Part 1: Legislative framework
Q1. Please 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:
The Cabinet of Ministers Regulation No.797 “Regulations Regarding Non-subjection of Certain Vertical Agreements to the Prohibition of the Agreement Specified in Art. 11, Paragraph One of the Competition Law”
The Civil Law
The Commercial Law
The Competition Law
The Consumer Rights Protection Law
The Unfair Trade Practices Prohibition Law (enters into force on 1 November 2021 and it repels the Unfair Retail Trade Practices Prohibition Law)
b. Link(s) to official publication:
The Cabinet of Ministers Regulation No.797 “Regulations Regarding Non-subjection of Certain Vertical Agreements to the Prohibition of the Agreement Specified in Art. 11, Paragraph One of the Competition Law” adopted 29 September 2008 is accessible via this link.
The Civil Law is accessible via this link.
The Commercial Law is accessible via this link.
The Competition Law is accessible via this link.
The Consumer Rights Protection Law is accessible via this link.
The Unfair Trade Practices Prohibition Law is accessible via this link.
c. Link(s) to English translation:
An English translation of the Cabinet of Ministers Regulation No.797 “Regulations Regarding Non-subjection of Certain Vertical Agreements to the Prohibition of the Agreement Specified in Art. 11, Paragraph One of the Competition Law” adopted 29 September 2008 is accessible via this link.
An English translation of the Civil Law is accessible via this link.
An English translation of the Commercial Law is accessible via this link (the version is outdated).
An English translation of the Consumer Rights Protection Law is accessible via this link.
An English translation of the Unfair Trade Practices Prohibition Law 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)?
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. Specific rules depending on distribution format
Agency agreements
Apart from the obligations provided in the Directive 86/653 (EEC), the Latvian Commercial Law stipulates additional requirements for agency agreements with respect to delcredere (Art. 53 Commercial Law), the statute of limitation (Art. 55 Commercial Law), the rights to a retainer (Art. 56 Commercial Law)
and the obligation to keep commercial secrets (Art.60 Commercial Law). For more information, we refer to the Q&A on agency agreements.
Franchising agreements
Art. D, XXI, Part 7 Latvian Commercial Law sets mandatory requirements for franchising agreements.
Art. 475 Commercial Law requires that a franchising agreement is concluded in written form.
(i) Franchisor’s obligations (Art. 476 Commercial Law)
A franchisor is required to disclose particular information to a franchisee during the pre-contractual phase, ensure validity of IP rights during the period of the franchising agreement, provide necessary support and training to a franchisee and supply the franchisee with all documents necessary for the performance of the agreement. In addition, if the franchising agreement provides that a franchisee must purchase goods exclusively from a franchisor (or a party designated by the franchisor), the franchisor must ensure delivery of goods within a reasonable time and in due time inform the franchisee of the failure to deliver goods in due time or in due amount. Further, the franchisor is liable to engage in marketing and brand recognition activities for the franchise.
(ii) Franchisee’s obligations (Art. 477 Commercial Law)
During the pre-contractual phase, a franchisee must disclose to the franchisor information which is of significance for the purpose of entering into a franchising agreement. During the term of the agreement, the franchisee must employ the franchise in accordance with the agreement terms, abide by reasonable instructions from the franchisor, respect franchisor’s IP rights and refrain from activities that could harm reputation of the franchise. The franchisee must also provide to the franchisor information necessary for the franchising agreement and allow the franchisor’s inspections during business hours. During the agreement and five years post-term, the franchisee must not disclose to third parties and not use against the purpose of the agreement commercial secrets which the franchisee learned due the franchise.
(iii) Termination of the agreement (Art. 478 Commercial Law)
The franchising agreement may be terminated based on the terms of the franchising agreement itself or on legal grounds.
Each party may unilaterally terminate an agreement if the counterparty has provided false information during the pre-contractual phase regarding issues which are material for the conclusion of the agreement.
Each party may also unilaterally terminate the agreement if fulfilment of the agreement became too burdensome due to “objective changes in circumstances”, in which case the parties must enter into negotiations to either change terms of the agreement or terminate the agreement. “Objective changes in circumstances” exist if these changes occurred after the conclusion of the agreement, a party could not foresee such changes during the conclusion of the agreement and the party did not accept a risk of changes in circumstances. If the negotiations do not succeed within one month, each party may ask the court to either terminate the agreement or amend it.
