Explanatory Memorandum to COM(2018)173 - Unfair trading practices in business-to-business relationships in the food supply chain

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This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2018)173 - Unfair trading practices in business-to-business relationships in the food supply chain.
source COM(2018)173 EN
date 12-04-2018


Contents

1.

CONTEXT OF THE PROPOSAL



• Reasons for and objectives of the proposal

Farmers, processors, traders, wholesalers, retailers and consumers are all actors in the food supply chain. Smaller operators in the food supply chain are more prone to face unfair trading practices (UTPs) due to their, in general, weak bargaining power in comparison to the large operators in the chain. Agricultural producers are particularly vulnerable to UTPs as they often lack bargaining power that would match that of their downstream partners that buy their products. This is because alternatives for getting their products to consumers are limited.

There is a wide-spread consensus that UTPs occur throughout the food supply chain. Three Commission communications since 2009 have focused on the food supply chain including UTPs.

In June 2016, a European Parliament resolution 1 called on the Commission to submit a proposal for a Union legal framework concerning unfair trading practices. In December 2016, the Council invited the Commission to undertake, in a timely manner, an impact assessment with a view to proposing a Union legal framework or non-legislative measures to address unfair trading practices. 2 In September 2016, the European Economic and Social Committee published a report calling on the Commission and the Member States to take swift action to prevent UTPs by establishing an EU harmonised network of enforcement authorities, so as to create a level playing field within the single market. 3

In its report from 2016 the Commission identified a number of areas for further improvement concerning both Member States’ UTP legislation and voluntary industry initiatives. The Commission committed to re-assessing the need for EU action to address UTPs in light of subsequent developments before the end of its mandate. The expectations about improvements were not fully met as is discussed in greater detail in the impact assessment (section 3.3).

When occurring, UTPs can put operators’ profits and margins under pressure, which can result in a misallocation of resources and even drive otherwise viable and competitive players out of business. For example, retroactive unilateral reductions of the contracted quantity for perishable goods equates to income foregone for an operator who may not easily find an alternative outlet for these goods. Late payments for perishable products after they are delivered and sold by the buyer constitute extra financial cost for the supplier. Possible obligations for suppliers to take back products not sold by the buyer after the suppliers and buyer may constitute an undue transfer of risk to suppliers that has repercussions on their security of planning and investment. Being forced to contribute to generic in-store promotional activities of distributors without drawing a commensurate benefit may unduly reduce a supplier’s margin.

In an agricultural policy environment that has become distinctly more market oriented, the good governance of the food supply chain has become more important for operators, in particular for agricultural producers. The proposal should ensure that these operators are able to compete on fair terms, thereby contributing to the overall efficiency of the chain. Unfair business conduct by operators wielding bargaining power that is not prohibited, or the existence of redress possibilities that lack effectiveness, are liable to undermine the economic viability of operators in the chain. Such weak governance is also likely to erode trust in the overall fairness and functioning of the food supply chain.

The food supply chain is a continuum of vertically inter-related markets. It is characterised by significant differences in relative bargaining power the between smaller and medium-sized enterprises and larger ones. The concentration levels at the stages downstream of primary production are high in all Member States. In some cases UTPs affect weaker producers, such as agricultural producers, even if they are not directly exposed to them, if UTP-induced costs are passed back along the food supply chain to the weakest link which is often the farmer. The negative effect of a UTP that occurs downstream, for instance between a retailer and a processor, thus can cascade backward in the chain to ultimately reach farmers.

Specific UTP rules in 20 Member States bear witness to the significant concern about UTPs at the national level. However, the heterogeneity in the treatment of UTPs in Member States is significant. In certain Member States, there is no, or ineffective specific protection against UTPs.

General (contract) law may prohibit certain practices and those who have faced UTPs have the option to seek redress before a court of civil law. But general contract law, to the extent that it covers the practice at issue, may de facto be difficult to enforce: a weaker party to a commercial transaction is often unwilling to lodge a complaint for fear of compromising an existing commercial relationship with the stronger party (“fear factor”).

The divergence of Member States’ regulatory approaches to UTPs results furthermore in dissimilar conditions of competition for operators. Under the current piecemeal approach, the extent of protection from UTPs that operators are granted depends on the Member State. Divergence of rules is liable to lead to differences in the conditions of competition.

There is also very little coordination among Member States’ enforcement authorities, due to the absence of formal coordination structures at EU level. Such coordination could improve the enforcement practices in Member States.

The voluntary Supply Chain Initiative (SCI) 4 is a private industry initiative that seeks to govern UTPs. Similar national initiatives exist in Member States alongside national mandatory measures. Since its inception, the SCI has played an important role in Member States in raising awareness about UTPs and fostering fairness of business conduct. It has been evolving and most recently nominated an independent Chair. It provides a forum for early and non-litigious dispute resolution. The SCI is, however, unlikely to develop into a comprehensive governance framework that would make public governance measures including enforcement superfluous. Participation in the SCI is voluntary and the SCI so far does not cover all operators in the food supply chain. For instance, while retailers are members of the SCI retailer buying alliances do not participate in the SCI, nor do the organisations representing agricultural producers. The latter did not join the SCI since, in their view, it does not ensure sufficient confidentiality for complaining parties and does not provide for independent investigations or sanctions. 5 However, organisations representing agricultural producers participate in national supply chain inititatives.

