Bulgaria: Proposal for EU Directive on unfair trading practices in business-to-business relationships in the food supply chain

By searching for an answer to that question, the European Parliament, the Council and the European Commission agreed in December 2018 to develop a proposal for the first directive regarding unfair trading practices in business-to-business relationships in the food supply chain (the "Proposal"). This Proposal aims to regulate the supply chain of agricultural and food products.

Who is protected by the Proposal?

The Proposal aims to protect small and medium-sized enterprises in the agricultural and food supply chain against the actions of purchasers who are not small or medium-sized enterprises. What is new is that the protection will cover not only small and medium-sized enterprises within the EU, but also those registered outside the EU but operating in the internal market.

The Proposal introduces two new definitions for Food law: "food products" and "perishable food products".

"Food products" includes all agricultural products used as food and listed in Annex I to the Treaty on the Functioning of the EU, including products from fishing and aquacultures, as well as processed agricultural products for use as food, i.e. processed food products, which are not included in Annex I to the TFEU. At this stage, the definition of "food products" in the Proposal raises the question of whether its implementation is justified, due to its obscure scope and the existence of the definition of "foods" in Article 2 of Regulation (EC) No 178/2002.

The Proposal covers the entire food supply chain

The applicable field of the Proposal covers the entire food supply chain and accounts for the fact that unfair trading practices ("UTP") are not always written in an agreement and in principle could arise at any stage of the commercial relationship between the buyer and the food supplier, even after the agreement is signed. In the Proposal it is considered that in certain cases the UTPs affect the weaker producers, such as farmers, even when they are not directed towards them. If the costs flowing from the UTPs are passed back along the food supply chain, their negative consequences at the bottom of the supply chain, for example between a retailer and a processor, can be felt in the opposite direction and eventually reach the farmers.

The scope of the concept of "supplier" as used in the Proposal is too wide and includes all suppliers selling food products in the chain, including farmers or individuals and legal entities, if they are small or medium-sized enterprises. The concept of "supplier" covers all individuals or legal entities established in the Union that purchase food products for commercial purposes.

Absolute and discretionary prohibitions

The prohibited UTPs are listed in Art. 3 of the Proposal. The current version of Art. 3 implies that UTPs are separated into two groups: (i) absolute prohibitions and (ii) practices not agreed with clear and unambiguous terms when signing the supply agreement.

Absolute prohibitions, such as (i) paying for perishable food products later than 30 calendar days after receipt of the supplier's invoice, (ii) supplier paying for the waste of food products that occurs on the buyer's premises and that is not caused by the negligence or fault of the supplier, (iii) cancelling of orders of perishable food products at such short notice that a supplier cannot reasonably be expected to find an alternative to commercialise or use these products, and (iv) certain unilateral changes by the buyer with opposite effect on the terms of the supply agreement, are objectively justified and do not depend on the discretion of the parties in the agreement process, i.e. their implementation would be qualified as a UTP, which is prohibited by the new rules regarding UTPs.

The envisaged prohibition regarding buyers paying suppliers later than 30 days after the delivery of perishable foods will represent a special provision (lex specialis) for the food sector derogating from the provisions regarding the payment term, envisaged in Directive 2011/7/EU on combating late payment in commercial transactions, which shall be applicable for all other economic sectors (Art. 303а of the Bulgarian Commercial Act).

The other group of UTPs covered by the Proposal are those which are not clearly and unambiguously agreed upon. The Proposal lists several examples of conditions which are unclear or ambiguous and could be viewed as a UTP. Those UTPs would not be the subject of an absolute prohibition, i.e. the affected party would need to prove that the respective UTPs have been implemented despite the lack of clear rules for this. For example, if one of the parties to an agreement (buyer) unilaterally imposes an obligation to accept unsold food products on the other party (seller) without an agreement setting out clear rules in that regard, this will be qualified as a UTP according to the Proposal. At the same time, such a practice would be acceptable and in accordance with the new rules, if it is clearly and unambiguously regulated in the agreement.

