Refusal to sell

In commercial trade, it is not unusual that a distributor or producer of goods refuses to deliver or sell its services or goods to a certain dealer.

Such a refusal can find its origin in a number of reasons. For instance, a particular distribution policy or trade policy, that a company tries to pursue, can come to mind. In this regard, it is important to know which rules and principles have to be respected.

Different scenarios can occur. If a company refuses to deliver certain products or services while there is a binding contract, the refusal will be regarded as a breach of contract.

The same will apply if there exists a framework contract, based on which the parties conclude consecutive sale agreements. A textbook example would be a distribution agreement. In these cases the refusal to sell would generally be sanctioned on contractual grounds.

If companies however, are not bound by any type of contract, the refusal to sell would only be qualified as illegitimate under certain circumstances.

1.    Principle – Refusal to sell is allowed.

Principally, companies are under no general obligation to sell their products to another company. The right to refuse to sell is accepted and is considered to be the corollary of the freedom of contracts.

However, the right to refuse to sell is not absolute and is limited on the one hand by the law of 15 September 2006 concerning the protection of economic competition (hereinafter LPEC) and on the other hand by the doctrine of abuse of right.

If the refusal to sell would take place during pre-contractual negotiations, a level of cautiousness is advised. After all, if the negotiations would be terminated abruptly, pre-contractual liability can come into play.

2.    Refusal to sell – Free competition

A couple of limitations resulting from antitrust regulation have to be taken into consideration.

Under certain circumstances, the refusal to sell can be deemed in violation with the free competition established on the internal market of the European Union. This would be the case if the refusal to sell would infringe articles 2 and 3 of the LPEC. These articles are the Belgian implementation of articles 101 and 102 of the Treaty on the functioning of the European Union (hereinafter “TFEU”). The fact that the refusal to sell would merely limit competition does not suffice to determine that a violation has occurred. The refusal to sell will be deemed as an act of unfair competition if it is the consequence of an illegitimate cartel, or if it will be regarded as an abuse of power.

In other words, article 2 LPEC or article 101 TFEU provides that all agreements between undertakings, decisions by undertakings and concerted practices, which affect trade and which have as their object or effect, the prevention, restriction or distortion of competition within the internal market, shall be prohibited. Hence, if the refusal to sell would originate from an agreement with another company or if it would be the result of concerted practices with another company, it will constitute antitrust behaviour if it intents to restrict the competition within the internal market.

Nonetheless, it should be noted that there are exceptions. Following article 101, 3 TFEU, the European Commission can grant group exemptions, trough which the general prohibition will not apply.

The consequences of a violation of these dispositions are quit severe. On the one hand, the national court can annul the agreement, which precedes the refusal to sell. On the other hand, the European Commission is competent to determine violations and to sanction the infringing companies with severe fines.

The right to refuse to sell can also be restricted if the refusing company has obtained a dominant position on the relevant market. Article 102 TFEU prohibits the abuse by an undertaking of a dominant position within the internal market or in a substantial part of it. The first condition in this regard implies that the company, which wishes to refuse to sell, has in fact a dominant position. Following the recent case law, it can more or less be ruled out that a dominant position will be found where the market share falls does not meet the level of 25%.

Another story concerns the selective distribution networks. This particular system is set up when a distributor only sells and delivers to a selected dealer, who fulfils certain criteria. These systems are mainly used in the trade of luxury products and they intend to maintain a high standard for the commercialisation of these products. Whether a selective distribution network will constitute unfair competition, will depend on the purpose of the network. It will be examined whether a qualitative or a quantitative network has been expanded. A quantitative system implies that a supplier tries to limit the number of dealers. This particular operation can be considered as an unfair competition practice. A qualitative distribution network entails that the supplier imposes certain standards on its dealers in order to become part of the network. This system is principally allowed as long as these standards or criteria are uniform and are established in a non-discriminatory way to all dealers. Finally, the distribution network has to be necessary to protect the quality of the product in question. Hence, the refusal to sell will in this regard be justified if all the criteria above are met.

3.    Refusal to sell – abuse of right

Although the refusal to sell does not result in unfair competition, it has been observed that  claims can be based on the abuse of right doctrine. In other cases, the claimant has tried to qualify the refusal as an unfair trade practice.

In accordance with article the Law of 6 April 2012 concerning market practices and consumer practices, an unfair trade practice is defined as any action, which is in violation with fair trade practices and which harms or can harm the professional interests of one or more companies.  This argument will normally not be upheld, thanks to the recent case law of the Supreme Court. More specifically, the Supreme Court has ruled explicitly that if the refusal to sell cannot be deemed in violation with the antitrust regulation, it is not possible to qualify the action as an unfair trade practice.

However, it has been accepted that the refused party called upon the principle of abuse of right. This argument will only prevail if it can be proven that the refusing company has no interest in its decision to refuse. More specifically, if the refusing company would merely refuse to sell in order to harm the refused party, or if the latter can prove that the refusal is purely discriminatory, the refusing company will be guilty of abuse of right. It is fair to say that the use of the abuse of right doctrine in this situation does not know a great success.

After all, a company has to right to determine its commercial strategy or business politics. In this perspective, it is allowed to refuse to sell to a direct competitor. The contrary would be in violation with the basic freedom of commerce.

09 January 2013

Griet Verfaillie - griet.verfaillie@peeters-law.be
Lynn Pype - lynn.pype@peeters-law.be

This contribution has also been published in KMO Business Magazine (D), www.kmopme.be and PME Business Magazine (F), www.pmekmo.be.

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