On 8 July 2014, the Luxembourg Parliament passed a law setting out specific rules for vertical agreements in the car distribution sector. The law is intended to protect the independence and financial security of Luxembourg car distributors by outlining a number of protective provisions applicable to vertical agreements between Luxembourg car distributors and foreign car suppliers (the parliamentary file can be found here). Some of these protective measures could already be found in Regulation (EC) No 1400/2002 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector, but were abolished by Regulation (EU) No 461/2010.
Background of the law
According to the explanatory memorandum, the law aims at re-introducing the protection measures previously provided for by Regulation (EC) No 1400/2002 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector. This Regulation was replaced by Regulation (EU) No 461/2010 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle sector. The latter placed the purchase, sale and resale of new cars within the remit of the general block exemption framework for vertical restraints set out by Regulation (EU) No 330/2010 Regulation (EU) 461/2010, however, did not carry over the protection measures of the earlier Regulation (EC) No 1400/2002. The law is therefore intended to 'restore' these protection measures adding other measures to "maintain the relative equilibrium which existed [in the car distribution sector] in the past".
Scope of application
The law applies in principle to all vertical agreements between car suppliers and car distributors, where one of the parties is established in Luxembourg. There are two aspects to this:
- The first is the definition of the parties to the agreement. "Supplier" is defined as either the manufacturer or the manufacturer's independent importer, while "distributor" is defined as the business selling goods or services "on behalf of" the supplier within the supplier's distribution network. The wording "on behalf of" raises the question as to whether true agents, i.e., an entity which negotiates or concludes operations in the name of and on behalf of the principal, also fall within the scope of the new law. A literal reading of the definition of "distributor" would further exclude the classic car distributors from the scope of the law as a traditional car distributor sells cars on to customers and, in principle, does not do so "on behalf of" the suppliers. However, it is obvious that it is the rationale of the law to apply to traditional car distributors as well.
- Secondly, all agreements where either of the parties is established in Luxembourg are covered. The law specifically sets out that the provisions of the law are to be considered as a matter of public policy. This entails that even if the distribution agreement is governed by the law of another country, the provisions of this Luxembourg law will be applicable. While this may seem unusual, the then European Commissioner for Competition, Neelie Kroes, stated that the protection of weaker contracting parties is a matter for Member States to regulate in their national law.
The adoption of the law therefore requires suppliers established outside Luxembourg, but using distributors established in Luxembourg, to take into account the protection measures of the Luxembourg law.
The law adopts a number of protection measures from Regulation (EC) No 1400/2002.
- A minimum period of five years for fixed term distribution agreements. If the agreement contains a renewal clause, notice must be given at least six months in advance, if either party does not intend to renew the contract.
- A minimum notice period of two years in the event of the termination of an indeterminate term distribution agreement, unless the termination is due to the supplier restructuring the distribution network, in which case the notice period is reduced to one year.
- The right for distributors to transfer their rights and obligations under a distribution agreement to another distributor.
- Termination of the agreement must be done by written notice, objectively and transparently setting out the reasons for termination.
- A right to mediation in the event of a dispute relating to the parties' contractual obligations.
The law equally foresees novel protection measures.
- In the event of termination and at the request of the distributor, the repurchase by the supplier of stock held by the distributor, which the latter was obliged to purchase subject to the distribution agreement.
- In the event of termination, reimbursement to the distributors, subject to certain conditions, for investments which have not been paid off or which cannot be reused, if the distribution agreement required the distributor to make certain investments to ensure a uniform distribution within the distribution network.
- Suppliers must remunerate distributors for any warranty services carried out by the distributor calculated equitably in accordance with the expenses accrued both during agreement as well as after the termination of the agreement.
Suppliers should therefore carefully consider the minimum stock purchase imposed on Luxembourg established distributors as well any obligatory investments, as these may present a significant cost upon termination of the distribution agreement.
The introduction of the law necessitates the review and potential renegotiation of distribution contracts for which either the supplier or the distributor is established in Luxembourg, as all agreements should account for the previous as well as novel protection measures as this clarifies the contractual relationship and renders it more predictable.
Furthermore, agreements considering only for protection measures contained in Regulation (EC) No 1400/2002 should be reviewed to ensure that account is taken of the additional measures introduced by the Luxembourg law.
It would also be prudent to reassess agency agreements in place to ascertain whether the agreement might fall within the scope of the newly introduced Luxembourg law.