Down on the farm
The EU has adopted legislation that protects farmers against unfair trading practices in business-to-business relationships. Cormac Little assesses how the new rules benefit food producers when dealing with larger buyers.
With the objective of protecting small suppliers like farmers against large buyers such as the major food processors, the EU has adopted legislation regarding unfair trading practices (UTPs) in business-to-business relationships in the agri-food sector.
These rules (contained in EU Directive 2019/633 of 17 April 2019) were implemented into Irish law on 1 July 2021 by the entry into force of SI 198/2021, the EU (Unfair Trading Practices in the Agricultural and Food Supply Chain) Regulations 2021, dated 28 April 2021 (the UTP Regulations).
The UTP Regulations contain a list of both ‘black clauses’ (practices that are prohibited in all circumstances) and ‘grey clauses’ (arrangements that are banned unless the parties unequivocally agree otherwise).
The regulations have applied since 1 July 2021 to any new supply agreements in the agri-food sector reached since 28 April 2021. In addition, all relevant supply agreements, including those adopted prior to this latter date, must comply with the regulations by 28 April 2022.
Symmetric bargaining
In adopting the 2019 directive, the EU recognised that asymmetry in commercial relationships may lead to the imposition of UTPs on producers in the agri-food sector. The latter, due to their weaker bargaining power, may be forced to accept unfair or onerous terms to continue to sell their produce to larger buyers.
The EU found that UTPs are less likely to occur when the negotiating parties have symmetric bargaining power. Although the 2019 directive represents the first time the EU has tackled UTPs in the agri-food sector, the new rules echo the EU’s regulation of unfair commercial practices that occur in business-to-consumer transactions.
Such unlawful conduct includes providing untruthful information to consumers (these rules are contained in Directive 2005/29 concerning unfair business-to-consumer commercial practices in the internal market).
Relevant products
The UTP Regulations apply to agricultural and food products listed in Annex I to the Treaty on the Functioning of the European Union (TFEU), as well as to unlisted foodstuffs manufactured containing products mentioned in Annex I.
The array of relevant products is, therefore, extensive. It includes vegetables, fruit, meats, cereals, fish, dairy products and processed food (including prepared meals and sauces). The regulations also apply to non-food products, such as live animals, live trees, cut flowers, and animal feed.
The regulations address agreements for the sale or supply of relevant products by a supplier to a buyer where at least one party to the transaction is established in the EU. They do not apply to agreements between suppliers and private consumers.
A ‘buyer’ is defined in the regulations as any natural or legal person who purchases agricultural and food products. Examples of buyers include processors, distributors, wholesalers, and public authorities. This definition also encompasses groups of such natural and legal persons.
The definition of a ‘supplier’ includes farmers, wholesalers/distributors, agricultural producers, plant nurseries, or any other groups thereof, such as organisations of producers and suppliers.
Turnover thresholds
In considering whether the UTP Regulations protect a supplier, the difference in size between the supplier and the buyer to a relevant transaction – rather than the absolute size of the latter – is the determining factor. The regulations apply where both the buyer and the supplier to a particular transaction satisfy the relevant financial thresholds in one of the following scenarios:
- Suppliers with an annual turnover below €2 million, and buyers with an annual turnover over €2 million,
- Suppliers with an annual turnover between €2 million and €10 million, and buyers with an annual turnover over €10 million,
- Suppliers with an annual turnover between €10 million and €50 million, and buyers with an annual turnover over €50 million,
- Suppliers with an annual turnover between €50 million and €150 million, and buyers with an annual turnover over €150 million,
- Suppliers with an annual turnover between €150 million and €350 million, and buyers with an annual turnover over €50 million, and
- Suppliers with an annual turnover below €350 million, and all buyers that are public authorities.
Interestingly, the regulations are silent on where the relevant turnover is generated. Moreover, they do not address whether turnover is to be assessed on a group basis. That said, given the purpose of the 2019 directive, a broad approach reflecting the entire financial resources available to the relevant buyer is likely to be appropriate.
Black clauses
There are ten practices that are prohibited in all circumstances by the UTP Regulations. These ‘black clauses’ comprise:
- Making payment later than 30 days for perishable agricultural and food products,
- Paying later than 60 days for other agricultural and food products,
- Cancelling orders for perishable agricultural and food products at short notice,
- The buyer making unilateral contract changes,
- Requiring payments from the supplier that are not related to the sale of the relevant products,
- Requiring the supplier to pay for the deterioration or loss of the products on the buyer’s premises,
- Refusing to enter into a written agreement,
- Unlawfully acquiring or using the trade secrets of the supplier,
- Threatening to carry out acts of commercial retaliation, and
- Requiring compensation from the supplier for the cost of examining customer complaints relating to the sale of the supplier’s products, in the absence of negligence or fault on the part of the supplier.