(iv) Post-term non-compete clause (Art. 479 Commercial Law)
A post-term non-compete must be provided in a written agreement and cannot exceed one year. The franchisor is obliged to reimburse the franchisee for the non-compete obligation, except when the agreement was terminated by the franchisor due to reputational risks or on valid grounds which are the franchisee’s fault.
b. Link(s) to official publication:
The Commercial Law is accessible via this link.
c. Link(s) to English translation:
An English translation of the Commercial Law is accessible via this link (the version is outdated).
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 Unfair Trade Practices Prohibition Law (“UTPPL”) which enters into force on 1 November 2021 prescribes rules in relation to unfair contract terms in B2B contracts in (i) the food and agricultural sector and (ii) the non-food sector, against retailers with significant buying power. The UTPPL transposes the requirements under Directive 2019/633 (EU) on unfair trading practices in business-to-business relationships in the agricultural and food supply chain, and contains national rules, and prescribes additional rules aimed at prohibiting abuse by retailers with significant market power, both in food and non-food sectors.
Unfair Trade Practices in the Food and Agricultural Sector
The UTPPL applies to “buyers” of agricultural and foods products when the buyer is a public authority or a private buyer with an annual turnover of more than 2 mln EUR.
The UTPPL prohibits “unfair trade practices” in line with the regulation under the Directive 2019/633 (EU). In addition to prohibited practices under the Directive, the UTTPL prohibits buyers to require from suppliers a best price guarantee.
Unfair Retail Practices in the Non-Food Sector
The UTTPL requirements also apply to non-food retailers in cases when they have significant market power against suppliers. Under the UTTPL, in such cases retailers are prohibited from the following:
(i) requesting payment for conclusion of an agreement, except when there is a need for a special assessment of a new supplier;
(ii) requesting slotting fees, except when there is a written agreement regarding product placement on specific shelves;
(iii) requesting payments related to expenses due to the opening of new stores or repairing the existing ones;
(iv) return of unsold products, subject to three exceptions: (1) the products are of poor quality; (2) the products are new for consumers and supply of the products or an increase in the amount of products supplied was initiated by the supplier; (3) the return of the unsold products is initiated by the supplier.
(v) providing and applying unfair sanctions;
(vi) providing and applying unfair trade terms.
b. Link(s) to official publication:
The Unfair Trade Practices Prohibition Law is accessible via this link.
c. Link(s) to English translation:
Not available.
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:
A requirement to disclose pre-contractual information applies to franchising agreements, both for a franchisor and a franchisee (Art. 476 and 477 Commercial Law).
b. Information to be disclosed:
The franchisor must disclose the following information to the franchisee in the pre-contractual phase:
1) a general description of the offered franchise, which corresponds to the actual circumstances;
2) evidence of the existence of the rights included in the franchise and a description of the know-how;
3) the term of the franchising agreements and options to prolong the term;
4) the remuneration and payment terms for the use of the franchise;
5) other information, which the franchisor considers necessary for the purpose of entering into a franchising agreement.
The franchisee must disclose to the franchisor information which is of significance for the purpose of entering into a franchising agreement.
c. Link(s) to official publication:
The Commercial Law is accessible via this link.
d. Link(s) to English translation:
An English translation of the Commercial Law is accessible via this link (the version is outdated).
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?
Yes.
If yes, which sanctions apply (e.g., nullity of contract, penalty payment)?
In case of franchising agreements, each party may unilaterally terminate the agreement if the counter-party has disclosed false information during the pre-contractual phase (Art. 478(2) Commercial Law).
Q7. Can a party be held liable if it terminates the pre-contractual negotiations?
No.
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?
Only in certain instances.
If only in certain instances, please explain when a written agreement is required.
The Commercial Law requires a written agreement for specific types of agreements, such as commercial agency agreements (Art. 46 Commercial Law) and franchising agreements (Art. 475 Commercial Law).
Further, a written form is required in relation to the following provisions in distribution agreements for supply of food and agricultural products:
- Payment for product placement on special shelves (Art. 5(1)2)c) UTTPL);
- Provision of volume or promotional rebates (Art. 5(1)16) UTTPL);
- Reimbursement for advertisements or related expenses (Art. 5(2)1) UTTPL);
- Reimbursement for marketing activities (Art. 5(2)2) UTTPL);
- Payment for logistics services (Art. 5(2)3) UTTPL);
- Requirement that a supplier purchases goods, services or estate from a third party designated by the buyer (Art. 5(2)4) UTTPL);
- Requirement to apply a rebate for goods during a promotional period if the goods have not been sold during this period (Art. 5(2)5) UTTPL).
