KFTC Releases Model Distribution Agreements for the Machinery, Animal Feed, Household Goods, Alcoholic Beverage, Paint and Cosmetics Industries

On January 18, 2022, the Korea Fair Trade Commission ("KFTC") released Model Distribution Agreements for supplier-distributor transactions in the machinery, animal feed, household goods, alcoholic beverage, paint and cosmetics industries ("Model Agreements").

While suppliers are not legally bound to adopt these Model Agreements, the KFTC is highly recommending their adoption, and they will serve as guidance as to what the KFTC considers to be "fair industry practice". In particular, the KFTC notes that it will award suppliers that adopt Model Agreements 20 points (out of a total of 100 points) during evaluation of implementation of fair trade agreements for those that have signed fair trade agreements (as prescribed by the KFTC) with their distributors, and based on the evaluation results, provide benefits such as exemption from KFTC-initiated ("ex officio") investigations. We recommend that these Model Agreements should be taken into consideration when amending, renewing or entering into new agreements with third-party distributors.

1. Provisions Common to All Six Industries

For all six industries, the Model Agreements include provisions to (i) lower or exempt the penalty interest rate for delay of payment for products sold by the distributor in a crisis situation (e.g., COVID-19), (ii) give distributors the right to request suppliers to provide information on online sales, and (iii) give distributors the right to request suppliers contract renewal (within a four-year contract term). Key details of these common provisions are as follows.

Item		Provisions
Setting of reasonable transaction terms	Orders	Require the supplier to use adequate means, e.g., electronic systems, to receive orders Prohibit the supplier from making arbitrary amendments to the distributor's order history after confirmation
	Supply	Require the supplier to specify in written form information on the products (e.g., number of items, price, date of supply) before supplying the products
	Supply price	Grant the distributor the right to request adjustment to the supply price if the supplier is directly selling a product to end consumers at a price that is lower than the supply price to the distributor
	Penalty interest rate for delay	Set an upper limit of 6% per annum (default interest rate under the Korean Commercial Code) on the penalty interest rate for delay of payment for products sold by the distributor Lower or exempt the penalty interest rate for delay of payment for products sold by the distributor in a disaster/crisis situation (e.g., COVID-19)
	Product returns	Require the supplier to pay for expenses necessary for product returns due to reasons attributable to the supplier, and for expenses that incur due to the supplier's unfair refusal to receive or a delay in receiving product returns after the distributor has made a reasonable request to return such products
	Online sales	Grant the distributor the right to request the supplier to provide information on online sales
Guarantee stable transactions	Transaction period	Grant the distributor the right to request contract renewal to guarantee a minimum four-year contract term
Guarantee stable transactions	Prohibit discontinuation of supply	Prohibit the supplier from engaging in conduct that amounts to contract termination, e.g., discontinuation of supply of products, reduction in supply volume
Eliminate unfair trade practices	Prohibited conduct	Prohibit the supplier from engaging in the eight types of prohibited conduct under the Fairness in Distributor Transactions Act, or other unfair trade practices against the distributor, including imposition of disadvantages of participating in collective activities

2. Provisions particular to the machinery, alcoholic beverage and cosmetics industries

Meanwhile, noting the differences in transaction methods and trade customs of the machinery, alcoholic beverage and cosmetics industries, the KFTC included the following provisions in the Model Agreements to reflect the unique characteristics of each of the three industries.

Item		Provisions
Machinery	After-sale services	Require the supplier to pay the distributor a fee when delegating after-sales services work, and provide necessary support (e.g., product parts, manuals, technical training)
Alcoholic beverage	Support for distributors	Require the supplier to abide by relevant laws, e.g., the Alcoholic Beverage License Act
Alcoholic beverage	Rebates	Prohibit provision of rebates - The supplier or distributor may terminate the contract if the counterparty provides it rebates or demands that it provide such rebates, and the counterparty would be liable to pay for the damages incurred as a consequence
Cosmetics	Door-to-door sales	Require the supplier to abide by relevant laws, e.g., the Door-to-Door Sales Act Require the supplier to negotiate with the distributor when providing support to door-to-door sales persons, e.g., incentives, training

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