Certain limitations to a voluntary code may also be structural. The SCI has no capability of imposing sanctions, nor are decisions published (no deterrent effect). One-on-one disputes are not dealt with in a manner that would ensure the confidentiality of complaints, not even in the early stages of the procedure. Furthermore, there is no ability to carry out own initiative investigations. The concerns about effective enforcement account for the continued low level of participation of agricultural producers in the SCI. Moreover, a voluntary initiative cannot address, in and of itself, the fragmentation of UTP rules in Member States.

Accordingly, the present proposal for a Directive aims at reducing the occurrence of UTPs in the food supply chain by introducing a minimum common standard of protection across the EU that consists of a short list of specific prohibited UTPs. The protection covers small and medium-sized suppliers in the food supply chain insofar as they sell food products to buyers who are not small and medium-sized. This scope aims at contributing to a fair standard of living for the agricultural community, an objective of the common agricultural policy under Article 39 TFEU.

Provisions targeting minimum enforcement requirements applying to national competent authorities add to the deterrent character of the proposed regime. Last but not least, a coordination mechanism between enforcement authorities facilitated by the Commission will enable the exchange of data concerning the number and type of infringements investigations carried out and will also provide a forum for the exchange of best practices, with a view to improving the effectiveness of enforcement.

The proposed measures are complementary to measures existing in Member States and the code of conduct of the SCI (minimum harmonisation approach).

• Consistency with existing policy provisions in the policy area

There are, as of yet, no EU horizontal rules on UTPs between businesses. Fairness in market activities in the business-to-business context is the specific objective of Directive 2006/114/EC, which deals with misleading practices and the requirements of comparative advertising. However, the provisions set forth in that Directive do not address business-to-business trading practices as identified in this proposal.

• Consistency with other Union policies

Competition law has a scope that is different from rules on UTPs. UTPs are unilateral practices that do not in most cases imply an infringement of competition rules because such an infringement requires the existence of a dominant position in a given market, as well as the identification of an abuse of that position that affects the market overall. Comparatively, rules on UTPs address any situation of unequal bargaining power (in most cases without a dominant position in the market) and prohibit undertakings from imposing on their trading partners, or obtaining or attempting to obtain from them, terms and conditions that are deemed unjustified, disproportionate or without consideration (without necessarily an effect on the market overall). Accordingly, UTP rules will be compatible with and complementary to the EU’s competition rules.

Regulatory divergence and under-protection of kinds similar to UTPs have given rise to EU initiatives in the area of business-to-consumer protection. Some Member States have extended such rules to national business-to-business situations. The conceptual approach under the EU’s business-to-consumer rules indeed shares relevant characteristics with Member States’ existing UTP rules governing business-to-business transactions, namely the focus on relatively weaker parties to a commercial transaction.

The Late Payment Directive (2011/7/EU) foresees that in commercial transactions between businesses ("undertakings") the payment term established in the contract should not exceed 30 calendar days, which can be extended to 60, unless otherwise expressly agreed in the contract and provided it is not grossly unfair to the creditor. Therefore the absence of a binding maximum payment term in business-to-business transactions is often exploited to impose payment terms much longer than what the creditor is comfortable with, or which is not justified by the practices of the trade or the nature of the contract. The proposal therefore aims at setting a maximum payment term of 30 calendar days in commercial transactions in relation to the purchase and sale of food products between businesses. This term is binding and shall not be exceeded under any circumstance. While this proposal constitutes a lex specialis concerning payment terms for the contracts within the scope of this Directive, the Late Payment Directive nevertheless remains applicable whenever late payment occurs, for the remaining provisions, in particular the parts concerning payments and rates of interests, compensations, unfair contractual terms and practices, expedited procedures to obtain orders of payments, payments schedules, retention of title.

3.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY


• Legal basis

A key objective of the CAP is to ensure a fair standard of living for the agricultural community (Article 39 TFEU). The EU’s constitutional emphasis on producer welfare is unique to the agricultural sector hinting at the comprehensive responsibility of the CAP for European agriculture. The Treaty lists four other objectives for the CAP, i.e. increasing agricultural productivity, stabilising markets, assuring availability of supplies and ensuring reasonable prices for consumers.

Article 39 of the Treaty on the Functioning of the European Union (TFEU) specifies that the common agricultural policy (CAP) shall ensure a fair standard of living for the agricultural community as well as increase agricultural productivity, stabilise markets, assure availability of supplies and ensure reasonable prices for consumers. Article 40 TFEU stipulates that the common market organisation shall exclude discrimination between producers. Article 43 TFEU specifies that the common market organisation shall ensure conditions for trade within the Union similar to those existing in a national market.

