Refusal to sell in the automotive sector

Analyse Today’s  automotive sector is a market with many players.  At different levels, networks are built, sales are concluded and trade relationships are maintained.

In this respect , it is not inconceivable that a d grantor refuses to accept  an individual garage owner into his network, or that a distributor of vehicles or parts does not wish to take the plunge with a particular buyer. The motivation for this refusal to sell  can be based on various reasons. So the question arises to what extent the refusal to sell  is legitimate or not.

1. Contractual Relationship Between Parties

If there is a contractual relationship between, say, a concession grantor and concessionaire, on the  basis of which successive purchase agreements are concluded  and the concession grantor has to deliver cars, a refusal to sell  will in principle constitute a contractual default. A concession grantor is not allowed to unilaterally decide just like that to stop his supplies. The same is true for any kind of contract that regulates the relationship between parties. In such cases, normally speaking the  refusal to sell  will compromise the refuser’s contractual liability.

2. No Contractual Relationship – Refusal to sell  is Permitted

If on the other hand there is no contractual relationship between the parties, the refusal to sell  will in principle be accepted. After all,  in our legal system the freedom of entering into a contract and running a business is guaranteed. The  D'Allarde Decree, in force since 1791, allows any enterprise to enter into a contract with anyone of its choice. The refusal to sell  is regarded as the consequence of the autonomy of will , and is therefore lawful in itself.

However, like other rights and freedoms, the right of refusal to sell  is not absolute either. The freedom of entering into a contract  is delineated, on the one hand,  by the Economic Competition Protection Act (ECPA) and, on the other hand, by the abuse of right doctrine.

In the pre-contractual sphere as well some caution is required. In spite of the fact  that the parties have actually not come to a contract yet, the abrupt termination of their negotiations may lead to pre-contractual liability.

3. Refusal to Sell  – Free Competition

Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) are the basis for free and fair competition. Their Belgian implementation can be found in sections  2 and 3 of the Economic Competition Protection Act (ECPA). If the refusal to sell  constitutes  a violation of these provisions, it will invariably be sanctioned.

In order to be able to conclude that the said provisions are violated,  several conditions must have been met. After all, the mere fact that a refusal to sell  may limit competition on the market in itself, is not enough. A violation requires that the refusal to sell is the consequence of an unlawful cartel or  dominant position abuse.

In other words, if two car manufacturers agree not to supply  certain dealers, there might be a violation of free competition if the agreement  between the companies  limits or disturbs free competition. In this context there are, however, exceptions whereby certain agreements are not deemed to  infringe free competition.  Pursuant  to article 101, paragraph 3 TFEU, the European Commission has the power to grant block exemptions with the result that the cartel prohibition will not apply in such circumstances.

In addition, a violation of the cartel prohibition can also have serious consequences. The national courts can nullify  the agreement preceding the refusal to sell, while the European Commission has the power to severely  fine  cartel infringements.

As long as an enterprise refuses on an independent basis  to sell to a particular buyer, it cannot be sanctioned on the basis of article 101, paragraph 3 TFEU. If on the other hand, it can be established that such enterprise would make abuse of its dominant position in case of a refusal, it runs the risk of being  sanctioned pursuant to article 102 TFEU or section 4 ECPA. This implies that a dominant enterprise cannot refuse just like that to provide its products or services to anyone requesting them.

A dominant enterprise may refuse to sell only if its refusal is objectively justified. This results from the special responsibility borne by a dominant enterprise. An important factor to judge whether the refusal is lawful or not, is the presence of alternatives on the market for the buyer. If the national competition authority, court or European Commission do not find an  objective economic justification for the refusal,  they have the power to also impose an obligation to supply  in addition to a fine or penalty.

4. Selective Distribution Networks

Meanwhile, it has become common that some car makes supply their dealers through selective distribution networks. This system is set up  by a manufacturer who selects some distributors before selling, who  in turn  are the only ones allowed to sell the manufacturer’s products.   The purpose of these systems is to keep up a certain standard, which is associated with that product.

In that case the question is when a manufacturer, who refuses to accept a specific car dealer into his  network, acts contrary to  free and fair competition. In order to answer this question, first it must be examined whether  a qualitative or a quantitative distribution network has been set up.  A quantitative network means that the number of buyers is limited and is in principle forbidden.  On the other hand, a qualitative distribution network ensures that a manufacturer may impose certain requirements on its distributors to form part of its network. This kind of network is accepted, provided that the requirements or criteria are laid down uniformly  and non-discriminatorily  for all distributors. Think for instance of the colours and the design of the showroom, the surface area  of the garage. etc.  These criteria must therefore be required to guarantee  the quality of the product concerned.  In this context, the refusal to sell is permitted if a buyer does not meet such criteria.

5. Refusal to Sell  – Abuse of Right

Finally, it is still be possible to sanction a refusal to sell on the basis of abuse of right. However, this is not an unqualified success.

After all, there will be an abuse of right only when it can be proved  that the refusing company has no interest in refusing  and that the refusal is inspired by the intention to harm the other party. The injured enterprise will have to show within this framework that the refusal is purely discriminatory, or that it causes a manifest imbalance between the parties.  In this regard the court has  only a marginal control –  it may only act in a moderating way in the event  of a manifest or obvious  crossing of the limits of reasonableness - and it must not be forgotten that a company  is of course allowed to outline its commercial strategy itself. For instance,  it is in principle permitted that an enterprise refuses to supply a particular company when its competitor places a bigger order.

This will be judged by the court on a case-by-case  basis  and is mostly  an issue of fact.

6. Conclusion

A general prohibition of a refusal to sell is not provided for in our Belgian legal system. A refusal to sell will be sanctioned if the act is contrary to competition legislation or if it is regarded as an abuse of right. Within the framework of a selective distribution network, it is important that transparent and uniform standards are used, and, if the enterprise is in a dominant position, it must show some caution. If these rules are observed,  a company will, in principle, not have to account for its actions   when it refuses to enter into a contract.