In recent years food sector analyses across the EU have flagged the issue of unfair abuse of power between contractual parties1 as being a concern and since the controversial practices do not always fall under existing competition law rules, member states and the EU have recognised the need to further clarify and regulate trading practices in the food supply chain. The challenge is to create a regulatory environment, which will clearly lay out which practices are in breach of competition laws and, which are grossly unfair and consequently in breach of other applicable national and EU laws, and to ensure that adequate enforcement measures are provided going forward
Imbalance of powers and unfair trading practices
In its Communication on tackling unfair trading practices in the business-to-business food supply chain (“Communication”), the European Commission (“EC”) points out that while the existence of a difference in bargaining power is common in commercial relationships, a problem arises when this difference is abused and leads to unfair trading practices (“UTPs”). According to the Communication, common examples of such practices include abuses of unspecified and incomplete contract terms, excessive transfer of contractual risks and costs to the weaker party, and abuse of confidential information.2 Only some of these practices fall under (EU or national) competition law rules, however, so the EC and member states are in the process of creating a separate legal environment to tackle those that remain.
Competition law assessment
Unfair conduct of a contracting party with a stronger position is captured by EU or national rules of competition law only where that party holds a dominant position in the relevant market (whereby geographically the procurement markets for most food items are usually defined as national or larger).3 In such cases, some UTPs qualify as an abuse of a dominant position in the sense of Article 102 TFEU (and respective national rules). Practices such as unnecessary or discriminatory contract costs charges and demands for super rebates are exploitative abuses, although unequal bargaining power is often also exploited to foreclose competitors, for example through as exclusivity obligations, minimum purchasing obligations, tying and refusals to supply.4 However, the competition law criteria for finding of abuse should be maintained and delineated from those applicable to UTP; in that sense not all UTP committed by a dominant undertaking should qualify as an abuse under 102 TFEU or respective national rules.
Regulation of UTPs
There is no unified and coherent regulation of UTPs on EU level nor harmonisation among member states. The EC is encouraging member states to put in place adequate measures against UTPs by taking into account their national circumstances and by the end of 2015 the EC shall assess what has been done on the national level and evaluate whether a regulation at EU level is required and, if so, what form it should take. In view of the European Parliament, the first regulatory steps to be taken on the EU level would include drawing up of a clear definition of UTPs and then establishing rules for their prohibition. Furthermore, the member states should be required to set up or recognise a national authority to oversee the process.5
National update: Slovenia
In Slovenia, the latest amendment of the Slovenian Agriculture Act in 2014 introduced a new prohibition of abusive conduct (defined as contrary to “good business practices”) by a contracting party in food supply agreements, which has a considerable market power (based on the scope or value of the sales). Among the examples of such unfair conduct the Agriculture Act lists undue delay in payments, forcing unfair payment terms, rebates, promotions, sales and delivery conditions, additional payments for, or return of unsold goods etc. The Agriculture Act defines that such abusive provisions are legally void.
To secure the enforcement of this rule, the amendment also introduces the institute of an Ombudsman for Relations in the Food Supply Chain, whose primary tasks are an overview of the food supply in Slovenia, recommendation of good practices and reporting of bad practices to the Slovenian Competition Protection Agency (“SCPA”)6. However, it is yet to be seen how exactly the cooperation between the Ombudsman and SCPA will work in practice and whether a clear line between competition law rules and the new rules on unfair conduct will be maintained.
While already to competition law restrictions on drafting supply agreements, practitioners and businessmen will, going forward, also have to pay attention to the regulation of UTPs, setting a higher threshold of diligence. Initially, this will be met with some growing pains due to the absence of a clear record on the application of such rules — a problem the regulators should recognise and consider addressing with clarity and transparency in other ways.
While already accustomed to competition law restrictions on drafting supply agreements, practitioners and businessmen will, going forward, also have to pay attention to the regulation of unfair trading practices, setting a higher threshold of diligence. Initially, this will be met with some growing pains due to the absence of a clear record on the application of such rules - a problem the regulators should recognise and consider addressing with clarity and transparency in other ways.
- A few examples of such inquiries: Germany, BKA: Sektoruntersuchung “Nachfragemarkt im Lebensmitteleinzelhandel” (2014); Slovenia, AVK: Preiskava sektorja prehrane (2014); Austria, BWB: Allgemeine Untersuchung des österreichischen Lebensmittelhandels unter besonderer Berücksichtigung des Aspekts der Nachfragemacht (2007); European Commission: ” The economic impact of modern retail on choice and innovation in the EU food sector” (2014).
- Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Tackling unfair trading practices in the business-to-business food supply chain, 15 July 2014, pg 5.
- For market definition see, for example, IV/M.803 — Rewa/Billa (1996), para 14; COMP/M.2161 — Ahold/Superdiplo (2000), para 21.
- For examples of how NCAs have established the abuses of dominance in the food market, see ECN Report on competition law enforcement and market monitoring activities by European competition authorities in the food sector, 2012.
- European Parliament, Committee on the Internal Market and Consumer Protection: Draft Report on unfair trading practices in the food supply chain (2015/2056(INI)), 6 July 2015, pg 6.
- His first list of good and bad practices after his initial months in the position was presented this September: Nepoštene prakse v verigi preskrbe s hrano Ljubljana; Slovenski dan varstva konkurence; 17 September 2015.