The implementation of the EU-directive on unfair trading practices in the food supply chain

Directive (EU) 2019/633 on unfair trading practices in the agricultural and food supply chain (“UTP Directive”) was approved on 17 April 2019. Setterwalls has previously reported about the implementation of the directive in Sweden, see here. The legislation enters into force on 1 November 2021, and will then apply to all agreements within its scope, including agreements which were entered into before this date. As such, it is important for actors to familiarize themselves with the legislation as soon as possible. Setterwalls guides you through the most fundamental parts of the legislation.
 

Background
Imbalances in bargaining power between suppliers and buyers are common in the agricultural and food supply chain. Such imbalances may entail the use of unfair trading practices, i.e. practices or contractual arrangements that deviate from good commercial conduct or are contrary to good faith and fair dealing, leading to unwarranted and disproportionate transfers of economic risk. In light of this, the EU has through the UTP-directive, introduced a minimum standard of protection against unfair trading practices in the food supply chain. Member states are free to determine if, and to what extent, they want to implement more far-reaching provisions.

As further detailed below, the forbidden trading practices can be divided into two main categories; Trading practices which are always prohibited (the “black list”) and trading practices which are prohibited unless previously agreed in clear and unambiguous terms (the “grey list”). The legislation will fully apply from the 1 November 2021.

Application of the legislation
A prerequisite for the application of the Swedish legislation is that at least one of the parties are established in Sweden. The directive uses a ‘staircase model’ to determine whether rules are applicable, taking into account the size and revenue of the buyer and supplier in question. In Sweden, the rules have been simplified and will be applicable simply if the buyer has a turnover that exceeds 2 million euros. The limitation based on turnover does not apply if the buyer is a governmental body.

Unlike the directive, the legislation makes no distinction between perishable products and other products. This affects, inter alia, the minimum payment terms, which are different for perishable product and other products in the directive.

Forbidden trading practices
The following trading practices are always forbidden (the black list):
 (i) to pay later than 30 days after delivery, or if the final payable amount is determined by the buyer, 30 days thereafter,
 (ii) to cancel an order with a notice of less than 30 days, however some sectors will be exempted through government ordinances,
 (iii) to unilaterally amend the terms of a supply agreement with respect to the frequency, method, place, timing or volume of the supply or delivery, quality standards, terms of payment or price of the products,
 (iv) to require payment from the supplier for costs which are not related to the sale of the supplier’s products,
 (v) to require the supplier to pay for the deterioration or loss of products that occur on the buyer’s premises, or after the title has been transferred to the buyer, where such deterioration or loss is not caused by the negligence or fault of the supplier,
 (vi) to refuse a suppliers request for a written confirmation of the terms of a supply agreement,
 (vii) to threaten to carry out, or carrying out, acts of commercial retaliation against a supplier if the supplier exercises its contractual or legal rights. This includes e.g. where the buyer decreases its orders after the supplier exercises these rights, or
 (viii) to require compensation from the supplier for the cost of examining complaints relating to the sale of the supplier’s products, despite the absence of negligence or fault of the supplier.

The following trading practices are prohibited, unless they have been previously agreed in clear and unambiguous terms between the parties (the grey list):
 (ix) to return unsold agricultural and food products to the supplier, without paying for such unsold products or for the disposal of such products,
 (x) to charge payment as a condition for stocking, displaying or listing the supplier’s agricultural or food products, or for making such products available on the market,
 (xi) to require the supplier to pay for the buyer’s advertising or marketing of agricultural or food products,
 (xii) to charge the supplier for staffing costs for furnishing the buyer’s premises used for the sale of the supplier’s agricultural or food products, and
 (xiii) to require 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.

Any unilateral introduction of terms or trading practices which are prohibited unless they have been previously agreed in a clear and unambiguous manner, will be prohibited under the prohibition of unilateral changes described under point (iii) above.

Powers of the competent authority
The Swedish Competition Authority (the “SCA”) will be the competent authority, supervising the application of the legislation. The SCA will have the power to e.g. impose orders and injunctions on buyers and suppliers to submit information. The SCA will also have the power to issue orders against third parties.

The competent authority can also impose prohibitions on the use of a certain trading practice, under penalty of a fine. The prohibition will not only cover the trading practice in question, but also other trading practices which in all material aspects correspond with the prohibited trading practice.

Finally, the competent authority may impose an administrative fine up to a maximum of one percent of a company’s revenue during the preceding year, if the company is found to have used forbidden trading practices. The administrative fine may not be applied in cases of minor violations, or if the violation is already subject to a prohibition. The legislation stipulates a strict responsibility, meaning that the fine will be issued regardless of negligence or fault. As such, if a violation can be objectively determined, an administrative fine may be applied.
The implementation of the directive also entails some changes to the Public Access to Information and Secrecy Act (Sw. Offentlighets och sekretesslagen). Essentially, any and all information which directly or indirectly may identify a party reporting a possible violation, shall be kept confidential, unless it is clear that the information could be disclosed without any harm for the concerned party.

Closing remarks
It is notable that, despite the minimum harmonisation approach of the directive, the Swedish legislation imposes stronger protective measures for suppliers on the food supply chain. For example, by not adhering to the “staircase model” in the directive, the Swedish implementation extends the application of the rules to more parties than otherwise would have been the case. Further, the legislation makes no distinction between perishable products and other agricultural and food products.

With respect to the material prohibitions, several topics are of particular interest. For example, we anticipate that there may be difficulties in drawing the line between volume forecasts, which are allowed under the legislation and is commonly used in the industry, and the prohibition of cancelling orders with short notice.

In relation to the prohibition of unilateral changes, it is noteworthy that Swedish contract law demands that two separate declarations of intent have been exchanged between the parties, for the conclusion of an agreement. As such, the prohibition should in theory not lead to any material changes. However, in practice it is likely that the prohibition will have some effect, not least by “setting the tone”. It will be interesting to see how the courts apply the prohibition, and especially as to what constitutes an ”unilateral” change, and what may merely be considered as “tough negotiations”.

In light of the fact that some EU member states, including Sweden, implement more far-reaching protection than the minimum requirements of the directive, the implementation may entail issues relating to forum shopping in cross-border transactions.

An interesting question, but more of a legal nature, is that the legislation as such only applies in relation to the authorities. Therefore, an agreement between two parties found to be in violation of the legislation, may still be legally binding between the parties. For example, a buyer’s late cancellation of an order may be deemed in violation of the legislation, risking the issuance of a prohibition by the competent authority. However, between the parties the cancellation as such could still be deemed as contractually valid. It will be interesting to see how the courts will manage these types of situations – not in the least in relation to the assessment of contract terms’ reasonableness in accordance with the Contracts Act.

Concluding, as already mentioned above, the legislation enters into force on 1 November 2021, at which point it will be fully applicable. Agreements which have been entered into before this date will not be exempted. Setterwalls team has great experience of similar matters and are familiar with the challenges unique for the food industry, and are happy to assist you in adapting your business to the new legislation.

The content is a general description of informative nature only and is not legal advice to use as a basis for assessments in an individual case.