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Q&A Distribution agreements

Part 1: Legislative framework

Q1Please specify the legislative framework generally applicable to the conclusion and execution of distribution agreements (a)? Please include a link to the official publication of the applicable rules (e.g., relevant link to the Official Gazette) (b) and, if available, to the English translation of the legislative framework (c). 

a. Legislative framework:

Competition Act (in Estonian: Konkurentsiseadus) Grant of Permission to Enter into Vertical

Agreements which Restrict or May Restrict Free Competition (Group exemption) (in Estonian: Konkurentsi kahjustavate või kahjustada võivate vertikaalsete kokkulepete sõlmimiseks loa andmine (grupierand))

Law of Obligations Act (in Estonian: Võlaõigusseadus)

b. Link(s) to official publication:

The Estonian version of the Competition Act is accessible via this link.

The Estonian version of the Grant of Permission to Enter into Vertical Agreements which Restrict or May Restrict Free Competition (Group exemption) is accessible via this link

The Estonian version of the Law of Obligations Act is accessible via this link

c. Link(s) to English translation:

The English translation of the Competition Act is accessible via this link

The English translation of the Grant of Permission to Enter into Vertical Agreements which Restrict or May Restrict Free Competition (Group exemption) is accessible via this link

The English translation of the law of Obligations Act is accessible via this link

Q2. Other than for agency agreements pursuant to Directive 86/653 (EEC) on the coordination of the laws of the Member States relating to self-employed commercial agents, are there specific rules depending on the distribution format (e.g. franchising, exclusive distribution)? 

No.

Q3. Other than general contract law and competition law, are there other rules which may generally restrict the parties when drafting and concluding distribution agreements (e.g., rules in relation to unfair contract terms in B2B contracts, specific requirements in the context of a prohibition of abuse of economic dependence)?

Yes.

If yes, which general rules apply (a)? Where available, please also include a link to the official publication of the applicable rules (b) and to the English translation of the regulatory framework (c).

a. General rules: 

The Estonian law does not contain specific rules on distribution agreements, but the general contract law sets out that if the Law of Obligations Act (LOA) contains rules in relation to unfair contracts terms that these rules also apply to B2B contracts. In addition, the Restriction of Unfair Competition and Protection of Business Secrets Act (RUCPBSA) sets out a general prohibition on unfair competition, which should also be borne in mind in distribution relationships.

Invalidity of standard terms in B2B contracts

According to Art. 42 (1) LOA, a standard term is void if, taking into account the nature, content, manner of entry into the agreement, interests of the parties and other material circumstances, the term causes unfair harm to the other party, particularly if it causes a significant imbalance in the parties’ rights and obligations arising from the agreement to the detriment of the other party. Unfair harm is presumed if a standard term derogates from a fundamental principle of law or restricts the rights and obligations arising for the other party from the nature of the agreement such that it becomes questionable as to whether the purpose of the agreement can be achieved. Invalidity of standard terms and the circumstances relating thereto is to be assessed as at the date of entry into the agreement.

A standard term is not deemed to be unfair if it relates to the main subject matter of the agreement or to the relationship between the price and the value of the services or goods to be supplied in exchange, or if the content of the term is based on such legislation which must not be derogated from pursuant to an agreement between the parties (see, Art. 42 (2) LOA).

Art. 42 (3) LOA lists a number of occasions when a standard term is considered unfair and therefore void when the other party is a consumer: e.g., terms that unfairly restrict liability, terms that preclude the use of legal remedies, terms that require the party to pay an unreasonably high contractual penalty, terms that restrict the party’s statutory right to refuse acceptance of performance of obligations etc. If such a standard term is used in a B2B agreement, the term is presumed to be unfair (see, Art. 44 LOA).

This implies that the party relying on the term in civil litigation must prove that under the given circumstances the term is not unfair in the particular B2B context (Supreme Court ruling in civil matter 3-2-1-139-14).

Prohibition on unfair competition

The RUCPBSA generally prohibits unfair competition between all market operators. According to Art. 3(2) RUCPBSA, unfair competition means dishonest trading practices and acts which are contrary to good morals and practices, including:

  • disclosure of misleading information, presentation and ordering of misleading information for disclosure and disparagement of a competitor or the product or service (hereinafter goods) of the competitor;
  • unlawful acquisition, use and disclosure of a business secret;
  • misuse of an employee or representative of a competitor.

