Annexes to COM(2014)472 - Tackling unfair trading practices in the business-to-business food supply chain - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2014)472 - Tackling unfair trading practices in the business-to-business food supply chain. |
|---|---|
| document | COM(2014)472  |
| date | July 15, 2014 |
There is a lot of divergence in how UTPs are addressed at national level. Some Member States have adopted regulatory measures but a number of them have opted for self-regulatory approaches or have not taken specific action against UTPs in supply chains, relying instead on general principles. The Member States that have sought to tackle UTPs specifically in their regulation have either put in place specific business-to-business rules, have complemented their national competition law or extended the application of the Unfair Commercial Practices Directive[19] to B2B relations. Some Member States that had initially addressed UTPs through voluntary approaches, have subsequently decided to address these practices through legislation.
This diversity of approaches implies that the extent and type of protection granted against UTPs, as well as potential enforcement mechanisms in place would depend on where the company with strong bargaining power and applying UTPs is situated. This could be problematic in a situation where multi-country procurement is increasing. Moreover, responses by public authorities to the Green Paper consultation reported isolated cases of ‘forum shopping’, i.e. a practice whereby the stronger contractual party unilaterally determines in which Member State, and hence under which regulatory framework, the contract is applied in order to avoid the national frameworks with stricter measures against UTPs. This issue was explicitly raised by 5 Member States in the public consultation and during discussions in various stakeholder fora organised by the Commission.
4.2. Enforcement
Any party exposed to UTPs may in principle seek redress via litigation in court under provisions of general civil law against abusive contract clauses. However, some stakeholders especially SMEs have highlighted that litigation through courts is, in practice, often not an effective way of addressing UTPs. Firstly, litigation is generally costly and time consuming. Secondly, and perhaps more importantly, the weaker party in a commercial relationship in the food supply chain (in most cases an SME) often fears that initiating litigation may lead the stronger party to terminate the commercial relationship (the ‘fear factor’). This can discourage parties that are subject to UTPs from taking legal action, which in turn can limit the deterrence factor for the trading party applying UTPs.
Against this background, some Member States have put in place other redress mechanisms to tackle UTPs in vertical supply chains. A number of Member States have designated an enforcement authority which is independent from the market players concerned, and some other Member States are currently discussing possible reforms in this direction.
In some cases, the national competition authority has been designated for the enforcement of rules against abusive behaviour towards economically dependent undertakings and/or abuse of a superior bargaining position. However, there are also examples of Member States having designated other existing authorities (e.g. authorities responsible for food-related issues or consumer protection) or having established new administrative authorities to enforce rules against UTPs. Several of these authorities have the power to conduct investigations and they typically accept confidential complaints.
In some other Member States a voluntary dispute resolution mechanism has been established by stakeholders to try to settle disputes out of court. In other cases, a 'mixed approach', consisting of voluntary schemes complemented with public enforcement, was retained.
Farmers and SME suppliers emphasise that the existence of an administrative authority with the power to launch investigations and to accept confidential complaints on alleged UTPs would be crucial to tackling the issue of the fear factor described above. Most of these stakeholders call for the establishment of an independent enforcement body at national level, because effective enforcement would be a key factor in reducing the occurrence of UTPs.
Other stakeholders considered that voluntary frameworks and self-regulatory solutions should be looked at first. In case such models should turn out not to effectively address UTPs, an independent authority could be envisaged.
4.3. The Supply Chain Initiative
The Supply Chain Initiative was developed in the context of the Commission’s High Level Forum for a Better Functioning Food Supply Chain which is composed of national authorities and key stakeholder representatives at EU level from the supply and retail sides of the food sector. In November 2011, all market representatives involved in the Forum’s working party on UTPs jointly agreed on a set of principles of good practice in vertical relationships in the food supply chain[20]. These principles include: predictability of changes in contract terms; responsibility for own entrepreneurial risk; and justifiability of requests and charges.
In a second step, a voluntary framework for implementing the principles of good practice (the Supply Chain Initiative) was launched in September 2013[21]. Individual companies may join the Supply Chain Initiative once they have assessed their compliance with the principles of good practice. Individual disputes can, according to the framework and subject to certain conditions, be addressed by dispute resolution mechanisms, mediation and arbitration. To prevent UTPs, the implementation framework focuses on organisational requirements at company level, including training of staff and the ability to participate in the dispute resolution mechanisms defined in the framework. Breaches of these organisational requirements can lead to the concerned company being excluded from the initiative. The framework commits its members to provide assurance that the weaker parties using the dispute resolution mechanisms are not subject to commercial retaliation.
