertakes responsibility for customers’ non-performance of the contract (unless the Commercial Agent is liable for own negligence or inaction);
• the Commercial Agent undertakes other costs and risks in connection with activities required by the Principal within the same product market (unless these costs are fully reimbursed by the Principal).

What are the primary obligations of the Commercial Agent and the Principal?

The Commercial Agent has the following primary obligations based on statutory law:

• to act as an agent on behalf and in the interests of the Principal, under Principal’s control and at Principal’s expense;
• to notify the Principal on each business transaction concluded on behalf of the Principal;
• to act personally and not to assign any of its rights under the Agency Agreement to third parties, unless otherwise agreed in the Agency Agreement;
• not to disclose confidential information of the Principal without its consent;
• not to use confidential information of the Principal for Commercial Agent’s or third parties’ benefit if that contradicts to the Principal’s interests (this obligation remains in effect even after expiry of the term of the Agency Agreement).

The Principal has the following primary obligations based on statutory law:

• to provide the Commercial Agent with the necessary means for performing its obligations under the Agency Agreement;
• to pay commission to the Commercial Agent;
• to reimburse Commercial Agent’s expenses, borne in connection with its activity under the Agency Agreement.

How is the Commercial Agent paid?

The Commercial Agent’s commission and terms of its payment shall be agreed in the Agency Agreement.

Unless otherwise agreed therein, commission to the Commercial Agent shall be paid after once the Principal receives payment from third parties under contracts concluded with the assistance of the Commercial Agent. The Agency Agreement may also prescribe additional commission payable to the Commercial Agent, in cases where the Commercial Agent undertakes to guarantee performance by third parties under the respective contracts with the Principal.

The Agency Agreement may additionally provide for payment of the commission to the Commercial Agent for contracts with third parties concluded after expiry of the Agency Agreement.

Term of the Agency Agreement

Term of the Agency Agreement is an essential condition of this type of agreement, and thus should be stipulated therein.

There are no statutory rules on the term of the Agency Agreements and the parties shall agree on it at their discretion.

Termination of the Agency Agreement

Unless other grounds for termination are provided in the Agency Agreement, it may be terminated:

• by mutual consent of the parties;
• by either the Principal or of the Commercial Agent (with at least one month prior notice), however only in cases where (1) the Agency Agreement is concluded for an indefinite term, or (2) the Agency Agreement is concluded for a fixed term, but the parties explicitly agreed on such possibility therein;
• in case of termination / liquidation / death of either party;
• by the decision of court (in case of a dispute).

The compensation claim as main consequence of the Agency Agreement's termination

In case of termination by the Principal, the Commercial Agent has a right to receive its commission calculated proportionally to the services provided under the Agency Agreement, reimbursement of incurred expenses, as well as compensation of direct and indirect damages and/or lost profits (the Agency Agreement may provide for limitations in respect of compensation of damages).

In case of termination by the Commercial Agent, the Principal has a right to receive from the Commercial Agent compensation of direct and indirect damages and/or lost profits (the Agency Agreement may provide limitations in respect of compensation of damages).

In case of a contractual breach, the liable party may be obliged to pay the other party the following:

• compensation for direct and indirect damages and/or lost profits (the Agency Agreement may provide limitations in respect of compensation of damages);
• penalties (fine, late payment interest).

Other consequences of the Agency Agreement's termination

Ukrainian law does not directly provide for a possibility to impose a post-contractual non-compete obligation under the Agency Agreement (unlike, for example, for franchising agreements). Nevertheless, the parties may agree on such obligation to be imposed on the Commercial Agent under the Agency Agreement, provided that the term of such obligation does not exceed 5 years. Post-contractual non-compete obligation in excess of 5 years or for indefinite term is subject to prior antitrust clearance by the Antimonopoly Committee of Ukraine.

Any claim arising from an Agency Agreement – also the compensation claim – is subject to a three-year limitation period, starting from the moment when the claimant discovered or should have discovered the contractual breach or existence of other circumstances giving rise to the claim.

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There are no specific statutory rules providing regulation for Distribution Agreements, thus Distribution Agreements are concluded based on the rule of freedom of a contract, applicable general principles of the Civil Code and the Commercial Code of Ukraine, as well as customary business practices.

Are there any formal requirements on concluding Distribution Agreements?

The Distribution Agreements must be executed in writing. Otherwise, no particular formalities are required. Usually, it is executed as a single document signed by the authorised representatives of the parties and stamped by their corporate seals (although affixing a corporate seal on a contract is not obligatory under Ukrainian law, it is usual commercial practice that serves as an additional protection against falsification).

The Distribution Agreement may be concluded also by means of exchange of letters, faxes, etc.