The patchwork of UTPs rules in Member States or the absence thereof is liable to impair the objective of ensuring a fair standard of living for the agricultural community. UTPs jeopardise the profitability of agricultural producers and lead to downward pressure on their market income. Their governance falls therefore within the CAP’s principled remit.

The absence of a common UTP framework stands in contrast to other areas which the CAP governs, and which have direct relevance for operators, such as competition rules, state aid rules and marketing standards. In these areas, the common market organisation (Regulation (EU) No 1308/2013) lays down common rules relevant to the market conditions operators face in the EU so as to contribute to economic and social cohesion, as well as to a level playing field in the single market.

According to Article 38(2) and (3) TFEU the CAP primarily covers the agricultural products listed in Annex 1 to the TFEU. However, the European Court of Justice has explicitly confirmed that food products not listed in Annex I TFEU (Annex I products are deemed “agricultural products” under the Treaty) can be covered by acts adopted under Article 43 TFEU if this contributes to the achievement of one or more of the CAP objectives and agricultural products are principally covered. 6

Moreover, an approach which protects agricultural producers and their associations (cooperatives and other producer organisations) also must take into account indirect negative effects they may suffer through UTPs occurring downstream in the food supply chain, i.e. by operators who are not farmers but whose weak bargaining position in the downstream chain makes them vulnerable to UTPs. Protection against UTPs applying to downstream suppliers prevents unintended consequences for farmers due to trade being diverted to their investor-owned competitors – for example at the processing stage – which would not enjoy protection (e.g. less legal risk for buyers to be confronted with UTP accusations).

In light of this, Article 43 TFEU, which entrusts the Union legislator with the legal powers to establish a common organisation of agricultural markets in the EU, can in principle serve as the legal basis for measures covering UTPs occurring in the food supply chain in relation to the trade of food products which originate with agricultural producers.

• Subsidiarity (for non-exclusive competence)

No common EU rules exist that would provide for a minimum European standard of protection by approximating or harmonising Member States’ diverging UTP measures. Short of EU measures, Member States lack coordinating mechanisms to bring about such approximation, nor do they have obvious incentives to self-align. A minimum standard of protection against UTPs in Member States does not yet exist, despite the Commission’s recommendations in its communications.

Certain Member States have no specific rules at all that would protect against UTPs. Others do not address important aspects of effective UTP enforcement. This leads to under-protection of vulnerable operators, in particular agricultural producers. Moreover, in spite of its positive effects in the area of private governance of UTPs, the voluntary codes including the SCI – to the extent it applies in Member States – are not able to effectively replace public governance measures.

There is thus a necessity for EU measures that target the problem of under-protection against UTPs by providing for a common EU-wide minimum standard. After years of discussion, analysis and recommendations, which have improved the situation on the ground only to a certain extent, EU legislation is a means that can ensure such a minimum standard of protection throughout the EU, including with regard to coordination and enforcement.

The effectiveness of EU rules consists in a minimum standard that is common in Member States and that would introduce protection in those Member States which currently lack rules protecting against UTPs. The approach chosen is proportionate in relation to the problem encountered and in relation to the measures existing in Member States. It does not lay down a comprehensive EU framework governing UTPs in Member States. Rather, in line with a minimum harmonisation approach, it tackles a short list of manifestly unfair trading practices but leaves Member States room to keep or provide for more far-reaching measures. More far-reaching national UTP rules and voluntary codes like the SCI would not be replaced but rather complemented. An EU minimum standard is therefore expected to lead to synergies rather than the cancelling out of the advantages of these regimes. Secondly, the proposed Directive lays down effective enforcement powers that have proven effective in tackling the fear factor, as well as enhancing the deterrent effect and improving redress possibilities in Member States. Again, the approach followed is that of a minimum harmonisation and relies on Member States enforcement authorities rather than any centralised enforcement authority. Third, the proposed Directive includes the setting up of a coordination network of enforcement authorities facilitated by the Commission which will enable the exchange of best enforcement practices and a platform on which to discuss and improve the application of the UTP rules. Experience from the enforcement of UTPs by the UK Grocery Code Adjudicator shows that an effective protection regime can reduce the occurrence of UTPs and improve effective redress against them.

Measures at the EU level, complementary to Member States regimes and the SCI, consist in common UTP rules that would aim at improving the governance of the food supply chain and pursue the objective of ensuring fair living standards of the agricultural community (Article 39 TFEU). The approach adopted takes the form of partial (minimum) harmonisation and takes the positive effects of market driven contractual arrangements between parties into account. As UTPs occur along the food supply chain and have repercussions that are likely to be passed through to agricultural producers, it makes sense to address them in a comprehensive manner and target them along the chain.