The enforcement of this prohibition is subject to civil litigation. The RUCPBSA does not have a direct impact on the content of distribution agreements (e.g., on the relationship between the supplier and distributor), but the prohibitions arising therefrom should be borne in mind by all traders upon carrying out their day-to-day operations. Therefore, the RUCPBSA has an indirect impact on the content of distribution agreements, as the parties are expected not to behave in a manner prohibited by the RUCPBSA while performing their contractual obligations arising from a distribution agreement.

b. Link(s) to official publication:

The Estonian version of the LOA is accessible via this link

The Estonian version of the RUCPBSA is accessible via this link

c. Link(s) to English translation:

The English translation of the LOA is accessible via this link

The English translation of the RUCPBSA via this link

Part 2: Pre-contractual phase

Q4. Are there mandatory provisions in relation to the disclosure of pre-contractual information prior to concluding and/or executing distribution agreements?

Yes.

If yes, which mandatory provisions apply (a) and which information must be disclosed (b)? Where available, please also include a link to the official publication of the applicable rules (c) and, if available, to the English translation of the regulatory framework (d).

a. Mandatory provisions:

See, Art. 14 LOA.

b. Information to be disclosed:

According to Art. 14 LOA, parties who engage in pre-contractual negotiations or other preparations for entering into an agreement must take reasonable account of one another’s interests and rights. Information exchanged by the parties in preparing the conclusion of the agreement must be accurate.

Parties who engage in pre-contractual negotiations or other preparations for entering into an agreement must inform the other party of all circumstances with regard to which the other party has, based on the purpose of the agreement, an identifiable essential interest. There is no obligation to inform the other party of circumstances of which the other party could not reasonably expect to be informed.

If information not subject to disclosure is provided to a party in the course of pre-contractual negotiations, this party must not disclose such information to other parties or use it in bad faith in its own interests, whether or not an agreement is ultimately entered into.

c. Link(s) to official publication:

The Estonian version of the LOA is accessible via this link.

d. Link(s) to English translation:

The English translation of the LOA is accessible via this link.

Q5. Is there a standstill obligation linked to the requirements imposed for the pre-contractual phase?

No.

Q6. Does the relevant regulatory framework impose sanctions if the pre-contractual obligations are not (fully) respected?

No.

Q7. Can a party be held liable if it terminates the pre-contractual negotiations?

Yes. There are no specific sanctions for not respecting the pre-contractual obligations, but the other party may be able to use legal remedies under general contract law (e.g., demand compensation for damages).

If yes, on what grounds (a); under what conditions (b); and what consequences are generally linked to such liability (c)?

a. Grounds for precontractual liability:

See, Art. 115 LOA.

b) Conditions for precontractual liability:

If parties who engage in pre-contractual negotiations fail to reach an agreement, no legal consequences arise for the parties. However, a party must not engage in negotiations in bad faith (e.g., if the party has no real intention of entering into an agreement), nor break off negotiations in bad faith. Therefore, pre-contractual liability for terminating the negotiations could occur when a party engages in or breaks off the negotiations in bad faith (see, Art. 14(3) LOA). The Supreme Court has ruled that a party acts in bad faith when it conducts negotiations without the actual intention to negotiate or enter into an agreement, and the purpose of the negotiations is not in accordance with the principle of good faith (e.g., to prevent the other party from concluding an agreement with its competitor) (Supreme Court ruling in civil matter no 3-2-1-89-06).

Art. 14(3) LOA regulates the party’s obligations until the conclusion of a valid agreement, but if the agreement later proves to be invalid due to a breach of a party’s pre-contractual obligations, that party can also be held liable pursuant to Art. 14(3) LOA.. (Supreme Court ruling in civil matter no 3-2-1-89-06).

Based on the opinions expressed in the commentaries of the LOA (P. Varul et al. Law of Obligations Act I. Art. 1–207 commentaries, pp 91–92), bad faith in the termination of the pre-contractual negotiations is determined by assessing the length of the negotiations and the party’s legitimate expectations in signing the agreement. Such legitimate expectation could arise in particular when the parties have agreed on the fundamental terms of the agreement, or a party has incurred costs or performances based on the negotiations.

