Following the adoption of the Directive 2019/633 of the European Parliament and of the Council on unfair trading practices in business-to-business relationships in the agricultural and food supply chain (the “Directive”), a draft law amending the Czech Act No. 395/2009 Coll., on significant market power in the sale of agricultural and food products and its misuse, as amended (the “Act on Significant Market Power”), was proposed. We have already addressed the Directive in our article, which provided information and summarized the fundamental changes that should come along with the adoption of the Directive.
The amendment to the Act on Significant Market Power is currently facing criticism, especially from those who may be affected by the amendment, i.e. suppliers, because it excludes, within the framework of certain provisions, the existing practices in the food market and industry, for example by excluding quantity discounts.
Another issue that is dealt with partly in the amendment to the Act on Significant Market Power is the issue of dual food quality.
Amendment in general
The amendment focuses mainly on changes in the area of contracting and declaring and introducing a list of unfair commercial practices in the sale of agricultural and food products.
The Directive, which must be transposed into Czech legal system, is based on the principle of minimum harmonization and thus allows member states to either adopt or maintain stricter legislation than that contained in this Directive. The proposed amendment makes use of this possibility in several places and suggests anchoring stricter legislation compared to the Directive, which, however, cannot be viewed in all respects as positive and is not seen with positive feedback from representatives of the food industry.
The amendment focuses mainly on the following:
- particulars of the contract between the customer and the supplier;
- guaranteed purchase price validity period;
- the method of assignment of the receivable;
- reimbursement of sanctions imposed by the inspection body; or
- carrying out audits and checks at supplier´s expense.
However, for example, the amendment does not distinguish between agricultural and food products and perishable agricultural products and food products, does not classify customers into 5 size groups or unifies the maturity of all payments regardless of the type of food for 30 days.
Legal analysis of some proposed changes
The draft amendment forbids any quantity discounts, the invoice must always contain the final purchase price, this also applies to extraordinary sales events. It should also be prohibited to require the cost of all services related to the sale of goods (e.g. secondary placements, logistics, advertising), respectively theirs at least partial transmission to the supplier shall be prohibited. Consequently, de lege ferenda, the limit of 3% of the supplier’s turnover to pay for these services, which is still in force, is also deleted.
The draft of amendment also requires agreement of the terms and conditions of comparable performance for all suppliers – the applicable legislation allows for differentiated conditions, provided there is an objectively justifiable reason for doing so.
The written contract between the customer and the supplier will have to be newly explicitly concluded before the commencement of supplies of food or services.
Definition of significant market power
The amendment also introduces a new definition of significant market power, which is regulated in Section 3 of the Act on Significant Market Power and is based on the wording of the Directive. In order to determine significant market power, it is essential to determine the net turnover of sales of food and related services. However, the concept of net turnover is not further specified in the amendment – it is not stated whether it is net turnover for the sale of food and related services before or after taxation or whether the turnover also includes the resale of food (i.e. sale of food purchased by the customer for resale) or the sale of food produced by the customer, which, according to some opinions, should be specified to maintain legal certainty.
Other changes
The provisions of Section 3a of the Act on Significant Market Power which regulates the mandatory requirements of the contract also was subject to further significant changes. The new amended wording of the provision dropped out the obligation to adjust the contract between the customer with significant market power and the supplier to the amount of the agreed price. In the sense of the supplier´s protection, it would seem appropriate to leave the provision on mandatory anchoring of the agreed price as an essential part of the contract.
A new obligation was added (Section 3 par. 1 letter c) stipulating that in the event of an extraordinary sale event, the contract must include the higher purchase price, the amount of food to be included in the event and its duration. The provision was clearly inserted, in particular to ensure the protection of small suppliers who deliver perishable foodstuffs. In the absence of such a provision, suppliers are currently under great pressure in the context of organizing discount events by customers, when customers for example in inadequate advance, change the requirements for the quantity of food to be delivered or the duration of the event, as a result of which, the suppliers cannot respond to the situation in a timely and proper manner. If they have stored more goods than the customer eventually took from them, they often must sell it below the price and the customer is not sanctioned or the customer asks the supplier to deliver a larger quantity of goods. It cannot be delivered, and the supplier is sanctioned again. In this context, it would also be appropriate to define the term of quantity of food.
Pursuant to Section 4, the definition of abuse of significant market power has also been modified and extended. As abuse of significant market power is considered, for example:
- unilaterally changing the terms and conditions;
- requiring payment for a deterioration of the food quality or a loss of food that occurs after the transfer of ownership of the food to the customer not due to the fault of the supplier;
- misuse of the supplier’s trade secret;
- threat or retaliation where the supplier exercises his contractual or legal rights;
- the negotiation or making of payments conditional on the storage or display of foods, their placing on the market or the making available on the market;
- arranging or claiming reimbursement of discounts on food sold in the context of an extra sale event;
- negotiating or claiming payments for food advertising by the customer;
- negotiating or applying payments for the adjustment of the customer’s sales premises for food sales;
- preventing the supplier from assigning a receivable against the customer;
- negotiating or applying quantitative discounts or similar arrangements on the supplied food.
As already mentioned above, some practices newly identified as abuse of significant market power are common practices in the supplier – customer supply chain, the prohibition of which could cause significant issues across the food industry.
Dual quality food
The proposed amendment also introduces an obligation for suppliers (which is not in principle consistent with the whole concept of legal regulation of mutual relations of the supplier customer envisaged by the Directive) as new Section 4a of the Act on Significant Market Power in which it stipulates that the supplier must not prevent the customer from supplying, importing or selling foodstuffs intended for the market in another member state of the European Union to the Czech market.
However, detailed regulation of the so-called ban on dual food quality is to be introduced by a separate amendment to the Czech Act on Foodstuff.
Conclusion
The amendment, as proposed now, rather distorts the existing practice, to which most of the suppliers within the food industry have adapted yet and, to certain extent, it restricts the market economy principle by the newly introduced rules.
In some cases, it goes beyond the requirements of the Directive, which nevertheless does not serve the purpose and preserve the very purpose of the Directive, namely the protection of suppliers as a weaker party in the supplier – consumer supply chain.
If you have any questions about the amendment to the act on significant market power, dual quality of food or food law in general, we are at your disposal – do not hesitate to contact us.
Mgr. Bc. Štěpánka Vajdová, junior lawyer – vajdova@plegal.cz
Mgr. Jakub Málek, partner – malek@plegal.cz
Veronika Pečová, legal assistant – pecova@plegal.cz
5. 11. 2019