The Government of the Republic of Croatia passed the bill regulating the unfair trading practices in the business-to-business food supply chain to be considered by the Croatian Parliament. Under the proposed Act on the prohibition of unfair trading practices in the business-to-business food supply chain the Croatian Competition Agency is empowered for the enforcement of the provisions concerned.
At the traditional lawyers’ gathering on 17 May 2017 in Opatija the president of the Competition Council, Mr Mladen Cerovac, dealt with the crucial provisions of the Act on the prohibition of unfair trading practices in the business-to-business food supply chain (hereinafter: Unfair Trading Practices Act) and explained the legal proceedings that will be carried out by the Croatian Competition Agency (hereinafter: CCA).
In spite of the fact that unfair trading practices (UTPs) may in principle occur in any trading sector their presence in the food supply chain is particularly alarming.
Developments such as the increased concentration and vertical integration of market participants across the EU have led to structural changes in the food supply chain. Mergers and acquisitions in this sector create food supply chains of significant market power. These developments have contributed to significantly different levels of bargaining power and economic imbalances in individual trade relations between the actors in the chain.
The European Commission started to tackle these imbalances as early as in 2008 when it analysed the segment concerned, compiled a report and in 2014 provided for recommendations with the view to tackling these issues in the 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.
The food supply chain is a complex vertical chain consisting of producers, buyers, processors, wholesalers and retailers of food and agriculture products and other participants providing services linked to this chain. The final point in this chain is the consumer.
There are several facts why the food supply chain is elementary for the internal market:
- The food supply chain ensures the delivery of food and drink products to the general public for personal or household consumption. It affects all consumers in the EU on a daily basis;
- Expenditure on food accounts for around 14% of the average EU household budget;
- The sector employs directly or indirectly more than 47 million people in the EU mostly in small and medium-sized enterprises;
- The total value of the EU market for products connected with the retail food trade is estimated at EUR 1.05 billion and accounts for around 7 % of gross value added at EU level;
- Cross-border trade between EU Member States accounts for 20 % of the EU’s total food and drink production;
- At least 70 % of all Member States’ food exports are to other Member States.
Croatia is a part of the internal market and the trends and business structures found in the EU are spilled over to the markets in Croatia. In the same way unfair business practices in the food supply chains cross the Croatian national borders.
The CCA indicated the need to tackle the issues in the business-to-business food supply chain as early as in 2014.
The decision to opt for a regulation framework resulted in the proposal of the Unfair Trading Practices Act following the Commission Communication on UTPs in 2016.
The proposed Unfair Trading Practices Act defines the UTPs as contract terms and commercial conduct that are imposed by a buyer, processor or a re-seller on the supplier using its strong bargaining power that are contrary to good faith and fair dealing, equality of the trading partners, reciprocal supplies of service and good commercial conduct in the production and trading of agricultural or food products. In other words, the Unfair Trading Practices Act covers exclusively trading in agri / food products.
Firstly, the term “strong bargaining power” means a certain level of realized total annual turnover. In that sense, it shall be considered that a company has a superior bargaining position if:
- in the case of a re-seller, its aggregate turnover exceeds the threshold of a 100 million Kuna;
- in the case of a buyer or processor, their respective aggregate turnover exceeds 50 million Kuna,
where total turnover includes the turnover of all connected companies realized in Croatia, excluding the turnover realized between the members of the group.
Within the meaning the Communication from the Commission there are four main categories of UTPs identified under the Unfair Trading Practices Act:
- a trading partner’s excessive and unpredictable transfer of costs or risks to its counterparty;
- demanding from the counterparty for conveniences for the services not rendered (such as listing fees or so called “reverse margin”);
- unilateral or retroactive changes to contract terms (unless it has been agreed so under fair conditions);
- unilateral and unfair termination or threats of disruption of a commercial relationship.
However, unlike the Commission Communication and the various ways of addressing the issue concerned in other Member States that regulate solely the relationships between the suppliers of agri / food products and retailers, the Croatian Unfair Trading Practices Act considerably raises the number of addressed actors.
Thus, the Croatian regulation is addressed to all the participants in the production, processing and trading of agricultural and food products, concretely:
– primary producers;
– processors (in the role of buyers for the purpose of their own production);
– wholesalers, and
Although a distinction is made between the agreements entered into by primary producers and buyers, and on the other hand, the agreements concluded between suppliers and re-sellers, the Unfair Trading Practices Act defines that all the agreements should be in writing and entail the following:
- the purchase price or the way the price is defined, and
- the payment terms and deadlines that cannot exceed the 60-day limit,
or otherwise they may be pronounced null and void.
Under the Unfair Trading Practices Act the receipt for each delivery must be issued.
The general terms of business should be explicitly defined and provide clarity and may not contain provisions that are understood as UTPs.
The Unfair Trading Practices Act provides for a non-exhaustive list of UTPs used by buyers and processors (excluding the re-sellers), such as:
- linking the conclusion of the agreement with barter arrangements;
- asking for compensation for ullage, spillage, spoilage and theft of the products after delivery;
- imposing an obligation on the supplier not to sell to others under a lower price.
