Suppliers and purchasers often agree on framework supply agreements where the relationship is intended to go beyond a one-off purchase, in order to regulate the fundamental issues of a long-term business relationship in a uniform manner. These typically include the type and quality of the products, prices including payment terms, quality assurance and liability rules, and dispute resolution mechanisms. Purchasers also seek to secure the supply of raw materials or finished products, ideally at stable or only slightly changing prices. Suppliers, in turn, seek to retain customers, ideally with fixed or even increasing sales volumes.
Long-term exclusive purchasing obligations may even be valid in general terms and conditions, provided they do not have market-foreclosing effects. This has now been confirmed by the Higher Regional Court of Düsseldorf in its judgment of 17 May 2017 (VI-U (Kart) 10/16).
The supply agreement contained the following provision:
“The purchaser undertakes to purchase the contractual products listed in Annex 1 exclusively from the supplier during the term of the agreement.”
The agreement had a fixed term of eight years and was thereafter renewed tacitly for one year at a time unless terminated with six months’ notice. Nevertheless, from the third contractual year onwards, the purchaser obtained contractual products from third parties. The supplier therefore brought an action against the customer for information and damages under Sections 280(1) and 241(1) of the German Civil Code. Both the Regional Court and the Higher Regional Court ruled in favour of the supplier.
The exclusive purchasing obligation was valid and, in particular, did not infringe the prohibition of cartels under Section 1 of the German Act against Restraints of Competition (paras. 21 et seq.). An exclusive purchasing obligation would be void only if it significantly foreclosed the market to the detriment of competitors. That was not the case here; rather, the exclusive purchasing obligation offered advantages to both parties: the supplier obtained a sales guarantee, while the purchaser obtained a supply guarantee. In addition, the supplier’s market share was only approximately 1%. Overall, the court considered the competition law objection to be unfounded and the relevant submissions insufficient, including the absence of information on market definition, market share and barriers to market entry.
The exclusive purchasing obligation was also not invalid as a general term or condition under Section 307(1) and (2) of the German Civil Code, because it did not unreasonably disadvantage the purchaser (paras. 27 et seq., 35 et seq.). This was the result of a comprehensive weighing of the interests of both parties. In particular, the purchaser’s long-term exclusive purchasing obligation, which provided a sales guarantee, was counterbalanced by numerous valuable services provided by the supplier, including market access on favourable, or at least customary, conditions with a supply guarantee, even though the supplier did not grant a long-term price guarantee. The supplier had also installed equipment free of charge at the purchaser’s premises and made it available for the entire contractual term for the use of the products. In addition, the supplier promised various free services. The purchaser was therefore bound by the exclusive purchasing obligation and, since it had breached that obligation in previous years, was required to pay damages.
Practical Notes:
The case confirms the existing approach that exclusive purchasing obligations may, in principle, be exempt from the cartel prohibition and valid even where they are intended to last for more than five years. Beyond the block exemption under Article 5(1) of the Vertical Block Exemption Regulation, this is a matter of individual assessment under Article 101(3) TFEU.
In abstract terms, the decisive question is whether the exclusive purchasing obligation has a significant market-foreclosing effect. This was already held in the well-known ice cream decision of the Court of First Instance of the European Union in the Langnese-Iglo case in 1996 (judgment of 8 June 1995, Case T-7/93, paras. 99 et seq. and 133 et seq.). In that case, the European Commission and the EU courts considered an exclusive purchasing obligation with an average contractual term of only 2.5 years to be unlawful because: (i) the supplier had a market share of more than 45%, meaning that it did not fall within the De Minimis Notice; (ii) purchasers were required to cover more than 80% of their demand from the supplier; and (iii) there were significant additional barriers to market entry. More than 15% of retailers were tied to the supplier and more than a further 10% to the other large manufacturer; the supplier provided freezer cabinets on loan subject to an obligation to use them only for its products, granted discounts to ensure exclusivity, and demand was highly fragmented.
In practical terms, two criteria in particular determine whether exclusive purchasing obligations are valid: the contractual term and the proportion of the purchaser’s demand covered by the obligation (cf. Article 5(1) of the Vertical Block Exemption Regulation and Article 101(3) TFEU). As a general rule, exclusive purchasing obligations are more likely to be valid the shorter their duration and the lower the share of demand covered.
The judgment confirms the leeway available to suppliers when structuring exclusive purchasing obligations for their purchasers. In particular, the duration of the obligation may exceed five years; the purchaser does not necessarily have to be guaranteed fixed prices for that period; and such an exclusive purchasing obligation may also be agreed in general terms and conditions.
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