If a Distribution Agreement is entered into between a Ukrainian and a non-Ukrainian counterparty, it is often executed as a bilingual document, in Ukrainian and in the other party’s original language or in English, with indication which language prevails in case of discrepancies.

Are there any specific information obligations on concluding Distribution Agreements?

There are no specific information obligations on concluding Distribution Agreements.

Are there any specific pitfalls which need to be borne in mind when concluding Distribution Agreements?

Depending on a particular industry where market players operate, specific rules may additionally apply to Distributors, e.g., in (pharmaceutical industry there are additional requirements to the Distributors’ personnel, storage facilities, etc. in particular, the Distributor should guarantee that medical products are stored, transported and handled in suitable conditions.

Are the parties free to agree on the scope of the Distribution Agreement?

The Distribution Agreement must contain essential conditions, such as scope of the activities of the Distributor, its duration and price.

Though the Principal and the Distributor are, in principle, free to agree on the scope of the Distribution Agreement, there are certain statutory limits, mainly based on the competition legislation. 1 The most relevant acts are the Law of Ukraine “On Protection of Economic Competition” No. 2210-III as of 11 January 2001 and the Regulation of Antimonopoly Committee of Ukraine “On Approval of Typical Requirements for Vertical Concerted Actions of Business Entities and Amendments to Typical Requirements for Vertical Concerted Actions of Business Entities for the General Exemption from Prior Clearance Approval of the Antimonopoly Committee of Ukraine” No. 10-рп as of 12 October 2017 (“Regulation”).

In particular when it comes to limiting the geographic region in which the Distributor may (or may not) sell the goods and the customers to which it may (or may not) sell them, such limitations are generally prohibited.

Non-compete obligations may be agreed only for a period five years or less. Non-compete obligations in excess of five years require prior antitrust clearance by the Antimonopoly Committee of Ukraine.

The Principal is generally not allowed to influence the Distributor's resale price of the goods, except for providing lists of maximum or recommended prices, which shall not, however, lead to pressure from the Principal.

What are the primary obligations of the Distributor and the Principal?

The Distributor has the following primary obligations:

• to pay to the Principal for the delivered goods;
• to distribute the goods;
• to maintain storage facilities suitable for efficient distribution of the goods;
• to provide the Principal with relevant information regarding the market, (potential) customers and requirements concerning the goods.

The Principal has the following primary obligations:

• to deliver all goods of quality and quantity ordered by the Distributor in due time;
• to support the Distributor with respect to the Principal's business (for example in providing advertising materials, etc.);
• to inform the Distributor on any changes with regards to goods (for example changes of product lines, etc.);
• to grant rebates to the Distributor, if so agreed in the Distribution Agreement.

How is the Distributor paid?

As a general rule, the Distributor is not entitled to a specific commission for its distribution activities. The commission of the Distributor consists of the profits it generates in purchasing the Principal's goods with a rebate and selling them to its customers at a higher price. The parties may, however, based on the principle of freedom of a contract, agree on additional commissions such as minimum monthly payments, bonuses, etc.

Rebates schemes (if any) should be carefully drafted, as their implementation may potentially have anticompetitive effects and thus, expose both the Principal and the Distributor to liability (especially, in case of retroactive rebates).

There are no statutory rules on the term of Distribution Agreements. The parties are free to set out the contractual term at their discretion.

Termination of the Distribution Agreement

Unless other grounds for termination are provided in the Distribution Agreement, it may be terminated:

• by the parties’ mutual consent;
• by the decision of court (in case of a dispute).

Unilateral termination of the Distribution Agreement by any party is prohibited, unless explicitly provided for in the Distribution Agreement.

There is neither indemnification nor compensation claim as the consequence of a Distribution Agreement`s termination.

Under Ukrainian law, termination of the Distribution Agreement does not constitute a ground for indemnification or compensation.

In case of a contractual breach, the liable party may be obliged to pay the other party the following:

• compensation for direct and indirect damages and/or lost profits (the Distribution Agreement may provide limitations in respect of compensation of damages);
• penalties (fine, late payment interest).

Other consequences of the Distribution Agreement's termination

Ukrainian law does not directly provide for a possibility to impose a post-contractual non-compete obligation under the Distribution Agreement (unlike for franchising agreements, for example). Nevertheless, the parties may agree on such obligation to be imposed on the Distributor under the Distribution Agreement, provided the term of such obligation is not in excess of 5 years. Post-contractual non-compete obligation in excess of five years or for indefinite term is subject to prior clearance by the Antimonopoly Committee of Ukraine.

Any claim arising from a Distribution Agreement is subject to a three-year limitation period, starting from the moment when the claimant discovered or should have discovered the contractual breach or existence of other circumstances giving rise to the claim.

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