European practise

The functioning of the food supply chain in the European Union has been discussed since the financial crisis in 2008. The matters came to a head after the disruptions on the market in agricultural and food products caused by the imposition of the Russian import ban on agricultural products in August 2014. The sanctions on EU agri-food exports have been extended until the end of 2017.

In 2009 the European Commission (EC) adopted a document under the title a Better Functioning Food Supply Chain in Europe. The EC proposed different solutions, admitting that in the longer run, a better functioning food supply chain is crucial for consumers and for ensuring a sustainable distribution of value added along the chain, thus contributing towards raising the overall competitiveness of the food sector. The EC proposed the implementation of activities that would eliminate unfair trading practices (UTPs) in the business-to-business supply chain in Europe and stated that if the identified market malfunctioning was not addressed soon, there was a risk that consumer food prices would increase in turn disproportionately, leading to a drop in purchasing power and consumer confidence.

The harmfulness of unfair trading practices (UTPs) in the food supply chain has also been acknowledged by stakeholders in the High Level Forum for a Better Functioning Food Supply Chain, set up by the Commission in 2010. Its task was to help the EC in the food supply chain related issues and to come forward with the possible solutions. Recognising the need to address the issue at European level, in 2013 stakeholders set up a self-regulatory framework (the Supply Chain Initiative) which the Commission has welcomed and which after nine months has shown a good uptake among retail, wholesale and manufacturing companies and some SMEs. But certain stakeholders – namely farmers and the meat processing industry – have not joined this framework at EU level. The farmers’ representatives have decided not to join the SCI as, in their view, it does not ensure sufficient confidentiality for complainants and lacks statutory powers for independent investigations and meaningful sanctions. The Supply Chain Initiative does not include a precise definition of UTPs, but provides a list of principles of good practices and examples of fair and unfair practices. These principles have been jointly agreed by all relevant EU stakeholder associations in the vertical food supply chain in the framework of the High Level Forum. In 2016 the SCI included 328 groups, wholesalers and retailers representing 1155 business entities from all Member States.

In 2014 the EC adopted 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 Communication aims at contributing to fair and sustainable commercial relationships and a level playing field for market participants in the food supply chain through helping to reduce the harmful effects and possible cross-border obstacles caused by UTPs, especially for SMEs. The direct effects of UTPs, in particular when they are applied in an unpredictable way, can result in undue costs or lower-than-expected revenues for the trading partner in the weaker bargaining position. In order to tackle this problem, the businesses in the food supply chain are encouraged to join voluntary frameworks and consider self-regulatory solutions but where such models should turn out not to effectively address UTPs, an independent authority could be envisaged at the national level.

In the recital of the Communication it says: “…, over the past few decades, 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. These developments have contributed to a situation of significantly different levels of bargaining power and economic imbalances in individual trade relations between the actors in the chain. While differences in bargaining power are common and legitimate in commercial relationships, the abuse of such differences may sometimes lead to unfair trading practices (UTPs). UTPs can broadly be defined as practices that grossly deviate from good commercial conduct, are contrary to good faith and fair dealing and are unilaterally imposed by one trading partner on another.”

Furthermore, assessing the impact of UTPs, the Commission states:

“UTPs may have harmful effects, especially on SMEs in the food supply chain. They may affect the SME’s capacity to survive in the market, undertake new financial investments in products and technology, and develop their cross-border activities in the Single Market. Whilst the overall effect of UTPs on the market is difficult to fully assess in quantitative terms, the negative direct effect on those parties affected by such practices is beyond doubt. In the abovementioned EU-wide survey, 83% of the respondents asserting that they were subject to UTPs said that UTPs increased their costs and 77% stated that UTPs reduced their revenues. Moreover, there could also be indirect effects along the supply chain in terms of SMEs, in particular, refraining from attempting a commercial relationship in the first place due to the risk of UTPs being imposed on them.”

Closing the Communication the Commission undertakes to present a report to the Council and the European Parliament at the end of 2015. In light of this report, the Commission would decide whether further action should be taken at EU level to address the described issues.

In January 2016 the Commission published the Report from the Commission to the European Parliament and the Council on unfair business-to-business trading practices in the food supply chain

Regarding the voluntary Supply Chain Initiative, the Report acknowledges the benefits achieved so far, but also suggests a number of possible enhancement measures to increase the credibility and effectiveness of the initiative, as farmers and meat processors did not join the original Supply Chain Initiative. After four years of existence of the original Forum, a new High Level Forum was established for the time period 2015 – 2019 in which the Republic of Croatia also participates.

