NEWSLETTER No. 71, July 2017
Proscription on abuse of contracting advantage in the agricultural and foodstuffs market
12 July 2017 witnessed the coming into force of the legislative Act of 15 December 2016 regarding counteraction of unfair exploitation of contracting advantage in trading in agricultural and food products (“the Act”). The aim of this statute is to protect smaller, weaker entities operating in the Polish agricultural produce and foodstuffs markets.
Ambit of the Act – Entities, actions
As a rule of thumb, the Act can be said to cover most medium-sized and large enterprises operating in the comestibles market. In practice, these would generally include supermarket chains and their cooperating entities, such as producers and franchisees.
The acts in law covered by the Act include contracts for purchase of agricultural or food products. These are defined very broadly as including any and all substances or products (in their raw and unprocessed form, processed, and in any intermediate stage) intended for human consumption, or which may reasonably be expected to be consumed by humans. The definition encompasses beverages as well as any and all substances, including water, deliberately added to food in the course of its production, preparation, or processing; it does not, meanwhile, include animal feed, live animals, “plants prior to harvesting”, or tobacco.
The Act generally applies to all contracts for purchase of agricultural produce or food, excluding:
1) Direct deliveries within the meaning of the legislative Act of 25 August 2006 regarding food and nutrition safety;
2) Contracts made within agricultural produce cooperatives between such a cooperative and its members;
3) Contracts made within produce groups or produce organisations between such a group / organisation and its members;
4) Small deliveries by producers directly supplying the end consumer or a local retail operation.
Significantly enough, application of the Act is also subject to an additional quantitative criterion, that of the turnover between the business partners in question and the aggregate turnover of the “stronger” party. And thus, the Act shall have application where the aggregate value of transactions between the parties exceeds PLN 50,000, and the revenue of the party resorting to unfair practices – PLN 100 million.
Unfair exploitation of contracting advantage
The new rules proscribe unfair exploitation of a contracting advantage held by a buyer over a supplier as well as by a supplier over a buyer. Such an advantage obtains where there subsists a material disproportion in the respective economic potential of the two parties, and the disadvantaged party has insufficient factual possibilities for purchase of agricultural and food products from other parties, or for selling such products to other parties. Exploitation of such an advantage will be deemed unfair where it contravenes established good practice and custom and, at the same time, potentially or actually violates material interests of the other party to the agreement.
The definition of contracting advantage, meanwhile, indicates – albeit indirectly – that its essence lies in blocking access to the market for comestible or agricultural products, and that it can be wielded, first and foremost, by entities which dispose of an advantage in this market. Abuse of contracting advantage includes, in particular:
1) Unjustified termination of the contract or threatened termination of the contract;
2) A situation where only one of the parties is entitled to terminate or rescind the contract;
3) A situation where execution of a contract or its continuation is made contingent upon acceptance or fulfilment by one of the parties of another benefit or deliverable having no substantive or customary connection with the object of the contract;
4) Unjustified prolongation of payment deadlines for delivered agricultural produce or foodstuffs.
This is not a closed catalogue, so actions different from those specified above may also be deemed to constitute disallowed practices.
A certain degree of interpretational guidance as to unfair commercial practices is provided in the reasoning for the Act. This document indicates that the unfair practices which the Act is intended to counteract include imposition of model agreements without allowing for negotiation of their details, unilateral termination of agreements, imposition of prices and of payment deadlines, and demanding additional benefits – especially ones without an element of reciprocity (such as “shelving fees” for prominent display of products and, more broadly, all and sundry supplementary fees, fees for special events, fees for not returning products, logistics fees, purchasing discounts and promotional discounts).
Notice of suspected practices unfairly exploiting a contracting advantage, proceedings
Any business enterprise which believes that it has been a victim of unfair exploitation of contracting advantage may notify the President of the Office of Competition and Consumer Protection (“UOKiK”) accordingly. Such notice must assume the written form, and it must set out information of relevance to the case, substantiate the suspicion of transgressions in light of the Act, and be accompanied by any corroborating documents.
Such notice, however is not, binding vis a vis the UOKiK President, and if proceedings are initiated on its basis, the enterprise reporting the suspected abuse of contracting advantage will not be a party to it, but will only be advised of the outcome.
UOKiK proceedings are initiated on an ex officio basis and ought to last not more than 5 months. No proceedings may be initiated upon the elapse of 2 years from the end of the year in which the inveighed practice has been discontinued. The proceedings proper may be preceded by clarificatory proceedings; these, in turn, should not last more than 4 months, or 5 months in particularly complex cases.
In the course of such proceedings, UOKiK and Commercial Inspection staff may conduct audits at any business enterprise, also if it is not a party to the proceedings. The permitted scope of such an audit is very wide – UOKiK and the Commercial Inspection may request access to premises and vehicles, to documents, accounts, electronic correspondence, ICT systems and data carriers, and demand clarifications as well as release of objects which may constitute evidence in the case.
UOKiK’s authority to demand information and documents extends to all business enterprises. An entity which refuses to furnish the information requested by UOKiK or which, even if only inadvertently, provides untruthful or misleading information is liable for financial penalties.
Financial penalties under the Act
The UOKiK President may impose a fine as high as 3% of the offending enterprise’s revenue for the preceding year – even in cases were unfair exploitation of the contracting advantage was inadvertent.
Apart from that, t he UOKiK President may impose :
- A fine of up to EUR 10,000 for every day of delay in complying with his decision or with rulings in unfair exploitation of contracting advantage cases;
- A maximum fine of approximately PLN 220,000 (i.e. up to 50 times the average monthly remuneration in the business sector) upon an enterprise’s directors or managers who do not comply with an UOKiK decision or who obstruct UOKiK proceedings, whether deliberately or inadvertently ;
- A maximum fine of PLN 5,000 upon witnesses called who refuse to appear or to testify in unfair exploitation of contracting advantage cases.
A business enterprise which impedes or blocks an audit or which refuses to disclose information or documents requested by the President of UOKiK, even if only inadvertently, faces a penalty of up to EUR 50 million.
The Act, granting as it does extensive audit and discovery powers to the UOKiK President, provides government agencies with considerable leeway to interfere in business operations. As it comes into force, business enterprises would be well advised to reconsider the provisions of their standard contracts as well as actual operations of their “agricultural raw materials and foodstuffs supply chains”. Also, it is worth the while to consider whether any of the rules implemented by way of the Act apply to your operations and, if so, then what steps might be taken to duly adapt them so as to not face liability under the Act. This point assumes especial significance in light of the fact that the legislative Act of 15 December 2016 regarding counteraction of unfair exploitation of contracting advantage in trading in agricultural and food products employs somewhat general wording, leaving UOKiK with considerable leeway in applying its provisions to specific cases.