Member Article

The European Court of Justice (ECJ) has ruled that motor vehicle distribution agreements may benefit from the exemption in Regulation 1400/2002 (Block Exemption) even if the supplier can terminate the agreement without notice in certain circumstances. The Block Exemption applies to such agreements provided the supplier gives reasons for the termination which are subject to review by an independent expert or arbitrator. In particular, such a review must be able to establish that the agreement was not terminated by the supplier where the distributor engaged in activities permitted under the Block Exemption.

Background
Article 81(1) of the EC Treaty prohibits agreements between undertakings which may affect trade between Member States and which have the object or effect of preventing, restricting or distorting competition in the common market. The Block Exemption provides an exemption from this prohibition to certain categories of motor vehicle distribution and servicing agreements provided certain conditions are complied with.

One of the aims of the Block Exemption is to prevent motor vehicle suppliers from terminating a distribution agreement because a distributor or repairer has engaged in certain behaviour which the European Commission considers to be pro-competitive. Such behaviour includes active or passive sales to foreign buyers, multi-branding or subcontracting of repair maintenance services. With this in mind, the Regulation only applies to motor vehicle distribution agreements where the agreement (i) requires the supplier to give notice of termination of the agreement in writing, setting out detailed, objective and transparent reasons for terminating the agreement; and (ii) gives the parties the right to refer disputes to an independent expert or arbitrator. These provisions are intended to prevent suppliers from terminating an agreement with a distributor because it is engaging in activities which are not restricted under the Block Exemption. The dispute resolution procedure should allow the expert to determine whether the termination of an agreement is justified based on the reasons provided in the notice.

Facts of the Case

City Motors Group NV (CMG) distributed Citroën cars in Belgium. The termination provisions of its agreement allowed Citroën to terminate the contract immediately without giving formal notice if CMG sold new Citroën cars, equipment and/or accessories to a reseller who was not a member of the official Citroën distribution network, authorised as a reseller and established in the EEA or in Switzerland. Citroën terminated the agreement when CMG sold cars to a company, Interlease NV, who was not authorised by Citroën. CMG sued for damages, claiming that Citroën had terminated the agreement in contravention of the Block Exemption.

The Belgian court asked the ECJ to consider whether the supplier’s right to terminate without notice in the circumstances meant that the agreement could not benefit from the Block Exemption.

Judgment

The ECJ stated that an agreement which provides for termination of the contract without notice in certain circumstances does not automatically fall outside the scope of the Block Exemption. The ECJ held that, as the Block Exemption does not prohibit parties from providing for an express termination clause, the validity of such a clause is governed by national law.

The ECJ confirmed the need for the supplier to give reasons for the termination, whether pursuant to an express termination clause or otherwise. These reasons must be subject to review by an independent expert or arbitrator. It is for the national court to verify that an effective review is guaranteed by national law. In particular, the review must be able to establish that the termination was not the result of activities of the distributor which the supplier cannot restrict under the Block Exemption.

The Court also held that the review by the independent expert or arbitrator does not necessarily need to occur before termination of the agreement takes effect. Moreover, the Block Exemption does not require that the effects of the termination need to be suspended pending the expert’s decision as to whether or not the termination was valid.

The ECJ stated that, while it is for the national court to consider whether or not the termination was valid, the principles of equivalence and effectiveness apply. This means that the independent expert or arbitrator cannot be required to undertake a review of the validity of the termination before termination if there is no equivalent requirement under domestic law (principle of equivalence). Moreover, the ECJ held that the exercise of Community law rights had not been made impossible or excessively difficult in this case (principle of effectiveness). The requirement in the Block Exemption is that there is an effective review of the validity of termination by an independent expert or arbitrator and this does not mean that the review had to take place before termination or that termination had to be suspended.

Comment

The case provides helpful clarification on the interpretation of the Block Exemption. It also provides comfort for suppliers wishing to terminate distribution agreements with immediate effect for objectively justifiable reasons. It is likely that suppliers and their advisers will reflect this ruling in the wording of their distribution agreements.

Source: Case C-421/05 City Motors Groep NV v Citroën Belux NV, judgment of 18 January 2007