VLP Legal Press #35: Law on Competition – Agreements Which Prevents, Restrict or Distort Competition

Cambodia's Law on Competition (“Law”) came into force on 6 October 2021. Since then, many articles have covered the Law, either as general overview or updates on its implementing regulations.

In this Legal Press, we focus on one question that matters to small and mid-sized businesses in Cambodia:

Does distribution, franchise or licence agreements – which often include restrictions on territory, pricing or exclusive purchase – risk breaching the Law on Competition?

How the Law on Competition applies to a distribution, franchise or licensing agreement:

Before the Law was enacted, supply, distribution, franchise and licensing agreements were governed mainly by the general rules of the Civil Code of Cambodia, which allows parties to structure their arrangement freely, provided they do not contravene the law.

Since the Law was implemented, these agreements fall within the definition of a “Vertical Agreement”: an agreement between persons who operate, or are likely to operate, at different levels of the production or distribution chain (Article 3(9) of the Law). For example, agreements between manufacturers and wholesalers, or franchisors and franchisees. This brings these agreements within the scope of the Law, in particular Article 8 of the Law, in addition to the general rules of the Civil Code.

What prohibitions under the Law on Competition parties should be aware of:

The key provision is Article 8 of the Law, which is quoted as below:

“Persons are prohibited from making and implementing a vertical agreement which directly or indirectly requires a purchaser to resell purchased goods or services at a minimum price set by the seller or to accept any condition of this nature set by the seller.

Persons are prohibited from making or implementing a vertical agreement which has or may have the object or effect of significantly preventing, restricting or distorting competition in a market by:

1. Requiring a purchaser to resell purchased goods or services only within a defined geographic area;

2. Requiring a purchaser to resell purchased goods or services only to specified customers or specified categories of customers;

3. Requiring a purchaser to purchase all or nearly all of its requirements for particular goods or services exclusively from the seller;

4. Preventing a seller from selling goods or services to another purchaser; or

5. Requiring a purchaser to purchase unrelated goods or services in addition to the goods and services that purchaser wants to purchase.”

Article 8 of the Law divides vertical restrictions into 2 categories:

Absolute Prohibition: Minimum Resale Price

The first paragraph of Article 8 stands alone and contains no exception or exemption. A clause that fixes or requires a minimum resale price is strictly prohibited. There is no need to prove that such a clause actually restricts competition in the market to establish a breach of Article 8.

This type of clause is not uncommon in franchise and distribution agreements (especially a regional or global template). For example, requiring the local distributor or franchisee to sell at or above a price set by the supplier or franchisor, often reasoned as “brand protection” or “price integrity”.  However, a clause on minimum resell price requirement is not enforceable in Cambodia.

Condition Prohibition: 5 Areas of Restrictions Based on Object or Effect

The second paragraph of Article 8 lists 5 other types of restriction below (“Concerning Restrictions”) that are prohibited only where they have the object or effect of significantly preventing, restricting or distorting competition in the relevant market:

1. Territorial exclusivity: requiring the distributor or franchisee to resell only within a defined geographic area.

2. Customer allocation: requiring resale only to specified customers or categories of customer.

3. Exclusive purchasing obligations: requiring the distributor to buy all or substantially all of its requirements for the relevant goods exclusively from one seller.

4. Restrictions on the seller: preventing the supplier from selling the same goods or services to other purchasers.

5. Tying: requiring the purchaser to buy additional, unrelated goods or services as a condition of obtaining the goods or services it actually wants.

However, the Article 3(14) of the Law broadly defines “significantly prevent, restrict, or distort” as the extent or degree of impact on competition for foods or services, as determined by the Cambodia Competition Commission (CCC) through economic analysis or any other means of analysis.

This means that the Law leaves the assessment to  CCC, which may rely on economic analysis or other methods to reach its determination on a case-by-case basis.

Each of these Concerning Restrictions (in particular, the territorial exclusivity) is common commercial practice in franchising or distribution agreement and is generally accepted across most jurisdictions, as long as it does not harm competition within the market. For this reason, parties to a vertical agreement should have a careful look into each restriction, rather than simply copying a template used elsewhere in the region.

Is there any exemption from such prohibition?

The Concerning Restrictions falling within the scope of Article 8 may be exempted from prohibition. Articles 12 to 14 of the Law provide a mechanism for businesses to seek a prior exemption from CCC before entering into an agreement or implementing the relevant conduct.

To obtain the exemption from prohibition, the applicant must justify that the following 4 requirements (“Exemption Requirements”) are fulfilled:

1. The agreement or Concerning Restrictions produces significant identifiable technological, economic or social benefits;

2. Such benefits would not exist without the agreement or restrictions;

3. Those benefits significantly outweigh the effects caused by any determined preventing, restriction, and distorting of competition; and

4. The agreement or Concerning Restrictions do not eliminate competition in any important aspects of goods or services.

While second paragraph of Article 8 of the Law implies that that prohibition on the Concerning Restrictions is conditional upon its effect that harms the competition in the market, Article 12, on the other hands, gives the impression that, by default, the Concerning Restrictions are prohibited until they fulfilled the 4 Exemption Requirements.

This raises a practical question: should parties contemplating the Concerning Restrictions that may or may not be caught by Article 8 should apply for exemption before implementing the arrangement, as a conservative approach, to avoid any fine and penalty imposed under the Law? Or should they wait and rely on Article 8’s own qualifying language, only addressing the issue if a CCC investigation later finds that the restriction is harmful to competition in the market?

What happens if the vertical agreement violates Article 8?

Where CCC determines that a vertical agreement has the object or effect of significantly preventing, restricting or distorting competition, it has broad investigative and enforcement powers the Law, including the authority to investigate, request information and documents, carry out inspections, and issue binding decisions.

Article 34 of the Law sets out the range of sanctions the CCC may impose for breaches of the Law, including written warnings, pecuniary fines, financial penalties, suspension or withdrawal of business registration certificates, licences or permits, and, in some cases, imprisonment.

For violation of Article 8 specifically, Article 35 provides that a person found to have violated Article 8, Article 9 (abuse of dominance) or Article 11 (anti-competitive business combinations) is subject to a written warning and a pecuniary fine of 3% to 10% of the person's annual turnover for each year the infringement continued, up to a maximum of three years.

If the person continues the infringement after receiving a written warning and fine, CCC may also seek suspension or withdrawal of the person's business registration certificate, business permit or licence. This sanction can affect the business's ability to keep operating.

We should note that not only a clause that is in contradiction with Article 8 unenforceable, CCC may upon investigation and determination impose penalties.

Key takeaway:

Although it makes sense to expect early priorities focus on higher-profile group of businesses and dominance matters, it does not mean that vertical agreements are a low-risk area for SMEs.

Given the consequences for violating Article 8, businesses should review their distribution, franchise, supply and licensing agreements for the clauses described above, with particular attention to any minimum resale price requirement, which carries no defense once identified. Where a territorial, customer-allocation, exclusivity or tying clause raises doubt, applying for an exemption from the CCC before implementing the arrangement may be a protective path rather than waiting to address the issue after the fact.

The information in this article reflects the law as at the date of publication and is for general reference only. It does not constitute comprehensive legal advice. If you need further guidance, feel free to reach out to us at connect@vlplaw.co.