Commercial and technology contracts legal A-Z: V is for vertical restrictions

Vertical agreements are agreements made between companies that are active at different levels of the supply chain. They are one of the most frequently seen types of commercial contracts. Examples include supply contracts between a manufacturer and a distributor or between a distributor and a retailer.

Vertical restrictions or vertical restraints refers to obligations in vertical agreements which limit the freedom of one party to take particular actions under such agreements. The most common examples of these include:

• Limits on the onwards sale price that can be charged by a buyer.
• Non-compete obligations on a buyer.
• Restrictions on the territory or customers to whom contract goods can be supplied.
• Exclusive supply obligations on a seller.

Vertical restrictions have the potential to infringe competition law (in the UK the Competition Act 1998), particularly if they constitute hardcore restrictions (e.g. fixing a buyers resales price) or are insufficiently limited in terms of scope or duration. However, regulators also acknowledge that in many cases restrictions will be a necessary or even pro-competitive part of a vertical arrangement. 

To reflect this both the EU and the UK have broadly similar guidelines and law exempting vertical agreements from competition law enforcement where certain conditions are fulfilled: In the UK the Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 (VABEO) has been in force since 1 June 2022. 

The position in the UK remains largely the same as the position in the EU, for example the exemption applies to arrangements where parties have market shares below 30% and the list of problematic restrictions is almost identical. However, there are now some detailed differences in approach in the UK which may need to be considered. Businesses should therefore carefully analyse the application of the law and guidelines in this area, and seek advice where necessary. The consequences of mistakes can be severe, with penalties of up to 10% of worldwide turnover and the potential for damages actions.