The initiative is managed by a governance group which is composed of different stakeholder associations representing operators in the food supply chain. To date, nine months after the launch, 98 retail, wholesale and manufacturing groups and companies have registered, representing 736 operating companies across all EU Member States. The number of SMEs registering is increasing. However, not all relevant stakeholder associations have signed up to the framework. Notably, representatives of primary producers (i.e. farmers) and the meat processing industry have refrained from participating in the scheme's governance group at EU level. Although they agree with the principles, these stakeholders are concerned about the lack of independent and effective enforcement within the Supply Chain Initiative. Some of them do however participate at national level.
The concerned stakeholders do not consider that the Supply Chain Initiative sufficiently addresses the aforementioned fear factor for economically dependent trading parties, notably because a company exposed to UTPs has no possibility to submit confidential complaints. The voluntary initiative provides for confidentiality only in the case of aggregated disputes through the possibility for stakeholder associations to require an interpretation of the principles from the governance group, and access to dispute resolution mechanisms requires the agreement of both contractual parties. Nor does the initiative provide for investigations or sanctions if a company breaches the principles of good practices.
It should be recognised that there are limits to how far a self-regulatory initiative can go in providing for a dispute resolution mechanism. Hence, supplementing the Supply Chain Initiative with independent enforcement measures, in those Member States where such measures currently do not exist, would increase the effectiveness of the initiative and would appear to remove the main reason for which certain stakeholder groups have not joined the framework of the Supply Chain Initiative.
In this context it should be noted that the European Parliament's own-initiative report on retail related matters adopted in December 2013 supported the principles and framework of the Supply Chain Initiative, but at the same time invited the Commission to examine the need and feasibility of independent enforcement to address the aforementioned fear factor of small players in the supply chain.[22]
5. An effective strategy against UTPs 5.1. Comprehensive market take-up of the Supply Chain Initiative
Voluntary codes of conduct are an important cornerstone in creating an environment where undertakings deal with each other in a fair and sustainable way. They can efficiently help to set up the right mind-sets, negotiation approaches and resolution mechanisms in organisations, thereby reducing or ideally eliminating unfair trading practices. Moreover, voluntary codes can provide for dispute resolution procedures between two parties in a vertical relationship, which can often help avoid lengthy and cumbersome legal action. The Supply Chain Initiative therefore constitutes a very important step in addressing UTPs. Setting up national platforms under the Supply Chain Initiative can further strengthen its positive effects.
Suggested way forward:
(1) The Commission encourages all undertakings and relevant organisations in the food supply chain to sign up to a voluntary initiative addressing UTPs, in particular the Supply Chain Initiative, in order to show their commitment, build trust in the food supply chain and achieve the critical mass and broad coverage such schemes require to be effective.
(2) The Commission encourages undertakings in the food supply chain to actively promote the Supply Chain Initiative to their business partners and inform them of their rights and obligations. They should by default inform each of their trading partners once they have joined the Supply Chain Initiative and should encourage their trading partners to do the same.
(3) The governance group of the Supply Chain Initiative should continue and enhance its efforts to build more awareness among SMEs and find efficient ways for them to join the initiative. SMEs are the key beneficiaries of such schemes, so it is crucial that their participation is maximised.
(4) The governance group of the Supply Chain Initiative should continue its efforts to drive and facilitate the creation of national platforms in each EU Member State.
(5) The Commission will continue to facilitate the exchange of information and discussion between key stakeholder groups and to closely engage with the initiative's governance group to maximise its reach, in particular towards SMEs, and will continue to closely monitor the development of the initiative and encourage the Supply Chain Initiative to work on reinforcement of the dispute mechanism and sanctioning systems.
5.2. Principles of good practice
Those Member States that have already tackled UTPs at national level have chosen different approaches to do so, including different definitions of unfair practices. Such national definitions range from very broad descriptions to detailed lists of prohibited practices. On the other hand, some Member States have not taken any specific action against UTPs at all. In order to address UTPs effectively throughout the EU, and particularly across borders, a common understanding for rules addressing UTPs would be beneficial.
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.
Therefore, they represent a useful basis for identifying the unfair practices that could be addressed in potential initiatives on UTPs. The identification of UTPs in turn allows the definition of principles to adress them. It is recalled that in applying such principles economic actors must also ensure that they comply with all applicable rules, including national and/or European competition law, as relevant.
The principles defined in the High Level Forum and endorsed by Supply Chain Initiative are as follows:
(a) Written agreements: Agreements should be in writing, unless impracticable or where oral agreements are mutually acceptable and convenient. They should be clear and transparent, and cover as many relevant and foreseeable elements as possible, including rights and procedures of termination.
(b) Predictability: Unilateral changes to contract terms shall not take place unless this possibility and its circumstances and conditions have been agreed in advance. The agreements should outline the process for each party to discuss with the other any changes necessary for the implementation of the agreement or due to unforeseeable circumstances, as provided in the agreement.