• Proportionality

The option packages discussed in the impact assessment differ according to their ambition. As regards their suitability to effectively address the issue, all are in principle suitable to contribute to achieving the stated objectives, which are to reduce the occurrence of UTPs and address the situation of under-protection. Having said this, recommendations by the EU can only do so much in relation to the objectives pursued. Recommendations in 2014 and 2016 by the Commission to Member States and the SCI have not been given full effect, partly because certain outcomes may depend on a common mandatory approach. Accordingly, the approach chosen in the present Directive is more effective in ensuring the goal of a common minimum level of protection in Member States and can, as has been shown by the example of certain Member States, address some of the identified problems relating to UTPs, including the enforcement shortcomings. By the same token, it would seem that less intrusive means are not likely to achieve the objective in an equally effective manner.

The approach taken is circumspect in different ways and is therefore proportionate to the objective pursued. Partial harmonisation is proposed, not full harmonisation. Member States will continue to be able to have rules on UTPs above and beyond the minimum standard of protection this Directive intends to introduce (subject to applicable EU law). What is more, the Directive suggests an approach that is based on decentralised enforcement by Member States. The Directive is complementary to existing rules, including those established by voluntary initiatives such as the SCI. Accordingly, the Directive does not aim to define all practices that could be UTPs but establishes a short list of prohibited UTPs. The scope of protection is limited to SME suppliers in the food supply chain thereby not interfering with the commercial relationships of large players who are less likely to be affected by UTPs or who can be expected to counter-vail undue pressure to “suffer” UTPs, and who would not be subject to the fear factor discussed in the impact assessment report in the same way as SME operators.

Sections 3.2 and 3.3 of the impact assessment address proportionality. The characteristics of the preferred option, which make the proposal proportional within the above meaning, are discussed in sections 5 and 6 and eventually in section 8, which presents the preferred option.

• Choice of the instrument

The instrument chosen is a Directive, as a soft law approach risks being ineffective in ensuring the desired minimum level-playing field. The endorsement of a Directive as the relevant instrument for UTP measures is also mindful of subsidiarity: a Directive enables Member States to integrate the minimum protection into their national legal orders in a way that is compatible with their choices of laws, regulations and administrative provisions.

4.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS


• Ex-post evaluations/fitness checks of existing legislation

As there is no EU legislative framework to address UTPs yet, it is not possible at this stage to present an evidence-based evaluation on how EU measures perform. However, some Member States have performed ex ante or ex post evaluations with respect to the effectiveness and efficiency of their UTP policies.

• Stakeholder consultations

The consultation process included consultations on the inception impact assessment, an open public consultation, targeted food supply chain stakeholder consultations (undertakings in the food supply chain and consumer organisations), a consultation of Member States, an academic workshop on UTPs in the food supply chain (organised by the Joint Research Centre), ad hoc meetings with food supply chain stakeholders, and engagements with CAP Civil Society Dialogue groups. The consultation process was primarily aimed at the collection of evidence to inform the impact assessment report.

Stakeholders were invited to offer comments and evidence on problem definition, policy objectives, the need for EU action, policy options, on the likely impact of the policy options, and on implementation issues, including monitoring and enforcement.

Stakeholders largely stated that frequent and damaging UTPs are occurring in the food supply chain, and they support legal action at the EU level (with the exception of the retail sector), including minimum enforcement standards. (Large) retailers disagree that UTPs occur widely and are opposed to EU measures. Consumer organisations had limited participation in the consultation process but expressed an interest to be involved at the legislative stage.

90% of respondents to the open public consultation agreed or partially agreed that there were practices in the food supply chain that could be considered to be UTPs. These results were broadly similar for all stakeholder groups (producers, processors, traders, researchers, etc.), with the exception of the retail sector (12% agreed or partially agreed that UTPs exist in the food supply). The most damaging practices that were identified in the consultation broadly aligned with those identified by the SCI in its Principles of Good Practice. Overall, 87% of respondents believed action should be taken by the European Union (in combination with Member States, 58%; or the EU acting alone, 29%). In terms of the effectiveness of enforcement, the most important features named by respondents were: transparency of investigations and results (94%), possibility of fines in the case of violations to the rules (93%), possibility to file collective complaints (92%), ability to receive and treat confidential complaints (89%), designation of a competent authority (89%), and ability to conduct own initiative investigations (73%).

Stakeholders’ input was incorporated in the impact assessment analysis throughout the text and taken into account in the proposal for the Directive. While most stakeholders called for extensive regulation of several types of UTPs in the food supply chain, the Commission’s proposal comes forward with a restricted approach to cover only a few types of particularly damaging UTPs. The Commission largely agrees with the majority of stakeholders on the importance of robust enforcement capability of Member State authorities and coordination of enforcement at EU level.

