On February15, 2017, the Korea Fair Trade Commission (“KFTC”) announced the Standard Distribution Agreement for transactions between suppliers and distributors in the food & beverage (“F&B”) industry.
Why significant:
While currently limited to the F&B industry, the publication of the Standard Distribution Agreement is meaningful, because it is the first standard distribution agreement announced by the KFTC since the enactment of the “Fairness in Distributor Transactions Act” (the “FDTA”) in December 2016.
This provides a standard for what should be deemed fair terms of a distribution agreement and how the FDTA will be enforced in the future. A prudent exercise may be to compare the terms of the Standard Distribution Agreement with the distribution agreement used by your company in preparation for potential future enforcement of the FDTA and other relevant laws.
Main contents of the Standard Distribution Agreement:
|
Item |
Standard Distribution Agreement |
Existing Industry Practice |
|
Penalty Interest for Delay |
% per annum (interest rate provided in the Korean Commercial Code) |
Approx. 15-25% per annum |
|
Real Estate Mortgage Expense |
Borne either (i) equally by the supplier and the distributor, or (ii) solely by the supplier |
Borne solely by the distributor |
|
Product Returns |
Provide permissible reasons for return and return period (minimum one day) |
Allowed only for very specific reasons and limited time periods |
|
Sales Incentives |
Provide conditions for, and time and method of sales incentive payment |
Condition for sales incentive payment is not expressly provided or is subject to frequent change |
|
Grounds for Termination |
Restricts grounds for termination (e.g., objective difficulty in continuing the transactions, uncured material breach following cure request) Termination allowed for unavoidable grounds with three month prior written notice |
Termination possible based on unclear grounds, such as change in supplier’s policy |
|
Transfer of Distributor Rights |
Money receivables transferable with prior notice |
Transferable only with prior approval of the supplier |
KFTC’s industry seminars:
The KFTC announced that it plans to hold industry seminars to actively promote the use of the Standard Distribution Agreement. Although the Standard Distribution Agreement does not have legal effect as a law, it serves as a reference in assessing whether a distributorship agreement is in breach of any unfair trade practice related laws.