(c) Compliance: Agreements must be complied with.
(d) Information: Where information is exchanged, this shall be done in strict compliance with competition and other applicable laws, and the parties should take reasonable care to ensure that the information supplied is correct and not misleading.
(e) Confidentiality: Confidentiality of information must be respected unless the information is already public or has been independently obtained by the receiving party lawfully and in good faith. Confidential information shall be used by the recipient party only for the purpose for which it was communicated.
(f) Responsibility for Risk: All contracting parties in the supply chain should bear their own appropriate entrepreneurial risks.
(g) Justifiable request: A contracting party shall not apply threats in order to obtain an unjustified advantage or to transfer an unjustified cost.
Suggested way forward:
(6) The Commission encourages Member States to examine whether their current national regulatory framework is appropriate to address UTPs, taking into account best practice in other Member States. Member States should also consider possible other effects of UTPs, such as increased food waste. For this purpose, Member States are invited to assess whether their frameworks could rely on a list of practices or a general provision that allows for addressing possible breaches of the aforementioned principles.
(7) In addition, Member States should encourage undertakings on their territory to join voluntary codes of conducts, both at national and EU level.
(8) The Commission will continue to support the exchange of best practices between Member States, e.g. by organising workshops with experts from national administrations.
5.3. Ensuring effective enforcement at national level
In order to ensure a credible deterrence factor against the use of UTPs, appropriate enforcement is needed.
If the weaker party in a commercial relationship is economically dependent on its stronger trading party, it may refrain from asking redress for a UTP through court litigation or voluntary resolution mechanisms. Situations of economic dependency may occur. For example, a study undertaken by the Spanish Competition Commission[23] shows that on the average almost 40% of the revenues of suppliers in the grocery supply chain was generated by only three retailers in 2010. In extreme cases, the situation of economic dependency means that the economic viability of a buying or selling party depends on individual commercial relationships. In cases where UTPs are not denounced due to the "fear factor" of losing the contractual relation, frameworks against UTPs can be significantly strengthened by the weaker party's possibility to have recourse to an independent authority or body with enforcement powers and the possibility to protect the confidentiality of the complainant.
Suggested way forward:
(9) The Commission invites Member States to assess the effectiveness and credibility of their available mechanisms for the enforcement of rules against UTPs. Member States are invited to consider whether further procedural or organisational measures may be appropriate, drawing on best practice in other Member States. Particular attention should be given to the capacity to preserve the confidentiality of individual companies submitting complaints and the possibility to conduct investigations.
(10) National enforcement mechanisms, which could include dedicated bodies, should be enabled to effectively cooperate at EU level in order to address UTPs applied across borders and avoid possible regulatory arbitrage.
(11) The Commission will continue to support the coordination between Member States by facilitating the exchange of information between the national enforcement mechanisms.
(12) In developing and applying enforcement measures, Member States should act proportionally, bearing in mind any impact for stakeholder and consumer welfare. In particular, they should apply the same enforcement criteria and practices to domestic and foreign market operators.
5.4. The potential benefits and costs of reducing UTPs
The potential benefits of eliminating or at least reducing UTPs may be substantial. When attempting to identify such benefits and costs, it appears that effects can arise at different levels. In individual bilateral relationships, the potential benefits of addressing UTPs are rather obvious.
UTPs often have a direct negative financial impact on the companies to which they are applied. Moreover, unpredictable behaviour by trading parties abusing their superior bargaining position could lead to economic efficiency losses, for example lower investments or over/underproduction due to unpredictability and increased transaction costs linked to the risk of unilateral and unexpected changes of the commercial terms. Hence, there could be significant gains from making commercial relationships more sustainable in the food supply chain. Possibly, this could extend beyond the direct benefits and financial relief for companies previously subject to UTPs, i.e. in most cases SMEs. The mechanisms suggested in this Communication could also mitigate the impacts of UTPs on weaker parties in third countries, including in developing countries.
For the market as a whole, the assessment of the effects of UTPs and the overall welfare impacts of their possible reduction or elimination is more complex. As regards the potential impact on consumers, there is no evidence suggesting a negative impact on consumer prices[24] in those Member States where UTPs are regulated and where action against abuses at business-to-business level is taken by public bodies. Where UTPs could have negative effects on product choice, availability and quality, a reduction or an elimination of these practices can be expected to be beneficial for consumers.
In terms of cost impact, there would be no additional costs for businesses already adhering to or planning to adhere to the Supply Chain Initiative or similar national frameworks. The suggested approach would not imply any costs for Member States where the current framework meets the criteria described above. In those Member States that would choose to adjust their framework in line with the above, the enforcement costs would depend on whether an existing mechanism is used for these purposes or whether new procedural or organisational arrangements are put in place.
