Implementation of the Unfair Trading Practices Directive in the food supply chain

Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain (“UTP Directive”) was approved on 17 April 2019, and is to be implemented in member states by 1 May 2021. Despite the minimum harmonisation approach of the UTP Directive, the Swedish legislator has proposed that the rules should extend beyond the UTP Directive. Setterwalls guides you to the proposed implementation.

Un updated article on this subject is available here.

Background
Imbalances in bargaining power between suppliers and buyers are common in the agricultural and food supply chain. Such imbalances in bargaining power can potentially lead to unfair trading practices, whereby more powerful trading partners may seek to impose certain practices or contractual arrangements that could deviate from good commercial conduct, be contrary to good faith and fair dealing. Such imbalances also risks leading to an unwarranted and disproportionate transfer of economic risk from one trading partner to another. In light of this, the EU have introduced a minimum standard of protection against unfair trading practices in the agricultural and food supply chain.

Application of the UTP rules
The UTP rules are proposed to be applicable regardless of whether the supplier, buyer or both are established in the EU. The UTP Directive uses a ‘staircase model’ to determine whether UTP rules are applicable, taking into account the size and revenue of the companies in question. In Sweden, the rules will be applicable regardless of the size or revenue of supplier and buyer.

The proposed implementation makes no distinction between perishable food and agricultural products and other food and agricultural products.

Agreements entered into before the rules have been implemented will be exempted from the rules for six months, i.e. until 1 November 2021 (since the rules will be implemented by 1 May 2021).

A complaint on unfair trading practices may be made to the competent authority in either the country of the supplier or the country of the buyer. Given the nature of the minimum harmonisation approach of the directive, whereby there will be greater protection for suppliers in certain countries such as Sweden than in others, the proposed implementation could raise the prospect of issues relating to ‘forum shopping’ in transnational transactions.

Forbidden trading practices
The forbidden trading practices have been divided into four parts in the proposed implementation:

• Trading practices relating to payment;
• Trading practices relating to cancellations, changes,  trade secrets and commercial reprimands;
• Trading practices relating to the division of costs; and
• Trading practices that are prohibited unless previously agreed in clear and unambiguous terms between the supplier and buyer.
   

Trading practices relating to payment includes a prohibition on the buyer paying the supplier later than 30 days after either when the supplier provides so, or delivery of the products, if the final payable amount is determined by the buyer.

Trading practices relating to cancellation, changes, trade secrets and commercial reprimands include:

1. Prohibition on cancelling orders at short notice, whereby notice of less than 30 days is always considered too short.
2. Prohibition on the buyer unilaterally changing the terms of a supply agreement. This includes changes concerning, for example, the frequency, method, place, timing or volume of the supply or delivery, the quality standards, the terms of payment or the price.
3. Prohibition on the buyer refusing to confirm in writing the terms of a supply agreement between the buyer and supplier for which the supplier has asked for written confirmation.
4. Prohibition on the buyer unlawfully acquiring, using or disclosing the trade secrets of the supplier.
5. Prohibition on the buyer threatening to carry out, or carrying out, acts of commercial retaliation against the supplier if the supplier exercises its contractual or legal rights. This includes filing a complaint with enforcement authorities or cooperating with enforcement authorities during an investigation. The purpose of the action determines what constitutes acts of commercial retaliation rather than commercially motivated actions, which are allowed.
    

With regard to the cancellation of orders, there may be problems in drawing the line between the use of forecasts, which is allowed under the UTP rules, and the cancellation of orders. As the UTP rules only apply in relation to the authorities, cancellation of an order contrary to the UTP rules may still be valid between the parties. However, the UTP rules could be considered a standard measure for what is considered reasonable, and the application of the rules on, for instance, unreasonableness in the Contracts Act (Sw. Avtalslagen) could therefore be used to invalidate such practices.

In relation to the prohibition of unilateral changes, it is noteworthy that the Swedish Contracts Act does not provide for unilateral changes of contracts, as a binding contract only can be concluded once two separate and independent declarations of intent have been exchanged between the parties. If the parties have previously concluded an agreement according to which certain aspects will be determined at a later stage, the mere determination in line with this will not fall under this prohibition. In general, changes to general terms and conditions do not fall under the prohibition. It will be interesting to see how the courts apply the prohibition, and especially as to what actually constitutes a ‘unilateral’ change, and what may be considered merely ‘tough negotiations’.

Trading practices relating to the division of costs includes:
(i) Prohibition on the buyer requiring payments from the supplier that are not related to the sale of the products of the supplier;
(ii) Prohibition on the buyer requiring the supplier to pay for the deterioration or loss, or both, of products that occurs on the buyer’s premises or after ownership has been transferred to the buyer, where such deterioration or loss is not caused by the negligence or fault of the supplier.
(iii) Prohibition on the buyer requiring compensation from the supplier for the cost of examining customer complaints relating to the sale of the supplier’s products, despite the absence of negligence or fault on the part of the supplier.