The Unfair Trading Practices Act provides for an additional list of 24 forms of unfair trading practices that are specific for the re-sellers when they charge different fees, such as:
- listing or slotting fees for product shelf placement (unless this is particularly asked for by the supplier);
- fees for refurbishing and conversion of the re-seller’s outlets;
- fees for marketing and advertising services of the re-seller;
- fees for managing unsold merchandise and goods past the expiration date;
- fees for market research.
In addition, a re-seller shall be prohibited to:
- make the conclusion of the agreement subject to barter deals;
- transfer of commercial risks to the supplier in the form of compensation for ullage, spillage, spoilage and theft of the products or monetary fines and other penalties imposed on the re-seller;
- re-selling of its own brand below the price of the production;
- participate in further reductions or repeated discounts.
The Croatian Competition Agency (CCA) is empowered for the enforcement of the provisions concerned. It opens the proceeding on its own initiative or based on the request of a party. The proceeding is carried out under the General Administrative Procedure Act whereas the fines are imposed under the provisions of the Unfair Trading Practices Act. The investigation is carried out under the provisions of the General Administrative Procedure Act. Within the proceeding, taking into account the standing of the party concerned, the CCA exams all the evidence and establishes whether UTPs have been used.
The CCA is empowered to seek written observations, contracts, documents and other information both from the parties concerned and any other legal or natural persons that do not have the status of the party to the proceeding, associations, professional organizations or interest groups, chambers and consumers’ associations.
Where after the investigation it establishes that the UTPs provisions have been violated the CCA communicates to the party a Statement of Objections (SO), informs it about the findings of the Competition Council and summons the party to the oral hearing.
The CCA closes the proceeding by taking an infringement decision and imposing a fine. The deadline for taking the infringement decision is 60 days from the day on which the CCA established all the relevant facts.
The Unfair Trading Practices Act ensures judicial review. The party may file a law suit at the competent administrative court that rules in the administrative dispute concerned. Administrative disputes are emergency procedures.
On the other hand, the Unfair Trading Practices Act provides for the possibility for the party to voluntarily offer committments to eliminate the established UTPs. Such a proposal may be offered by the party within 40 days from the opening of the proceeding. The CCA decides whether the proposed measures are sufficient for the elimination of the UTPs, taking into account the gravity, scope and the duration of the infringement. If the CCA finds the proposed committments acceptable, it issues an interim decision on the basis of which these committments become binding for the party that must provide evidence on the fulfilment of these measures. Where the party submits this evidence, the CCA decides to terminate the proceeding. On the other hand, where the CCA assesses the proposed measures as inadequate or where the party fails to submit evidence on the fulfilment of the measures, the CCA informs the party thereof and continues to carry out the proceeding.
Depending on the gravity and the significance of the infringement the fines that may be imposed for the use of UTPs fall under three categories:
- fines for serious infringements,
- fines for minor infringements and
- fines for other infringements.
The fines for minor infringements depend on the fact whether the infringement was committed by a legal or a natural person. Though, these fines can solely be imposed on persons that hold a status of the party to the proceeding.
The cap amount of the fine for a minor infringement that may be imposed on the party to the proceeding is therefore:
- HRK 1.000,000 for a legal person, and
- HRK 500,000 for a natural person.
In the case of a serious infringement the maximum fines are:
- HRK 3.500,000 for a legal person, and
- HRK 1.500,000 for a natural person.
For other infringements the law provides for a lower maximum amount of fines:
- HRK 100,000 for a legal person, and
- HRK 25,000 for a natural person.
When imposing the fines the CCA takes into account all mitigating and aggravating circumstances, such as the gravity, scope and duration of the infringement and the consequences this infringement had on the suppliers.
Limitation periods: the relative deadline for the establishment of the infringement and the imposition of the fine is five years, whereas the absolute limitation period is 10 years after the date of the infringement.
The Unfair Trading Practices Act enters into force on the eighth day from its publication in the Official Gazette. However, given the fact that the Unfair Trading Practices Act provides for the transition period until 31 Dec 2017 for all the retailers, buyers and processors who have to adjust the provisions of their agreements with the suppliers of agri and food products with the UTPs rules, and taking into account the fact that the Unfair Trading Practices Act is at the moment entering the parliamentary adoption procedure, it can be realistically assumed that the provided transition period will not be sufficient for a qualitative adjustment of the contracts with the provisions of the piece of legislation concerned.
Namely, there are hundreds, if not thousands of concluded agreements whose review takes time to be re-negotiated. On the other hand, it is also the CCA who needs some organizational adjustment period. In spite of the fact that the CCA proposed a pragmatic provision allowing the agreements to adjust in the six-month-period after the entry into force of the Unfair Trading Practices Act, this proposal was not accepted.
The real effects of the enforcement of the UTPs provisions will yet to be seen. The Ministry of Agriculture will carry out the review after two years of enforcement.