6. Conclusions
Practices between market participants in the food supply chain are in most cases fair and sustainable for both parties. Nevertheless, stakeholders throughout the supply chain agree that UTPs do exist and especially SMEs make the case that they occur relatively frequently and have negative effects on their financial viability and capability to conduct business. The Green Paper consultation, accompanying studies and some of the most recent national initiatives suggest that a ‘mixed approach’, i.e. voluntary schemes complemented with credible and effective enforcement based on comparable principles, may be appropriate in addressing UTPs. In the presence of a credible deterrence factor, voluntary initiatives such as the Supply Chain Initiative could be the primary way of resolving conflicts between trading parties, while public enforcement or court litigation would only be resorted to if the more efficient and quicker alternative of a bilateral solution is not viable. Thus, the way forward suggested in this Communication would not only complement but also strengthen the Supply Chain Initiative by making it more attractive for those stakeholder groups that have so far refrained from joining, due to their concerns about a lack of effective enforcement.
In order to address the issues around UTPs, this Communication suggests a combination of voluntary and regulatory frameworks, identifying UTPs and principles to address them, taking into account different national circumstances and approaches. While some Member States have adopted specific legislation, others rely on general principles of law and/or on self-regulatory initiatives. In considering whether further measures are needed, in line with this Communication and taking into account best practice, Member States should act proportionally and take account of any impact on stakeholders and consumer welfare. At the level of the Commission, the proposed actions do not have any budgetary impact over and above of what is already foreseen for the years to come in the official programming.
The Commission will monitor and assess the progress made by evaluating (i) the actual impact of the Supply Chain Initiative and its national platforms[25] and (ii) the enforcement mechanisms set up by Member States to increase all parties' trust and confidence in the proper functioning of a sustainable food supply chain.
The Commission will present a report to the Council and the European Parliament at the end of 2015. In light of this report, the Commission will decide whether further action should be taken at EU level to address the described issues.
[1] Expenditure on food accounts for around 14% of the average EU household budget (Eurostat HBS data)
[2] Report of the High Level Forum for a Better Functioning of the Food Supply Chain, December 2012
[3] See Commission Communication COM(2009) 591: A better functioning food supply chain in Europe http://ec.europa.eu/economy_finance/publications/publication16061_en.pdf
[4] Survey on Unfair Commercial Practices in Europe, March 2011, organised by Dedicated on behalf of CIAA (European association of the food / drink industry) and AIM (European Brands Association)
[5] Report on the relations between manufacturers and retailers in the food sector, Comisión Nacional de la Competencia, October 2011
[6] Indagine conoscitiva sul settore della GDO – IC43, August 2013
[7] See also Commission Communication COM (2011) 78 final: Review of the Small Business Act in Europe, stating that '…SMEs often face unfair contractual terms and practices imposed by various players in the supply chain.'
[8] Supporting measures for the creation and development of producer organisations exist under the new rural development programme, which can help producers face larger buyers.
[9] The new Common Market Organisation for fisheries and aquaculture products (Regulation (EU) No 1379/2013) provides support to producers' organisation to improve the placing on the market of their products and their market position through production and marketing plans.
[10] Commission Decision of 30 July 2010 establishing the High Level Forum for a Better Functioning Food Supply Chain (2010/C 210/03)
[11] Belgium, Germany, the Netherlands, and Finland
[12] European Parliament Resolution on imbalances in the food supply chain of 19.01.2012
[13] Green Paper on unfair trading practices in the business-to-business food and non-food supply chain in Europe COM(2013) 37 , 31 January 2013
[14] Impact of Unfair Trading Practices in the European agri-food sector, April 2013, organised by Dedicated on behalf of COPA COGECA (European association of farmers and agri-cooperatives)
[15] Directive 2006/114/EC of the European Parliament and of the Council of 12 December 2006 concerning misleading and comparative advertising
[16] Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts
[17] Proposal for a Directive of the European Parliament and the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure of 28 November 2013 COM(2013) 813 final
[18] Proposal for a Regulation of the European Parliament and the Council on a Common European Sales Law of 11 October 2011 COM (2011) 635 final
[19] Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market
[20] http://www.supplychaininitiative.eu
[21] Id.
[22] European Parliament resolution of 11 December 2013 on the European Retail Action Plan for the benefit of all actors
[23] Report on the relations between manufacturers and retailers in the food sector, Comision Nacional de la Competencia, October 2011
[24] As regards general price developments, the European Food Prices Monitoring Tool is one useful instrument: http://ec.europa.eu/enterprise/sectors/food/competitiveness/prices_monitoring_en.htm
[25] In this context, the Commission will consider prolonging the mandate of the High Level Forum for a Better Functioning of the Food Supply Chain to follow the implementation of the actions set out in this Communication through a transparent dialogue with private stakeholders and national authorities.