Grey clauses
There are also six practices that are prohibited by the UTP Regulations unless the parties have a clear agreement to the contrary regarding the practice in question. These ‘grey clauses’ are:
- Returning unsold products to the supplier without paying for those unsold products,
- Charging payment as a condition for stocking, displaying, or listing the supplier’s products,
- Requiring the supplier to bear the costs of discounts on products sold by the buyer as part of a promotion,
- Obliging the supplier to pay for advertising by the buyer,
- Requiring the supplier to pay for marketing by the buyer, and
- Charging the supplier for staff to fit out premises used for the sale of the products.
Enforcement
The UTP Regulations state that the Minister for Agriculture, Food and the Marine is currently designated as the relevant enforcement authority in the State. As an interim measure, the minister has created a UTP Enforcement Authority (UTPEA) within the department, pending (as stipulated by the current Programme for Government) the adoption of primary legislation creating a National Food Ombudsman (NFO).
Once this happens, the NFO will succeed the minister as the national enforcement authority for the regulations.
The minister/UTPEA (acting through its authorised officers) currently has the power to:
- Conduct investigations, either on its own initiative or upon receipt of a complaint,
- Require buyers and suppliers to provide all necessary information,
- Carry out unannounced on-site investigations,
- Take decisions if an infringement is found and require the buyer to bring the prohibited trading practice to an end by issuing a compliance notice,
- Initiate court proceedings for the imposition of fines, and
- Publish decisions following the conclusion of the investigation.
Reflecting in many respects the powers granted to the Competition and Consumer Protection Commission, these enforcement powers are very extensive, if not draconian.
For example, an authorised officer, if he/she has reasonable grounds for believing that an offence under the UTP Regulations has occurred (or is occurring), has the power to search premises/vehicles, seize documents, detain vehicles/other modes of transport, and/or remove equipment, including computers/servers.
Moreover, an authorised officer may use reasonable force to exercise his/her functions under the regulations. Finally, an authorised officer may enter a private dwelling if he/she believes evidence of an infringement is likely to be destroyed. Given the underlying activity that the regulations are trying to prevent, it is questionable as to whether such strong powers of enforcement are proportionate.
Complaints/investigations
Part 3 of the regulations sets out conditions under which suppliers may address complaints to the minister/UTPEA. In order for such a complaint (which can be anonymous) to be actioned, either the supplier or the buyer must be established in the State.
On receipt of such a complaint, the minister/UTPEA must inform the complainant within a reasonable period of time regarding how it intends to proceed.
The UTP Regulations also set out a requirement for the publication of an annual report by the minister/UTPEA detailing the number of complaints received and the number of investigations initiated or concluded during the previous year.
The minister/UTPEA also has discretion to publish details of its decisions relating to infringements, such as where the buyer was required to cease a prohibited UTP, or decisions concerning the imposition or initiation of proceedings for the imposition of fines, penalties, or interim measures.
If, following an investigation, the minister/UTPEA concludes that a breach of the UTP Regulations and/or the 2019 directive has occurred or is occurring, it may issue a compliance notice requiring the buyer to take appropriate action.
Failure to comply with such a notice is a criminal offence, leading, on indictment, to a prison sentence of up to three years and/or a fine of a maximum of €500,000. Again, these potential penalties are hefty and should act as a strong deterrent.
Dominance/other rules
Buyers in the agri-food sector with high shares (for example, above 40%) in one or more relevant markets should also be aware of the potential application of EU and Irish rules prohibiting the abuse of a dominant position.
Dominance, per se, is not illegal, but dominant entities are under a special responsibility not to hinder effective competition in the market. Both article 102 of the TFEU and section 5 of the Competition Act 2002 (as amended) contain a non-exhaustive list of various types of abusive conduct.
These include applying dissimilar conditions to equivalent transactions, thereby placing third parties at a competitive disadvantage (that is, discriminatory behaviour), or directly/indirectly imposing unfair purchase/selling prices, or other unfair trading conditions.
While a dominant entity may seek to rely on an objective justification for any unilateral conduct, it should, nevertheless, be careful that its engagement with suppliers is not seen as abusive.
Next steps
Earlier this year, perhaps concerned about the lack of awareness among smaller producers of agri-food, the UTPEA launched an engagement with both suppliers and buyers regarding the application of the UTP Regulations in the market. Results of an online survey of small producers are likely to be published later this year.
Separately, buyers, if they have not already done so, should ensure that their relevant contractual and other arrangements comply with the regulations. Most importantly, any contract, arrangement, or conduct that gives rise to a potential infringement of any of the ten ‘black clauses’ must be carefully reviewed.
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Cormac Little
Cormac Little SC is head of the competition and regulation unit of William Fry LLP and a member of the Law Society’s EU and International Affairs Committee.