Profiting from Breach of Contract in a Selective Distribution System
Alfa Romeo Nederland ('ARN') uses a selective distribution
system for the sale of its Alfa Romeo cars in the Netherlands. In a
selective distribution system the supplier sells the goods only to
distributors who have been selected on the basis of fixed criteria,
and the distributors are not allowed to sell these goods to any
unauthorized distributors.
The dealers included in the distribution system of ARN have to
meet various conditions of quality with regard to the organization
of their business, the training of their staff, and for example
their product presentation. The high requirements of quality
ensure, amongst others, that the number of dealers remains limited
and that a certain exclusivity is guaranteed, enabling the dealers
to recoup their investments.
In order to maintain this exclusivity the distribution system
has a ban on resupplying. Authorized dealers may only sell cars to
end users or to other authorized dealers. This protects the
competitive position of the authorized dealers, because it prevents
the unauthorized dealers from selling new Alfa Romeo's without
having to make big investments.
Dispute with
Multicar
However, ARN found itself confronted with an unauthorized
dealer, Multicar, which did sell new Alfa Romeo's to consumers in
the Netherlands. Multicar did not obtain these cars through ARN but
through an authorized dealer who was breaching the ban on
resupplying, and thus committing breach of contract vis-à-vis
ARN.
ARN took action against Multicar and claimed that Multicar was
acting unlawfully vis-à-vis ARN by deliberately profiting from the
breach of contract by the authorized dealer. ARN argued that the
sale of new Alfa Romeo's by Multicar affected the competitive
position of the authorized dealers. After all, it is conceivable
that this competition makes it harder for authorized dealers to
earn back their - considerable - investments. This undermines the
selective distribution system.
ARN claimed in preliminary relief proceedings that Multicar
would not buy any more new Alfa Romeo's in the EEA, or in the
Netherlands, from an authorized dealer, and would cease the trading
of Alfa Romeo's 'as good as new'.
Adjudication of the
Court of Dordrecht and the Court of Appeal of The Hague
However, the Court and the Court of Appeal rejected the claim of
ARN. The Court of Appeal ruled amongst others that Multicar might
be competing with the authorized dealers. However, even if the
authorized dealers would be in a less favorable position than
Multicar at all, this would first of all be the result of the
specific distribution system chosen by ARN and not the result of
the actions Multicar. The Court of Appeal did not give an opinion
on whether there was unfair competition.
Judgment of the
Supreme Court
The Supreme Court disagreed with the Court of Appeal, and held
that the choice of distributor for certain selling standards should
not have to be for the account of the authorized dealers. According
to the Supreme Court, it may be unlawful under certain
circumstances that Multicar profits from the unfavorable
competitive position of the authorized dealers.
Therefore the Supreme Court held that there is unlawful behavior
vis-à-vis the authorized dealers if a trader not bound by the
distribution system, like Multicar:
- trades products he has obtained by deliberately using the
circumstance that a trader who is bound, and who does belong to
the selective distribution system, violates the ban on resale
vis-à-vis the distributor;
- by selling the cars thus obtained, engages in competition
with traders who are bound and subject to such a ban on resale;
and
- in order to promote its own business, profits from the
circumstance that these bound traders are in a more unfavorable
position than he is, because they have to adhere to the ban on
resale.
Such behavior is unlawful vis-à-vis the bound traders. However,
the Supreme Court also ruled in addition that the above-mentioned
unfair competition may also be unlawful vis-à-vis the distributor
if the distribution system is undermined, for example because:
- other traders bound by the system will also start evading
their obligations;
- they terminate their attachment to the system; or
- third parties do not wish to accede to the system for that
reason.
As regards the question of whether Multicar was acting
unlawfully vis-à-vis ARN, the Court of Appeal should have
adjudicated first of all:
- whether there was unfair competition;
- whether the distribution system was being undermined;
and
- whether the above, given the circumstances, was unlawful
vis-à-vis the distributor.
So the Supreme Court does not rule out that Multicar has indeed
acted unlawfully vis-à-vis ARN. For this reason, the Supreme Court
referred the case back and it is now up to the Court of Appeal of
Amsterdam to apply the criteria set by the Supreme Court and to
give substance to the additional
circumstances.
Conclusion
The regular line in case law has been continued in the
ARN/Multicar judgment. Profiting from breach of contract is not, in
principle, unlawful, but additional circumstances may make it so.
The Supreme Court has confirmed this once again and has also
described some specific circumstances under which the undermining
of a selective distribution system may be unlawful.