• Collection and use of expertise

In addition to the stakeholder consultations described above, the analysis for the impact assessment relied on a wide range of scientific, legal and applied knowledge. For the definition of the baseline, information was collected from Member States and processed and analysed by external legal experts; additional information pertaining to the possible impacts of the options was also collected from Member States, as well as from publicly available information. More generally, the evidence base of the impact assessment includes data and information obtained through the above-mentioned consultations, through an academic workshop and a technical report, through independent literature reviews, and through exchanges with Member States and third countries with experience in regulating UTPs. For instance, in its report “The supply of groceries in the UK market investigation” from 2008, the UK’s Competition Commission found that certain UTPs may have a negative effect on competition and consumer welfare. In a study for DG GROW in 2016, Areté discussed the limits of the SCI in addressing UTPs. And in a report about UTPs in 2013, SEO confirmed the role the fear of retaliation plays in UTP cases.

In addition, the in-house expertise of both the researchers at the JRC, in particular its Unit on Economics of Agriculture, and the economic and legal experts within DG AGRI were used in the impact assessment.

5.

Academic workshop on UTPs in the food supply chain


Together with DG AGRI, the Joint Research Centre (JRC) organised a workshop on “Unfair trading practices in the food supply chain” in July 2017. More than a dozen participants at this workshop came from universities across the EU as well as from the US.

Based on the outcomes of the workshop, and with the support of the workshop’s academic rapporteurs, the JRC produced a technical report that confirmed the existence of UTPs in the food supply chain and referenced the extensive regulatory and analytical work on this topic.

6.

Study on national UTP rules in Member States


Using a questionnaire-based approach, the Commission elicited feedback from Member States on their experiences with UTP rules and on the data and information they could share in this context. In particular, Member States were asked to (i) update information on the existence, implementation, and enforcement of national UTP legislation that had been collected in an earlier study in 2015, (ii) share information from impact assessments they may have carried out for decision-making on national UTP rules, and (iii) provide data and information on the administrative costs to public administrations from the introduction of national UTP rules.

The replies from Member States were used as input for an overview of the “Specific regulations on unfair trading practices in Member States in the business-to-business retail supply chain” (Cafaggi, F. and P. Iamiceli, Annex F to the impact assessment). In addition, DG AGRI used Member States’ estimates of their administrative costs related to the introduction and enforcement of their national UTP rules when drafting the impact assessment and designing the different options.

7.

Analysis of the impact of UTP regulation


The Chief Economist of DG COMP provided an analysis of the possible impact of the regulation of trading practices in the food supply chain, including the identification of the possible benefits and drawbacks (for operators and consumers) of regulating different types of practices.

• Impact assessment

DG AGRI presented the impact assessment to the Regulatory Scrutiny Board on 21 February 2018. The RSB issued a negative opinion on 23 February 2018. The Board requested further work to be done and asked for the resubmission of the impact assessment report. The Board identified several shortcomings that needed to be addressed in a revised version. A revised version of the impact assessment report was submitted to the Regulatory Scrutiny Board on 5 March 2018 and the Board issued a second opinion, received on 12 March 2018, of positive with reservations. An overview of the Board's recommendations and the changes made is provided in Annex 1 of the impact assessment.

The different policy options are presented and discussed in section 5 of the impact assessment. These options are then evaluated and combined into several plausible differentiated option packages (section 6.4). A preferred option package is presented in Section 8. The methodology used and the assessment of the effectiveness and efficiency of the packages and of their underlying elements is described in Annex E.

As to the option elements, the following considerations are important. A detailed harmonisation of UTP rules in the EU food supply chain does on the basis of the evidence available, not seem warranted. A partial harmonisation approach with substantive UTP rules can accommodate Member States’ stricter UTP rules while at the same time introducing a common minimum standard of protection in the EU that supports the objective of reducing the occurrence of UTPs.

A general clause prohibiting UTPs would provide a common standard of protection against UTPs in Member States. While it would be interpreted by authorities in Member States on a case-by-case basis it would entail expectations about a uniform application. A general clause could thus come to de facto imply a degree of harmonisation that could give rise to tension in relation to Member States’ existing regimes which often rely in their own right on general national prohibitions. Prohibitions of specific UTPs - the approach taken in this proposal for a Directive - do not have this broad de facto harmonising effect. Concretely formulated prohibitions targeting specific UTPs will also reduce legal uncertainty for commercial transactions that may derive from a more general prohibition. Due to their specificity the rules aim to be predictable for operators and to be workable for authorities entrusted with their enforcement.

It is necessary to distinguish between practices that are foreseen in clear and unambiguous terms in the supply agreement between the parties before the transaction has started, and practices that occur after the transaction has started without being agreed in advance in clear and unambiguous terms. The first category of practices is likely to generate efficiencies whereas the second category is unlikely to generate efficiencies for the parties. The definition of certain UTPs in this proposal therefore accommodates contractual arrangements between parties unless they cannot reasonably be seen as creating efficiencies, for instance if they give vague and unspecified powers to the stronger party to unilaterally decide on such practices at a point in time after the transaction has started (unpredictability) or because some practices are by their nature unfair.

