UOKiK must exercise caution in protecting suppliers

On 30 November 2016, the lower chamber of Polish parliament, the Sejm, adopted the legislative Act regarding counteraction of unfair use of contractual advantage in trading agricultural produce and foodstuffs. While the underlying purpose of this statute is a commendable one, the specific solutions adopted therein are controversial.

We would begin our comments by raising a point which, in our view, has not received anything close to sufficient attention during the debate leading up to the statute’s adoption, namely that the legislative Act regarding counteraction of unfair use of contractual advantage in trading agricultural produce and foodstuffs (hereinafter referred to simply as “the Act”) affects a legal institution at the very heart of civil law dealings: contracts between professional entities. In this context, the law imposes neither a strict requirement of legal form nor systemic safeguards for the weaker party; it does, meanwhile, provide for an increased standard of care and skill and for a liberal interpretation of declarations of intent. The business community does well to steadfastly defend these basic values and to consistently demand that any limitations imposed on them be as narrow, and as precisely defined, as possible.

Voices to that effect become particularly audible in the realm of competition and consumer protection. Given the large degree of business risk involved, the President of the Polish Office of Competition and Consumer Protection is regularly called upon to issue guidelines as to when, and how, the law may be invoked to question actions by business entities as a contravention of collective consumer interests, an unfair market practice, an unlawful collusion, or as abuse of a dominant market position.

Unfair advantage… meaning what, exactly ? 

This set of proscribed behaviours which may be challenged by the Office of Competition and Consumer Protection (hereafter referred to by its Polish abbreviation, “UOKiK”) is about to be expanded to include another one – unfair exploitation of contractual advantage / imbalance. Alas, the key definitions around which the new rules are constructed remain regrettably vague. The legislature has defined contractual advantage / imbalance as a situation in which the weaker party to the legal relationship (the one adversely affected by “significant disproportions in economic potential”) lacks “adequate and actual” possibilities of contracting with another entity. At the same time, the legislature has neglected to elaborate exactly what disproportions in economic potential might qualify as significant, or when – in a market economy reality – the possibilities of taking one’s business someplace else will be inadequate.

In like spirit, the Act proscribes exploitation of this evasive contractual advantage as unfair if it “contravenes good customs” and “threatens or violates the interests of the other party”. Even though the Act does set out examples of undesirable practices, the definition remains a very broad one.

In this connection, the Act omits what is a very important issue – it leaves us in the dark as to whether unfair exploitation of contractual advantage will be constituted in an offer to purchase products at a price which is too high, or too low. The Act offers no examples in this regard, although its presumed goal is to identify elements of the contractual relationship that are most prone to abuse.

This fundamental imprecision of the Act’s provisions leaves the UOKiK President with considerable leeway for interpretation. Given that UOKiK is also equipped with sweeping audit and discovery powers, and that it is empowered to impose steep fines, large food suppliers and distributors now find themselves on shaky ground. This pervasive legal uncertainty amounts to our most important issue with the new Act.

Contracts under UOKiK scrutiny 

What might be the new Act’s practical implications for parties to distribution agreements ? First of all, they would be well advised to consider whether they meet the criteria for legal classification as an entity benefitting from contractual advantage, which is defined in reference to standalone or consolidated revenues in excess of PLN 100 million.

If this revenue threshold has been attained, the entity in question must reckon with scrutiny of contracts for purchase of agricultural produce or food products with a given contracting counterparty where turnover with that party exceeds PLN 50,000 per year. In general, long-term supply relationships will carry a higher degree of risk, while sourcing in the net-net model will be safer.

It should be borne in mind that UOKiK may zoom in on any and all elements of the contract. Stipulations concerning additional fees, receivables rotation, and rebates will be among those most likely to be scrutinised from a contractual advantage angle.

Imprecise definitions leave the UOKiK President with ample room for interpretation 

Significantly enough, the Act’s provisions will make it harder for the stronger party to terminate an agreement. Noti ce of termination must include justification; accordingly, there arises a need for strategizing communications between the parties.

Whether or not outright termination of the given contract is justified falls to be considered in reference to the possibility – or, as the case may be, lack thereof – of applying less extreme measures, such as liquidated damages or a reduction in price. Thus, in practice, the UOKiK President may conceivably weigh in as to whether, for instance, a minor delivery delay was sufficient grounds for abrogating the entire contract rather than claiming liquidated damages. A party which, in accordance with market practice, disposes of a certain catalogue of rights may now find that these rights end up working to its disadvantage.

We would take this opportunity to emphasise that, as regards stepping into the contractual relations of two business entities, restraint and circumspection are called for on the part of the public administration authorities. It is the right – not to say the job – of business people to hold their business parties up to the most exacting standards and to cooperate only with those entities which can meet those standards.

Not only the major players 

The debate preceding adoption of the Act somehow glanced over the fact that the statutory yardstick for assessing the practices of the biggest market players will also have bearing on the mutual dealings of smaller enterprises. Provisions of the Act are bound to impact upon the general understanding of acts of unfair competition, a legal concept often invoked by parties to business disputes (specifically ones concerning distribution arrangements).

Contrary to the appeals of some parliamentary deputies during drafting of the Act, the UOKiK President does not receive the power to actually modify existing contracts. The track record built up by UOKiK in application of the Act is nonetheless bound to influence judicial practice in ruling on smaller cases. Our assessment of this particular aspect is a positive one, in that it provides potential for introducing greater predictability and order to large-scale supply chains without expanding the powers afforded to UOKiK.

In a recent debate covered by DGP (“Can the government succeed in protecting small Polish producers”, DGP of 30 November 2016), the UOKiK President offered the opinion that dramatic assessments of the Act’s future impact may well turn out to have been overblown. Alas, whether or not this scenario comes to pass will depend exclusively on the professionalism and practices cultivated by UOKiK itself. While it is indubitably one of the most efficient public agencies in Poland, it is still an administrative authority and, as such, is susceptible to political influence, so the fears entertained by some stakeholders (who fret about malicious denunciations and attempts at circumventing the law) are perfectly understandable.