17 Sept 2018
Unfair Trade Practices: European Parliament Holds Debate on Future Law, with Suppliers and Retailers of Foodstuffs to Be Affected
Freedom of contract has long underpinned business to business (B2B) relationships, as distinguished from business to consumer (B2C) relationships which are heavily regulated in the EU. In B2B scenarios parties are usually free to tailor contracts according to their needs. However, this longstanding legal principle is being increasingly questioned in the food supply chain, where unfair trade practices are widespread.
Unfair trade practices are defined as B2B practices that deviate from good commercial conduct and are contrary to good faith and fair dealing. Such practices stem from the significant differences in bargaining power between the different operators in the food supply chain, resulting in situations where the weakest link, usually agricultural producers, are subject to undue economic pressure. According to recent statistics, farmers receive, on average, just over 20% of the share of value of agricultural products, with 28% going to processors and as much as 51% to retailers.
In addition, the combination of the voluntary “Supply Chain Initiative”, a private industry initiative, and the divergence of Member States’ regulatory approaches to unfair trade practices, results in dissimilar conditions of competition, thereby disrupting the workings of the single market. In the absence of formal coordination structures at EU level, there is a lack of coordination among the enforcement bodies of Member States.
The European Commission’s legislative proposal distinguishes between two kinds of trading practices. While many are simply unfair in nature “as such”, others may be acceptable if clearly agreed by the parties, and become unfair only when applied without agreement. Of particular note to Hong Kong’s foodstuff sellers, four trading practices which fall into the first aforementioned group would be prohibited outright under the future law: (i) late payments for perishable food products; (ii) last-minute order cancellations; (iii) unilateral or retroactive changes to contract terms; and (iv) any obligation on the supplier, imposed by the buyer, to pay for wasted products.
Further trading practices would be prohibited unless these are agreed in clear and unambiguous terms by the parties to the supply agreement: (i) return of unsold food products by a buyer to a supplier; (ii) the charging of a payment by a buyer to a supplier as a condition for a supply agreement on food products; and (iii) payment by the supplier for the promotion or the marketing of food products sold by the buyer.
The proposal aims specifically at empowering the weakest partners with little bargaining power, so the supplier has to be of small or medium size according to the definition set at EU level. Small and medium-sized enterprises (SMEs) are defined in EU Recommendation 2003/361.
Hong Kong sellers may like to know that the European Parliament is currently debating the proposal. Parliamentarians (MEPs) are primarily concerned with the limited scope of the proposal which covers only SME suppliers. Several MEPs and the foodstuffs industry have voiced their concerns regarding the potential for discrimination between the different operators in the food supply chain. Many advocate for a wider scope and that the proposed Directive should be applicable to all players in the supply chain, regardless of their size, as it would impact all commercial relations.
British MEP Anthea McIntyre explained that the crux of the matter lies in “fairness… and what is good for SMEs should be good for bigger suppliers too. Despite their size, they can be just as vulnerable to mistreatment by major retailers.” This view is equally shared by the “Visegrad Four” (Poland, Czech Republic, Slovakia and Hungary), as well as Bulgaria, Romania, Croatia and Slovenia. They claim that limiting the scope of the future Directive will lead to further disproportions within the food supply chain. In opposition, Germany, the Netherlands, Denmark, the UK, Ireland, Finland, Sweden and Cyprus back the Commission’s proposal. Meanwhile, countries like Belgium, Luxembourg and Malta are seeking a middle-ground solution. Under pressure from the Austrian Presidency to finalise negotiations, it is left to be seen whether a timely agreement will be reached to extend the scope of the Directive to include big multinational suppliers.
Hong Kong’s food suppliers may like to know that the proposed Directive will apply to EU and non-EU suppliers alike in order to prevent unintended distorting events.
The choice of legal instrument (namely, a directive as opposed to a regulation) aims at providing the necessary leeway for Member States to impose stricter conditions than the minimum contained in the future law, should they wish to do so. The fact that B2B relationships are under review should be taken into account when working with other businesses within EU supply chains. Hong Kong businesses may wish to consider how, as a company or a group of companies, they carry out their business across supply chains, when their counterparties are in different jurisdictions, where different national law requirements or trading practices may apply.
Another contested issue of the proposed Directive concerns its implementation. As it is, the future Directive will require Member States to designate a public authority in charge of enforcing the rules. This body would be responsible for conducting investigations and imposing fines in case of proven infringements. However, some have suggested the creation of an EU-wide monitoring mechanism and the appointment of a European regulator.
The debate is not yet closed; the European institutions involved in the legislative procedure (the Commission, the Parliament and the EU Council) have to hammer out their differences before the Directive can be adopted, which may take several months or even longer.