Distribution agreements are a necessary legal basis for any distribution chain across industries, and are very important both for the cooperation of companies within individual countries, and for the cooperation of distribution chain companies coming from different countries. In an attempt to retain or conquer the market, certain companies (manufacturers or main distributors) may try to restrict local distributors or wholesalers to selling only their products or to selling at certain prices, by imposing specific distribution conditions on them in (exclusive) distribution agreements. Most of those companies are not aware that such imposed distribution conditions are prohibited by law and that very high penalties are prescribed for such actions in Bosnia and Herzegovina.
The Competition Act of Bosnia and Herzegovina, Official Gazette no. 48/05, 76/07, and 80/09 (the Law), prohibits some competition practices, including distribution agreements, that aim and have the effect of preventing or restricting market competition by, inter alia, directly or indirectly determining or imposing purchase and selling prices and other conditions; restricting production, markets, and others; market sharing; by applying different conditions to identical transactions with other entities; by conditioning the other contracting party to accept additional obligations that are not related to the subject of the contract; and others.
All such practices and agreements are considered null and void by the Law. However, it takes a special procedure initiated before the local antitrust authority for determination of such agreements as prohibited, which always leads to the imposition of significant fines, mostly to the contractual parties that imposed such prohibited distribution clauses within the same agreements.
What needs to be emphasized, however, especially for manufacturers and main distributors trying to protect their products and market share on the local market of Bosnia and Herzegovina through such prohibited distribution conditions, is that there is a solution for some of these distribution agreements.
The Law regulates the possibility for contractual parties to such distribution agreements – that contain certain restrictions for distributors – to apply to the antitrust authority of Bosnia and Herzegovina for an individual exemption from the prohibition. If obtained, such an exemption would be valid for the market of Bosnia and Herzegovina only.
In order to secure the exemption, the distribution agreement (as well as any other agreement) should contribute to the improvement of production or distribution of goods and/or services within Bosnia and Herzegovina, or to the promotion of technical and economic progress, while allowing consumers a fair share of the resulting benefit. The agreement: a) shall impose only those restrictions necessary to achieve these objectives; and b) shall not enable the exclusion of competition in the substantial part of the products or services.
The parties to such agreements can apply for individual exemption by filing a request to the local antitrust authority, the Competition Council of Bosnia and Herzegovina, with the distribution agreement attached, before entering such a distribution agreement or before it comes into force. Individual exemptions cannot be given for an unlimited period of time. The period of validity is limited to five years maximum, which can be extended for another five years, provided that the agreement still meets the statutory requirements related to the limitation of restrictions which needed to be met when the first request for exemption was filed.
When granted by the antitrust authority, an individual exemption usually contains certain conditions and prohibitions determined by the authority in order to ensure the protection of end customers and the market availability of all products. However, even limited in scope, the individual exemption still enables the contractual parties to protect their interests.
It is important to emphasize that a fine of up to 10% of the total annual income of the company – for the year preceding the one in which the violation of the Law took place – shall be imposed on the company if it concludes a prohibited agreement or otherwise participates in an agreement which violates, restricts, or prevents market competition. An additional fine between EUR 7,500 and EUR 25,000 may be imposed on the company’s CEO, as well.
By Dzana Smailagic-Hromic and Ezmana Turkovic, Partners and Co-Heads of Competition, Maric & Co