The proposed UTP rules focus on products listed in Annex I TFEU and being for food use as well as processed agricultural products traded along the food supply chain, thus covering all traded food products. Purchases of such products by non-SME buyers in the chain will have to respect the EU’s UTP rules. This comprehensive scope is consistent with the SCI’s approach and with UTP measures in Member States. Only covering agricultural products as listed in Annex I would risk creating distortions in the supply chain that could ultimately affect negatively the trade in agricultural products and agricultural producers.

A targeted protection of small and medium suppliers in the food supply chain is justified because they are often the ones who cannot defend themselves against UTPs due to their lack of bargaining power. There also is a risk of negative unintended consequences concerning measures affecting the contractual relationships between larger operators. Therefore, even though in the impact assessment UTPs are defined in terms of absolute fairness considerations, a targeted protection is more proportionate at this stage. By the same token, the rules are to apply to non-small and medium-sized buyers in the food supply chain, those being the ones who may be able to use their bargaining power against smaller operators in a way that enables the use of UTPs.

Certain procedural powers for authorities that are competent to monitor UTP rules – and the existence of such an authority in the first place – have proven important for the perception of operators that effective enforcement exists and is apt to address the root causes for those who have been faced with UTPs not to seek redress (fear factor). Member States are therefore required to designate a competent authority for UTP enforcement that is given certain minimum enforcement powers inspired by best practices in Member States’ existing regimes.

A coordination mechanism between competent authorities should accompany the EU rules and ensure their coordinated application, and it should facilitate an exchange of best practices. Importantly, it should also collect data through Member State reporting that can inform a future review of the measures. The Commission would facilitate the network by hosting annual meetings based on annual application reports submitted by Member States’ competent authorities.

As regards the impacts of UTP rules, a precise quantitative estimate of the benefits that will accrue to operators is difficult to give. However, each of the targeted UTPs has a clear negative impact on their bottom line through the undue transfer of risk and generation of uncertainty, i.e. through costs that in competitive markets would not be part of their entrepreneurial agency. Respondents in the numerous surveys that were cited in this impact assessment almost all converge in their concern about the occurrence of UTPs and their harm, as well as in their expectations of positive effects from public (EU) UTP rules and their effective enforcement. For instance in the UK the Grocery Code Adjudicator reports that it has proven effective in reducing the occurrence UTPs.

Estimates about the harm which UTPs cause are given in sections 2.5 and 6.2.1 of the impact assessment. According to a 2013 survey of agricultural producers and agricultural cooperatives based on a wide definition of UTPs, the estimated damage from UTPs amounted to over EUR 10 billion per year. Manufacturers of food products participating in a survey in 2011 based on a wide definition of UTPs reported that their UTP-related costs amounted to 0.5% of their turnover, which would be equivalent to EUR 4.4 billion if extrapolated to the overall food industry turnover in that year.

The expected benefits of reducing the occurrence of UTPs could be considered costs for those stronger operators that have been applying them and that must no longer apply them due to UTP rules. However, due to societal considerations concerning fairness such benefits, which are a result of subjecting suppliers to UTPs, are not considered justified in the first place. It follows that the benefits resulting from the prohibition of UTPs outweigh this specific form of “harm”.

The main costs for operators that are subjected to UTP rules will be compliance costs. In this context, compliance costs are generally costs that relate strictly to training and adherence to the rules. The proposed UTP rules do not require operators to carry out certain activities, they only prohibit certain behaviour that is deemed unfair. Moreover, at least the signatories of the SCI already incurred compliance costs to respect the SCI’s voluntary code. One large retailer, for example, has spent EUR 200,000 on one-off training measures of staff in relation to the SCI code of conduct.

A partial harmonisation of UTP rules at EU level is expected to have limited effects on consumers. In the open public consultation, operators do in general not claim that UTPs (e.g. by the SCI) lead to advantages for consumers, for example through lower consumer prices that become possible through margins that were extracted from upstream suppliers through UTPs. It is sometimes argued that consumer prices are negatively affected by below-cost-sales prohibitions, but these are not covered by the impact assessment. The consumer organisations which have reacted to the consultation encourage public UTP rules because they expect a longer-term negative effect of UTPs on consumer prices.

Member States will have to transpose the UTP rules into national law. The choice of a Directive leaves Member States a discretionary margin how to implement this transposition. Member States are not precluded from adopting and applying on their territory stricter national laws protecting small and medium sized buyers, as well as the suppliers specifically mentioned in this Directive. UTPs have been subject to a variety of heterogeneous legislative measures in Member States over the years. Accordingly, the majority of Member States already provide for a governance framework for UTPs. The impact of EU UTP rules on Member State legislation will depend on the (scope of the) existing national rules. In cases where there is no framework at all, the Member State would have to implement the new measures, including designating an enforcement authority. Having said this and as shown by some Member States, the mandate of an existing authority (e.g. a national competition authority) can be expanded. Therefore, such implementation costs can be absorbed to some extent by current structures in Member States and therefore these costs would be limited. By way of illustration, the running costs of the UK Grocery Code Adjudicator stood at GBP 1,786,000 in the 2015/2016 financial year, and at GBP 622,000 in the 2016/2017 financial year. Most of the difference is due to a large-scale investigation into one retailer in 2015/2016.

