When entering a distribution agreement in China, it is important to draft a clear, balanced, and complete contract. This document will stipulate aspects such as competition, prices, and restrictions, and will regulate the distribution relationship.
Foreign companies operating in China should negotiate and execute a bilingual agreement. Though an only English contract is valid, the local court system’s official language is Chinese and therefore it is convenient to have a Chinese version of the contract, if the need arises.
Restrictions on the distribution of competing products in distribution agreements are not always enforceable. Non-compete provisions are generally enforceable during the term of a distribution relationship, and post-term, only if the restricted period is not excessively long (a two-year restricted period for the original distribution territory is generally acceptable).
The pricing policy is usually determined by the supplier. However, price-fixing arrangements between the supplier and the distributors to monopolize the market are prohibited, unless the parties can prove that the price-fixing arrangements or price maintenance conduct do not have anticompetitive effects under the Anti-Monopoly Law.
According to the Anti-Monopoly Law, a distributor is prohibited from abusing its dominant position in the market to secure certain trading conditions that restrict market entry by other parties. Furthermore, the law states that an entity (a supplier) shall not organize other entities to reach any monopoly agreement or provide substantive aid to other entities to reach any monopoly agreement.
In China, the law does not limit the seller’s ability to charge different prices to different customers, based on location, type of customer, or quantities purchased. However, under the law, a supplier who is in a dominant position in the market is not allowed to offer different transactional terms and conditions (sale prices) to customers with the same conditions without proper reason.
There is no statutory definition of ‘customers who are of the same conditions’, the regulatory authority and the court have wide discretion to determine who may be in breach of this law.
In a contract, a distributor may agree on an exclusive territory, and the contractual provisions determine how to define the territories and markets. The law does not provide sufficient guidance on construing the contractual provisions on active sales and passive sales that are not actively solicited, but which are heavily litigated in other jurisdictions.
Since e-commerce distribution rights are granted separately, it is common for a supplier to restrict or prohibit e-commerce sales by its distribution partners in China. Whether restrictions as to the use of e-commerce intermediaries exist is a matter of negotiation between the parties, but the engagement of e-commerce intermediaries has been a growing phenomenon in the past few years.
Most distribution agreements include provisions on territorial limitation as to distribution activities with enhanced technological requirements. A supplier may require that its distribution partners, or e-commerce intermediaries, do not sell products outside their assigned territories.
Suppliers may ask their distribution partners to provide reports of sales by territory, and some distribution systems have a specific fee or ‘invasion fee’ for sales outside the authorized territory.
It is prohibited by law to refuse to deal with particular customers, without a proper reason. The court and local authorities determine the acceptable reasons depending on the case. However, if there is no abuse of a dominant position, this prohibition is not relevant, and the supplier will be free to devise a policy on the selection of customers.
According to the Anti-Monopoly Law, a merger or common control of shareholdings of different competitors entering arrangements for the control of different competitors may lead to a concentration situation, which is subject to reporting and approval requirements.
The concentration is reportable if: the annual global sales figure for it is more than 10 billion yuan, when the annual sales figures of two operators in China exceed 400 million yuan; or the annual Chinese sales figure for it is more than 2 billion yuan, when the annual sales figures of two operators in China exceed 400 million yuan.
In China, competition and anti-trust are ruled buy two legislations: the Anti-Unfair Competition Law and the Anti-Monopoly Law. It is prohibited that a supplier abuses its dominant position in the market and that requires its distributors to purchase products from the suppliers designated by it for the purpose of excluding fair competition.
The regulatory authority under the Anti-Unfair Competition Law is the Anti-Unfair Bureau of the Administration for Market Regulation, and the regulatory authority under the Anti-Monopoly Law is the Anti-Monopoly Bureau of the Administration for Market Regulation. Both authorities have the necessary powers to investigate and impose administrative penalties.
Companies affected by situations included in the Anti-Unfair Competition Law or the Anti-Monopoly Law can start legal action for damages, loss of profits and reasonable investigation costs.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com. DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.