An agreement that a supplier pays for product placement on special shelf places also requires a written form in non-food retail if the retailer holds significant market power (Art. 6(2) UTTPL).
Written form requirement also applies to a post term non-compete in commercial agency agreements (Art. 61(1) Commercial Law) and in agency agreements (Art. 479(1) Commercial Law).
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
Q.11 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
Yes specific rules apply to non-compete clauses.
If yes, what do these specific rules and/or restrictions entail?
There are specific rules for non-compete clauses in franchising and commercial agency agreements.
Post-term non-compete clauses in franchising agreements (Art.479 Commercial law) must be provided in a written form and cannot exceed 1 (one) year. The franchisor is obliged to reimburse the franchisee during the post-termination non-compete period, except when the agreement was terminated by the franchisor due to reputational risks or on valid grounds which are the franchisee’s fault.
For non-compete clauses in commercial agency agreements (Art. 61 Commercial law) reference is made to the Q&A on agency agreements (Q19 and following).
Further, the Latvian national vertical block exemption regulation (the Cabinet of Ministers Regulation No. 797 “Regulations Regarding Non-subjection of Certain Vertical Agreements to the Prohibition of the Agreement Specified in Art. 11, Paragraph One of the Competition Law” adopted 29 September 2008, hereinafter – “Regulations 797”), is largely based upon and harmonized by the Regulation (EU) 330/2010, but provide for different exemption thresholds to be applied for agreements under Latvian jurisdiction.
Under the EU Regulation, the relevant market share threshold is 30% for the buyer and the supplier, whereas under Regulation 797 the following market share thresholds apply:
- (i) The market share of the supplier and the buyer each does not exceed 10% (Art. 3 Regulation 797). It is worth noting that in strict legal terms, the 10% limit is not the de minimis (there are no express national law provisions following the de minimis notice), however, the Latvian Competition Council has referred to such agreements in its RPM Guidelines as agreements with “negligible effect on competition”, making a reference to the EC De Minimis Notice. In practice, the Latvian Competition Council would also likely to follow the de minimis approach when assessing the agreements; or
- (ii) The market share of the supplier does not exceed 30%, except for exclusive distribution agreements; (Art. 4 Regulation 797); or
- (iii) The market share of the buyer does not exceed 30% in case of exclusive distribution agreements (Art. 5 Regulation 797).;
- (iv) The market share of each undertaking does not exceed 10% in case of an agreement between an undertaking (a retailer) and retailer’s association; or an agreement between a retailer’s association and a supplier (Art. 10 Regulation 797);
For (i) and (ii):
- if a market share is initially not more than 30% but subsequently rises above that level without exceeding 35%, the exemption shall continue to apply for a period of 2 (two) consecutive calendar years following the year in which the 30% market share threshold was first exceeded (Art. 6 of Reg.797);
- if a market share is initially not more than 30% but subsequently rises above 35%, the exemption shall continue to apply for one (1) calendar year following the year in which the level of 35% was first exceeded; (Art. 7 of Reg.797).
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?
Specific rules apply to (i) obligations of the distributor vis-à-vis the supplier or vice versa and (ii) specific sectors.
If yes, what do these specific rules and/or restrictions entail?
Please see Q3 and 9. The UTTPL prescribes specific sector rules for distribution agreements in (i) the food and agricultural sector; (ii) the non-food retail if the retailer has significant market power.
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))?
Yes.
If yes, what do these specific rules and/or restrictions entail (a)? Please include whether these specific rules and/or restrictions differ depending on whether the distribution agreement is of definite or indefinite duration (b) or whether the distribution agreement is terminated by one party for convenience or for breach by the other party (c).
a. What do these specific rules and/or restrictions entail:
Specific rules apply for termination of franchising agreements (Art. 478 Commercial Law). See, Q2.
b. If applicable, differences dependent on whether the distribution agreement is of definite or indefinite duration:
Not applicable.
c. If applicable, differences dependent on whether the distribution agreement is terminated by one party for convenience or for breach by the other party:
Please see, Q11. In case of franchising agreements, a franchisee loses a right for a post-term non-compete compensation (if a non-compete obligation was agreed) if the agreement is terminated by the franchisor due to solid grounds which are the franchisee’s fault.
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.