Finally, UTP rules are not expected to have a significant direct impact on the environment, although operators that are not subject to UTPs may be left with more economic margin to invest in producing in environmentally sustainable and climate-friendly ways and to prevent food waste, or they may feel less pressured to compensate for the lost margin by cutting corners when it comes to environmental and food safety legislation.

• Regulatory fitness and simplification

SMEs are expected to benefit from the proposal. While SMEs may also face compliance costs, this was not an issue raised in the answers to the consultation. Moreover, voluntary rules like those of the SCI already apply regardless of size.

• Fundamental rights

Implementation plans and monitoring, evaluation and reporting arrangements The EU is committed to high standards of fundamental rights. A fair and effective system of protection against UTPs will contribute to stakeholders’ ability to conduct a business (see Article 16 Charter of Fundamental Rights of the European Union (CFR)). Union legislation must respect the rights enshrined in the Charter (Articles 51, 52 CFR). Enforcement powers therefore have to be shaped in a manner compatible with the rights of defence (Article 48 CFR), e.g. by providing an effective remedy against the decision of an enforcement authority that is imposing penalties. In particular for the confidential treatment of complaints, a balance must be struck in relation to the rights of defence.

2.

BUDGETARY IMPLICATIONS



The proposal would have a limited impact on the EU budget. It would entail one annual coordination meeting of Member States’ enforcement authorities in Brussels and the creation and management of a basic website for the information exchange by the Commission.

8.

5. OTHER ELEMENTS


• Implementation plans and monitoring, evaluation and reporting arrangements

There are no relevant statistics available at EU level in the Eurostat database that could serve as primary sources of data for the monitoring and evaluation of this Directive. Statistics on producer, processor and consumer prices collected either through Eurostat or directly in the framework of the Common Organisation of the Markets, will be used by the Commission as a basis for econometric work in support of the monitoring and evaluation of the Directive.

Monitoring and evaluation will therefore rely on data collected in the framework of the present Directive, mainly by means of annual reports of the national competent authorities. Such reports will detail the activity of authorities on the application and enforcement of the rules under this Directive, e.g. in terms of the number of complaints received (confidentially or not), the number of investigations launched (under own initiative or upon request) or the share of cases resulting in findings of an infringement. The annual reports will also cover concrete practices and experiences, with a view to facilitating the adoption of best practices. This will be further complemented by surveys of undertakings in the EU (from agricultural producers to retailers) examining perceptions, as already carried out by some Member States and voluntary initiatives. Both experiences and perceptions are important factors influencing the behaviour of businesses in the Single Market. Finally, the Commission will also directly carry out or commission economic studies aiming at measuring the impact of the different practices concerned by national rules and voluntary initiatives at the micro- and macroeconomic level.

According to the indicators identified in the impact assessment, the Commission will evaluate the effectiveness, efficiency, relevance, coherence and EU added value of this policy, as well as possibly other relevant evaluation criteria such as utility, equity and acceptability or coordination (with Member State rules and voluntary self-regulation initiatives). These indicators can serve as the basis for the evaluation that should be presented no sooner than three years after the application of the Directive, to ensure that a sufficient data-set is available.

An implementation plan is not required for this Directive, which has a limited scope, does not propose full harmonisation, and does not entail particular technical, compliance or timing challenges. In addition, several support actions are provided for by the Directive itself, which lays down a cooperation mechanism between enforcement authorities and the setting-up of a website for this purpose.

• Explanatory documents (for Directives)

For the reasons given above in the section on implementation plans, the Commission will not request explanatory documents concerning the transposition from Member States.

• Detailed explanation of the specific provisions of the proposal

The proposed Directive consists of 14 Articles.

Article 1 defines the subject matter of the Directive, which follows a partial (minimum) harmonisation approach to introduce a minimum standard of protection relating to UTPs across Member States. The protection applies only to SME suppliers in the food supply chain as regards their sales to buyers which are not SMEs.

Article 2 provides definitions of terms recurrently used in the provisions of the Directive: “buyer”, “supplier”, “small and medium sized enterprise”, “food products”, and ”perishability”. These definitions contribute to defining the scope of the application of the Directive.

In terms of products covered, the Directive covers food products, that is to say agricultural products as listed Annex I TFEU for the use as food, including fishery and aquaculture and processed agricultural products for food use – i.e. processed food products which are not already covered in Annex I TFEU.

