Protection of distributor’s rights in Kazakhstan
This note will be of interest to manufacturers and distributors of goods in Kazakhstan.
We are pleased to share with you the results of an interesting court case.
A food production plant located in Kazakhstan granted a Distributor, also located in Kazakhstan, the right to exclusive sales of the Plant’s products within a specific territory – Western Kazakhstan.
The Distributor invested its own funds in the brand recognition of the product for several years. When sales significantly increased, an unscrupulous competitor emerged.
This unscrupulous competitor, without incurring marketing, warehouse, and personnel costs, began selling the product by purchasing it on the wholesale market near the Plant’s location. Furthermore, the competitor conducted cash sales, avoiding tax payments. Thus, the competitor was able to offer a product price equivalent to (sometimes even lower than) the Distributor, who received a discount from the Plant ranging from 15% to 20%.
The Distributor’s initial actions were as follows:
1. Complaint to the National Chamber of Entrepreneurs “Atameken.” However, unfortunately, this body proved to be entirely ineffective.
2. Complaint to the Tax Department regarding the tax evasion by the unscrupulous competitor. However, the Tax Department did not conduct an audit of the competitor since (1) there were no discrepancies in turnover and payments to the budget in the tax accounting system, and (2) the taxpayer was not on the list of scheduled audits. Essentially, the tax authorities did not see the turnover in the system as the transactions were conducted in cash.
3. Legal action to prohibit the competitor from selling the Plant’s products. The court accepted the Distributor’s arguments and evidence, issuing a decision to restrict the unscrupulous competitor’s sale of goods.
Losses.
According to current judicial practice, proving losses in Kazakhstan is very difficult. The primary supporting documents for calculating losses can be (1) accounting invoices and (2) bank transfers. However, the difficulty lies in the fact that the unscrupulous competitor destroys accounting invoices and disputes the requirements for banking data, citing banking secrecy laws.
As a result, in the first court case, the Distributor was unable to recover the losses incurred. However, the Distributor, having the relevant court decision, uses it to prevent unfair competition from becoming widespread. When identifying an unscrupulous competitor, the Distributor sends a copy of the decision to market participants, thereby discouraging medium and large entrepreneurs from violating such conditions.
Additionally, the Distributor initiated a second court case to recover damages from the unscrupulous competitor. We will definitely inform you of the results.
To protect business investments, we recommend that Distributors:
1. Properly prepare the distribution contract;
2. Document expenses for developing this direction;
3. Closely interact with clients (agents) regarding the state of the market and competitors.