In the Supreme Court’s practice, the termination of the negotiations has been considered to be in bad faith when parties have signed a preliminary agreement, have drawn up a memorandum of understanding or have otherwise indicated their intention to sign the agreement. The termination of negotiations is not considered to have been made in bad faith if there is a compelling reason for the termination. This must be assessed from the point of view of the other party. Therefore, the reason for the termination must be compelling to the other party and the termination must not undermine the other party’s trust that the agreement will be signed (Supreme Court ruling in civil matter 3-2-1-168-14).

c. Consequences of pre-contractual liability:

In case of the improper termination of the pre-contractual negotiations (i.e., when a party breaks off negotiations in bad faith), the damaged party may be entitled to compensation for damages on the basis of Art. 115(1) LOA. The damaged party is to be placed in a situation as near as possible to the situation in which the party would have been if he had not relied on the terminated pre-contractual negotiations (see, Art. 127(1) LOA). Therefore, the damaged party is compensated for the damages that occurred because he relied and depended on the pre-contractual negotiations. The damages may include travel costs, costs related to the time spent on negotiations,  costs of drafting the contract (P. Varul et al. Law of Obligations Act I. Art. 1–207 commentaries, pp 97–98), costs of preparing for the performance of the contract and costs of restitution (Supreme Court ruling in civil matter no 3-2-1-89-06).

Q8. Are there other relevant rules and/or restrictions that apply during pre-contractual negotiations between supplier and distributor? 

No.

Part 3: Contractual phase

A. Form of distribution agreements

Q9. Must a distribution agreement be executed in writing to be valid and enforceable?

No, never.

Q10. Are there any (other) requirements as to the form of the distribution agreement for it to be valid and enforceable?

No.

B. Content of distribution agreements

Q11. Other than restrictions imposed by EU competition law (including Regulation (EU) 330/2010), do specific rules and/or restrictions apply in distribution agreements with respect to

  • the territory in which or the customers to whom the goods/services will be sold;
  • an exclusivity granted to the distributor;
  • (exclusive) sourcing/purchasing obligations;
  • resale prices;
  • non-compete clauses?

No.

Q12. Do specific rules and/or restrictions apply in distribution agreements with respect to

  • obligations of the supplier vis-à-vis the distributor, including in relation to the remuneration of the distributor;
  • obligations of the distributor vis-à-vis the supplier or vice versa;
  • a non-solicitation clause during and/or after the term of the distribution agreement;
  • minimum sales quota imposed on the distributor;
  • specific sector rules?

No.

C. Term and termination

Q13. Are there particular rules and/or restrictions in relation to the term (incl. renewal) of distribution agreements?

No.

Q14. Are there any specific rules and/or restrictions with respect to the termination of distribution agreements (e.g. minimum notice period, statutory right to compensation (goodwill or other))?

No.

Q15. Is it possible to terminate the distribution agreement based on certain grounds for termination (breach or other) included in the distribution agreement?

Yes.

If yes, is prior judicial intervention required in order for the termination of the agreement to take effect?

No.

Part 4: Post-contractual phase

Q16. Is the supplier required to repurchase the stock that is still at the distributor’s disposal when the distribution agreement ends?

No.

Q17. Are there other post-contractual obligations that generally apply to either of the parties in the context of the termination of the distribution agreement?

No.

Part 5: Dispute resolution

Q18. Do specific rules and/or restrictions apply as regards the choice of forum and/or jurisdiction?

No.

Q19. Can the parties opt for arbitration?

Yes.

If yes, are there any rules and/or restrictions as regards the enforceability of arbitration clauses in distribution agreements?

No.

Q20. What is the statute of limitations applicable to claims regarding the performance of a distribution agreement?

According to Art. 146 General Part of the Civil Code Act (in Estonian: Tsiviilseadustiku üldosa seadus), the limitation period for a claim arising from a transaction is three years. The limitation period is ten years if a party intentionally violated its obligations.

The Estonian version of the General Part of the Civil Code Act is accessible via this link

The English version of the General Part of the Civil Code Act is accessible via this link.  

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