In the same way, payment by the supplier for storage, exposure or inclusion in the product range of its goods could prove to be efficient and a successful strategy for both parties to the agreement. The same applies to advertising and marketing activities. That is why these practices are acceptable if they are agreed upon by the parties and if the amount of the payment for product storage and inclusion in the product range is based on the buyer's objective and justified cost estimates. This means that the parties can agree that, if requested by the supplier, the buyer is obliged to present an estimate of the payments made.

Competent authority and fines

The Proposal requires Member States to identify a competent authority regarding the prohibited UTPs. For economic reasons, the Proposal allows the competent authority to be an existing law enforcement authority, for example in the field of competition law, which in Bulgaria is the Commission on the Protection of Competition. Under the applicable Foodstuffs Act, in Bulgaria there is the National Consultative Council for better functioning of the food supply chain (National Council) and a Conciliation Commission, which seeks to achieve out-of-court settlements between food producers and sellers.

In contrast with other European documents, which explicitly envisage clear fines for the infringing undertakings (for example the GDPR), the Proposal only mentions that "the fine shall be effective, proportionate and dissuasive taking into account the nature, duration and gravity of the infringement."

Due to the lack of a specific fine amount envisaged in the Proposal, it would be interesting to see how the national legislators will implement this part of the Proposal in the national legislation and what fines will be set. In Bulgaria, for example, insofar as UTPs are an infringement of competition law, it would be logical for the legislators to comply with the fine amounts applicable for other infringements of competition law – up to 10% of the total annual turnover for the preceding financial year of an undertaking or association of undertakings that implement UTPs. At the same time, if another Member State sets a lower fine amount, and the respective commercial activity (or UTP) covers trade between more than one Member State, then for part of the participants in the food supply chain (implementing UTPs) it would be more cost-effective to implement the legislation of the respective other Member State as applicable in their agreements.

It is also interesting to see what powers would be given to the respective law enforcement authorities and whether their jurisdiction will cover each case in which the trade in the respective state is affected, irrespective of the settlement of foreign law between the parties.

Proceedings for the establishment of a UTP

The Proposal governs complaints submission and explicitly notes that the governing authority will be able to examine confidential complaints and – if it receives such a request – to protect the identity of the claimant. It is also envisaged that the governing authority would be granted the necessary rights to conduct investigations on its own initiative or based on a complaint, to gather information, to terminate violations, to fine and to publish the decisions taken to achieve a deterrent effect.

Regulation for UTP – currently applicable in Bulgaria

Although the Proposal is a new legislative initiative at the EU level, 20 of the Member States already have UTP rules, such as the ones set forth in the Proposal. In Bulgaria, for example, this type of action is currently covered by the general prohibition of "abuse of dominant position when contracting" from the Competition Protection Act ("CPA"), existing from 2015. At the same time, at least in Bulgaria, the text of "abuse of dominant position when contracting" is too general and requires proof of a number of circumstances in order to fine the infringing party (proof of "dominant position when contracting", lack of objective economic justification, bad faith, etc.). From that point of view, the new rules would be a relief for the smaller participants in the food supply chain, which would receive absolute protection from certain UTPs (i.e. unilateral change of the terms of the supply agreement made by the buyer, cancelling of orders of perishable food products at short notice, etc.). In addition, they would be able to push for the introduction of clear and unambiguous criteria for issues which directly relate to their business (under what conditions the return of goods would be possible, when taxes for marketing would be paid, etc.)

Next legislative steps

It is expected that the necessary steps for the adoption of the Proposal will be taken in the first quarter of 2019. After that, the Member States must implement the Directive in their national legislation within 24 months and, at the same time, accept standards for violation of fines. After another six months (from the date of implementation in national legislation) each of the Member States, including Bulgaria, will apply the new legislation regarding UTPs.

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Further reading:
Bulgaria: Metro penalised for unfair comparative advertising campaign