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EU Directive Published on Unfair Trading Practices in the Supply Chain for Foodstuffs

On 25 April 2019, Directive 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain was published in the Official Journal. The Directive aims to provide protection along the entire agri-food supply chain, to suppliers vis-à-vis their buyers. Relevantly for Hong Kong’s foodstuffs suppliers, the Directive also protects farmers and suppliers of agri-food products which are located outside the Union. Member States have to transpose the Directive into national law by April 2021 and apply its provisions to economic operators 6 months later.

The new Directive protects suppliers that sell (a) agricultural products as listed in Annex I to the Treaty on the Functioning of the European Union, as well as (b) products which are processed from these products for the use of food. As such, all kinds of vegetables, cereals, fish and animal feed are covered, as are processed foods such as chocolate, prepared meals, sauces, dairy products, spreads and yoghurts.

The law is built on the premise that the agri-food supply chain is structurally different from other industries. For example, 11 million farms in the EU deal with much fewer and often more powerful processors, distributors, and retailers. Asymmetry in bargaining power can lead to the imposition of unfair trading practices on suppliers. Due to their weaker position, suppliers are often, in reality, forced to accept unfair practices in order to continue to sell their products and maintain commercial relations with buyers in the supply chain.

The EU’s lawmakers therefore decided to improve the protection of farmers - as well as of small and mid-range sized suppliers – by laying out mandatory rules that outlaw certain unfair trading practices. It is noteworthy that the Directive protects farmers and suppliers of agri-food products which are located both inside and outside the EU, against buyers that use unfair trading practices regardless of whether such buyers are within or outside the EU. The Directive applies if at least either the supplier or the buyer are located within the EU.

Hong Kong sellers should note that the Directive does not apply to end-consumers. There is a separate EU law, adopted in 2005, setting out rules that apply in business-to-consumer relationships (Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market).

Protection along the agri-food supply chain is provided under the new Directive, depending on the relative size of operators. A “step approach” is utilised, based on turnover figures, reflecting the different bargaining powers of suppliers and buyers. The step approach protects a supplier from unfair trading practices engaged in by an economically stronger buyer.

For example, a food supplier with less than EUR 2 million turnover is protected against buyers with a turnover exceeding EUR 2 million. Suppliers with turnovers above EUR 2 million and not exceeding EUR 10 million are protected against buyers which have a turnover higher than EUR 10 million. The protective effect covers suppliers having turnovers of up to EUR 350 million. It is felt that trading partners with larger bargaining power (more than EUR 350 million turnover) can frequently address issues in their contractual negotiations without need for regulatory protection. It should be kept in mind that, in order to establish the turnover of a supplier or a buyer, also the turnover of the group, of which they are possibly members, will be taken into account.

Keeping the above in mind, the new Directive prohibits 16 specific unfair trading practices, distinguishing between “black” and “grey” practices (see: table below). While black unfair practices are always prohibited and can never be contractually waived, grey-listed ones are only prohibited if both parties have not agreed to their contractual inclusion in a clear and unambiguous manner.

Black unfair trading practices

Grey unfair trading practices

1. Payments later than 30 days for perishable agricultural and food products1. Return of unsold products
2. Payment later than 60 days for other agri-food products2. Payment of the supplier for stocking, display and listing
3. Short-notice cancellations of perishable agri-food products3. Payment of the supplier for promotion
4. Unilateral contract changes by the buyer4. Payment of the supplier for marketing
5. Payments not related to a specific transaction5. Payment of the supplier for advertising
6. Risk of loss and deterioration transferred to the supplier6. Payment of the supplier for staff of the buyer, fitting out premises
7. Refusal of a written confirmation of a supply agreement by the buyer, despite request of the supplier 
8. Misuse of trade secrets by the buyer 
9. Commercial retaliation by the buyer 
10. Transferring the costs of examining customer complaints to the supplier 

 

For example, a fish supplier sells fresh fish to a fish factory for the production of tinned fish filets. He is paid only 40 days after delivering the fish. As he cannot get the fish factory to change its payment practice, he complains to the enforcement authority. The fish factory hears about this, and threatens to stop dealing with the supplier if the latter does not withdraw the complaint. In this example the buyer, i.e., the fish factory, commits two black unfair trading practices: first for not paying within 30 days for a perishable product, and second for commercial retaliation.

In another example, a retailer wishes to promote the sale of lamb chops and plans a complete marketing strategy, involving local radio and brochure advertisements. He wants a supplier to participate in this marketing action by delivering a larger quantity of lamb chops, but at a reduced price. The supplier is also asked to help with financing the marketing campaign. The supplier feels that the strategy is a good idea to promote the sale of his products by the retailer. The parties negotiate the length and scope of the promotion campaign, agree clearly at what price the lamb chops should be delivered, and discuss the shared payments and costs for the marketing measures. Here, as there is clear agreement over grey practices, the practices would be allowed.

Directive 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain entered into force on the fifth day following that of its publication in the Official Journal. However, Member States have been afforded a grace period: they have to transpose the Directive into their national statute books by 1 May 2021. They must then apply the transposed provisions no later than 1 November 2021.

Content provided by Picture: HKTDC Research
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