In line with the Report there are five key elements important for effective regulatory frameworks to address UTPs:

  1. Coverage in the supply chain – The laws in the majority of the Member States apply to business–to-business (B2B) relationships in all stages of the supply chain. Some Member States apply legislation only to relationships in which one party is a retailer. Looking ahead, given that UTPs can potentially occur at every stage of the chain, Member States that have not yet done so should consider introducing legislation that covers the entire B2B food supply chain. Member States should also ensure that their legislation covers operators from non-EU countries.
  2. Core types of UTPs – The analysis preceding this report identified four key categories of UTPs that an effective regulatory framework should target:

– one party should not unduly or unfairly shift its own costs or entrepreneurial risks to the other party;

– one party should not ask the other party for advantages or benefits of any kind without performing a service related to the advantage or benefit asked;

– one party should not make unilateral and/or retroactive changes to a contract, unless the contract specifically allows for it under fair conditions;

– there should be no unfair termination of a contractual relationship or unjustified threat of termination of a contractual relationship.

  1. Flexibility vs rigidity in defining UTPs – Member States have chosen different legislative approaches to addressing abuses of economic imbalances. Some Member States have general legal provisions requiring an assessment on a case-by-case. Other Member States have chosen to introduce more detailed UTP-specific legislation. Several of these laws contain extensive lists of practices considered to be intrinsically unfair and thus illegal (blacklists). Both approaches have its advantages and limitations.
  2. Confidentiality of complaints and the possibility of own-initiative investigations – An effective enforcement system needs to address the weaker party’s fear of compromising its commercial relationship when complaining openly to authorities about UTPs. Many Member States allow confidential formal complaints where the identity of the complainant is protected. Several allow aggregated complaints which better protect the identity of the complainant, or permit any interested party to lodge a complaint. Member States have appointed different national enforcement authorities to address UTPs. These authorities have the power to launch own-initiative investigations whenever there is sufficient indication that a company has been using UTPs prohibited under national legislation.
  3. Deterrent effect – Measures to tackle UTPs must act as a real deterrent. Just how much of a deterrent they are is determined by the likelihood of unfair practices being investigated by an enforcement authority, and the level of the potential penalties or fines.

The fact that a large majority of Member States (20 out of 28) have introduced regulatory measures and public enforcement systems is a very important development. Therefore, the Commission does not see the added value of a specific harmonised regulatory approach at EU level at this stage. However, the Commission recognises that, since in many Member States legislation was introduced only very recently, results must be closely monitored, and reassessed, if necessary. In any event, before the end of its mandate the Commission will re-assess the potential added value of EU action to address UTPs in light of new developments, or a lack thereof.

The European Parliament has also been involved in addressing the issue with respect to tackling unfair trading practices in the business-to-business food supply chain.

In January 2012 the European Parliament adopted its Resolution of 19 January 2012 on imbalances in the food supply chain where it, among others, calls on the European Commission to propose robust EU legislation to guarantee fair and transparent relationships between producers, suppliers and distributors of food products. At the same time, it calls on the Commission and Member States to continue to address the problem of unfair distribution of profits within the food chain, especially with regard to adequate incomes for farmers, recognises that in order to stimulate sustainable production systems farmers need to be compensated for their investments and commitments in these areas. It calls strongly for a clear, rigorous and objective definition of abusive and unfair practices and highlights a non-exhaustive list of practices about which producers have raised concerns in relation to the functioning of the food supply chain.

In June2016 the European Parliament published its Resolution on unfair trading practices in the food supply chain . It invites the Commission to submit a proposal for an EU-level framework laying down general principles and taking proper account of national circumstances and best practices to tackle UTPs in the entire food supply chain in order to ensure a level playing-field across Member States that will enable markets to operate as they should. It considers that Member States should, when not already the case, establish or recognise public agencies or dedicated bodies like an adjudicator, at national level with responsibility for enforcing action to combat unfair practices in the food supply chain. It stresses that the enforcement authorities should have a range of different enforcement measures and sanctions at their disposal, in order to allow, in accordance with the gravity of the specific circumstance, a flexibility of response. It believes that such measures and sanctions should have a deterrent effect with a view to changing behaviour in business-to-business relations.

 

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

Report from the Commission to the European Parliament and the Council on unfair business-to-business trading practices in the food supply chain

Resolution of 19 January 2012 on imbalances in the food supply chain

Resolution on unfair trading practices in the food supply chain