The relation between suppliers and buyers in combination with the product coverage results in a scope of the measures that applies along the food supply chain and that covers UTPs that can cascade backwards to eventually put farmers under pressure, whether directly or indirectly. The protection covers small and medium-sized agricultural producers (including their producer organisations such as cooperatives) and other SME suppliers in the chain, while the UTP rules constrain the behaviour of buyers which are not SMEs.

The proposal takes into account that UTPs are not necessarily always laid down in a written contract and might, in principle, occur at any stage of the commercial transaction between the buyer and the supplier of the food supply chain, including ex post after a contract has been concluded.

As the food supply chain consists of inter-linked vertical supply relationships, and UTPs that occur at subsequent chain levels may have a negative impact on agricultural producers and in general on the efficiency of the food supply chain, the proposal does not limit the notion of “supplier” to agricultural producers and their organisations, but covers any supplier, i.e. including manufacturers and distributors, along the food supply chain as long as they are small and medium sized undertakings.

The manufacturing sector, in particular, has a fair share of SMEs. The coverage of the proposal takes into account that small and medium sized intermediaries which might not be able to resist UTPs used by non-SME buyers, may pass on costs resulting from these practices to their own suppliers, namely agricultural producers. In addition, foreign suppliers established outside the Union can invoke the prohibition if they sell to buyers established in the Union.

Article 3 lists prohibited UTPs. While paragraph 2 makes this subject to the contractual freedom of parties, in other words it makes the UTP qualification subject to the parties’ discretion to decide otherwise by virtue of an agreement, the UTPs listed in paragraph 1 are not subject to parties’ contractual discretion due to their “as such” unfair nature.

The group of practices in paragraph 1 covers the prohibition for buyers to pay their suppliers after 30 days, when the supply concerns perishable products. This provision will constitute a lex specialis for the food sector only for the provisions concerning the payment terms of the Late Payments Directive that is applicable to all sectors of the economy. This group also covers short notice order cancellation for perishable products and unilateral and retroactive changes in the terms of a supply agreement: these practices are expressions of disproportionate allocation of risk in favour of the buyer, are manifestly unfair, and should be prohibited.

Other practices that are unfair when applied without agreement may be acceptable and even lead to mutually beneficial efficiency if covered by an agreement between the parties. Therefore these practices should be treated differently by UTP rules, in order to allow efficiency-enhancing practices resulting ultimately in appropriate supplies and prices.

The terms of such an agreement have to be clear and not ambiguous. A vague agreement that would authorise one party to later determine the conditions concerning these practices would be unpredictable and cannot therefore be seen as redeeming such later determination or practice and prevent the practice concerned from being qualified as a UTP.

This second group of UTPs includes the return of unsold or wasted products. Payments for stocking, displaying or listing food products of the supplier may yield efficiencies in favour of both contract partners and thus lead to win-win situations. This also applies to promotion and marketing activities. The buyer must provide the supplier with a payment estimate if so requested. In the case of marketing and stocking, displaying or listing activities the buyer must - on request - also provide the supplier with a cost estimate.

They are acceptable if agreed by the parties and if objective and reasonable cost estimates are at the basis of the payment for stocking and listing products. Suppliers’ contributions to the promotion of products or the buyers’ marketing can also be efficient if agreed by the parties.

Article 4 requires Member States to designate a competent enforcement authority for the prohibited UTPs. Existing enforcement authorities, for example, in the area of competition law (national competition authorities) could be chosen as the competent authority to realise economies of scope.

Article 5 deals with complaints and stipulates that the enforcement authority shall be able to deal with confidential complaints and to protect, where requested, the identity of the complainant. Also producer organisations and associations of producer organisations should be able to file a complaint with the enforcement authority, not only in their own right as a contract partner, but representing their members’ (or their members' members) interest if these members are SMEs.

Under Article 6, enforcement authorities are vested with the necessary powers to start an investigation on their own initiative or based on a complaint, to gather information, terminate an infringement and to impose fines and publish the decisions taken to achieve a deterrent effect.

Coordination and cooperation between enforcement authorities is foreseen in Article 7. This covers annual meetings facilitated by the Commission and annual reports that the enforcement authorities will submit. To the extent possible, Member States’ enforcement authorities should provide each other mutual assistance in their investigations.

Article 8 of the proposal clarifies that Member States may provide for additional rules designed to combat UTPs going above and beyond this minimum Union standard as long as those rules respect the rules pertaining to the internal market.

In Article 9 the reporting obligations of Member States are laid down. The provision foresees the possibility for the Commission to adopt an implementing act in this area of reporting that may specify useful modalities.

Article 10 provides for the committee procedure that will assist the Commission in this respect.

Article 11 provides for an evaluation to be carried out by the Commission no sooner than three years after the application of this Directive as well as an interim report on the transposition of the Directive.

Provisions concerning the transposition of the Directive are contained in Article 12. The provisions are standard procedure for Directives.

Article 13 is about the entry into force of the Directive. Finally, Article 14 stipulates that the Directive is addressed to Member States.