In applying the prohibition on costs for loss or deterioration, there may be problems in drawing the line towards the prohibition on returning unsold goods, unless it has been agreed previously between the parties. In order to determine when a product is lost or deterioration has occurred, the existing rules on faulty products in the Sale of Goods Act (Sw. Köplagen) will likely act as guidance.

In line with what has already been stated above, the contractual obligations between the parties remain unaffected by the UTP rules. It could therefore be possible to claim damages, for example, for faults in a product, even though it would fall under a prohibition in the UTP rules.

The trading practices below are prohibited, unless they have been previously agreed in clear and unambiguous terms in the supply agreement or in a subsequent agreement between the supplier and the buyer. Any unilateral introduction of these terms would be considered forbidden under the prohibition of unilateral changes, described above.

(i) Prohibition of terms that enable the buyer to return unsold agricultural and food products to the supplier, without paying for such unsold products or without paying for the disposal of such products, or both;
(ii) Prohibition on the supplier being charged payment as a condition for stocking, displaying or listing its products, or of making such products available on the market;
(iii) Prohibition on the buyer requiring the supplier to pay for advertising or marketing by the buyer;
(iv) Prohibition on the buyer charging the supplier for staff for fitting out premises used for the sale of the supplier’s products; and
(v) Prohibition on the buyer requiring the supplier to bear all or part of the cost of any discounts on products that are sold by the buyer as part of a promotion. Such terms are always considered unfair if the buyer has not specified the timing of the promotion and the expected amount.

Powers of the competent authority
As part of the implementation of the UTP rules, the member states are obliged to appoint a competent authority in charge of the supervision and enforcement of the UTP rules.

The legislator has decided to appoint the Swedish Competition Authority (the “CA”) as the competent authority, which appears to mainly have been motivated by the CA’s experience in conducting investigations (“dawn raids”). However, the CA has objected to the appointment. In short, the CA considers that the scope of the competent authority’s mandate under the UTP Directive differs substantially from the CA’s general task to support efficient competition for the benefit of consumers on all markets. The UTP rules will instead strengthen the suppliers competitiveness within a specific sector and it would accordingly be more appropriate to assign one of the sectoral authorities (i.e. the Swedish Food Agency or the Swedish Board of Agriculture) with the tasks of the UTP authority.

The competent authority will have the power to initiate and conduct investigations on its own initiative, or based on a complaint. A decision to not initiate an investigation based on a complaint may not be appealed. All decisions by the responsible authority, with the exception of decisions on administrative fines, will apply immediately.

The competent authority may require buyers and suppliers to provide information in order to conduct investigations of prohibited trading practices. Furthermore, it may carry out unannounced on-site inspections within the framework of its investigations. Both of the above may be stipulated under penalty of a fine. Lastly, it may impose prohibitions, including interim measures, and may issue prohibitions under penalty of a fine.

Finally, the competent authority may impose an administrative fine up to a maximum of one percent of the company’s revenue. The administrative fine may not be applied in cases of minor violations, or if the violation is already subject to a prohibition under penalty of a fine. However, the administrative fine is applied regardless of fault, i.e. there is strict responsibility. The strict responsibility has been questioned in the remittance procedures of the proposed implementation. It has also been questioned whether it should be the competent authority that issues such administrative fines, or whether a court of law might be more fitting.

Secrecy
The implementation of UTP rules also entails some changes to the Public Access to Information and Secrecy Act (Sw. Offentlighets och sekretesslagen). In short, confidentiality must be applied to any information that potentially could, directly or indirectly, identify the party that has made a complaint. Even the mere existence of a complaint could be subject to confidentiality. Absolute confidentiality (Sw. absolut sekretess) must apply.

Closing remarks
It is notable that, despite the minimum harmonisation approach of the UTP Directive, the Swedish legislator goes beyond what is stipulated in the directive. For example, the proposed implementation extends the application of the UTP rules to all companies, regardless of size or revenue. Further, there will be no distinction between perishable goods and other goods, entailing greater protection for suppliers of non-perishable foods compared with the directive.

Nonetheless, it is important to note that the UTP rules are market rules rather than civil rules. Thus, a contract term that is not in line with the UTP rules could still be applicable and valid between the parties. For example, the late cancellation of an order may be considered in breach of the UTP rules and put the buyer at risk of a prohibition under penalty of a fine. However, the cancellation may still be valid between the parties, and a refusal to comply with such a late cancellation could entail liability to pay damages to the other party. Although the UTP rules could be considered a benchmark of what is considered reasonable (cf. Section 36 of the Contracts Act), such distinctions will lead to interesting court proceedings in the future.