In the food supply chains, small and medium-sized agricultural producers are facing what in some cases are powerful processing and retail companies. In the agri-food sector, these include in particular large supermarket chains, large dairies or slaughterhouses. The economic dependence and the existing economic imbalance between the contracting parties usually works to the disadvantage of the producers in contract negotiations. In practice, this has sometimes led to large retailers cancelling their ordered deliveries at short notice and paying only for the part of the goods that they have already accepted delivery of. In such cases, producers face considerable losses in turnover.
The European legislator wants to put an end to this and other practices in future. The German legislator has now presented the draft law implementing EU Directive 2019/633 on Unfair Trading Practices in Business Relationships between Businesses in the Agricultural and Food Supply Chain (Unfair Trading Practices Directive, briefly the “UTP Directive”). The UTP Directive already has to be implemented by 1 May 2020. The original draft bill essentially provided for a 1:1 implementation of the Directive. Under pressure from producers, the current draft law now goes beyond a mere 1:1 implementation. With this, the Federal Government is increasing the level of protection for producers compared to that provided by the UTP Directive.
Essential content of the UTP Directive
The core of the UTP Directive is a list of compulsorily prohibited commercial practices and unilateral conduct, i.e. prohibitions per se (Article 3(1) UTP Directive) on the one hand. On the other hand, it focuses on commercial practices whose effectiveness requires a prior clear and unequivocal agreement between the contracting parties (Article 3(2) UTP Directive).
The UTP Directive per se prohibits the following commercial practices and conduct in future:
- payment term agreements for perishable agricultural, fishery or food products (hereinafter referred to as "agricultural products") of more than 30 days and for other agricultural products of more than 60 days after delivery;
- the agreement of the buyer's right to cancel orders for perishable food products at short notice or to terminate contracts. Termination or cancellation within a period of less than 30 days is considered per se as short-term;
- agreements according to which the buyer is to be unilaterally entitled to modify delivery conditions;
- agreements on the assumption of costs by the supplier that are not related to the sale of the producer's agricultural products;
- agreements on the assumption of costs by the supplier for a reduction of quality or wastage after the delivered goods have been handed over;
- agreements on cost sharing for the processing of customer complaints concerning the delivered goods.
The following unilateral conduct is also prohibited:
- the refusal to confirm delivery agreements and conditions in writing;
- the prohibition of retaliation: prohibition of the threat and/or execution of retaliatory measures if the supplier asserts his contractual or legal rights;
- obtaining, using or disclosing business secrets of the supplier without the supplier's consent.
In addition to these prohibited trade practices, the following are considered unfair if they have not been clearly and unambiguously agreed between the buyer and the supplier:
- returning unsold agricultural products without payment of the purchase price and participation in the costs of their disposal;
- demanding a listing fee for agricultural products;
- demanding discounts from the supplier for the marketing of agricultural products (amongst other things, sales offers of the buyer, advertising for the sale);
- demanding payments or discounts from the supplier for the storage and fitting-out of premises in order to sell the agricultural products.
Transposition of the UTP Directive into national law
The draft bill presented by the Federal Ministry of Food and Agriculture [Bundesministerium für Ernährung und Landwirtschaft, BMEL] provides for the implementation of the UTP Directive in the Agricultural Market Structure Act [Agrarmarktstrukturgesetz, AgrarMSG]. This will be expanded to include the provisions of the UTP Directive and, in the course of its implementation, will be renamed the "Act on Strengthening the Position of the Producer in the Food Supply Chain (Food Supply Chain Act [Lebensmittellieferkettengesetz, LmlkG])".
The draft law (as of 13 November 2020) goes beyond the provisions of the Directive. The Federal Government plans to add two trade practices to the list of trade practices prohibited per se. Unlike in the UTP Directive, the return of unsold goods at the supplier's expense and the assertion of storage costs after delivery is to be fundamentally prohibited. According to the UTP Directive, such commercial practices are only considered unfair if the contracting parties have not clearly and unambiguously regulated these issues in the contract.
The LmlkG specifies the Federal Office for Agriculture and Food [Bundesanstalt für Landwirtschaft und Ernährung, BLE] as the enforcement authority.
Extensive right of appeal and consequences
The Federal Office for Agriculture and Food shall monitor compliance with the standardised prohibitions and banned trading practices. The enforcement authority may act both ex officio and on the basis of complaints.
In addition to the individual (specifically affected) supplier, supplier organisations, associations of supplier organisations or other independent, non-commercial legal organisations with a legitimate interest in representing suppliers are also entitled to lodge complaints. The identity of the specific supplier in question does not have to be disclosed.
If a buyer engages in an unfair trading practice or conduct and the supplier suffers damage as a result, the buyer is still also able to assert damages under civil law.
It remains to be seen whether the courts will classify the LmlkG as a market conduct regulation, which would mean that violations of the LmlkG would also be considered an unfair commercial practice within the meaning of the German Unfair Competition Act [Gesetz gegen den unlauteren Wettbewerb, UWG]. In such case, companies could also seek injunction relief against the unfair practices of their competitors.
Conclusion: action is required
In practice, this means that existing supply contracts and supply conditions need to be scrutinised. In the event of violations subsequent to the entry into force of the implementing law, companies that violate the regulations face the following:
- fines in a sensitive amount of up to EUR 500,000
- the publication of their names on the website of the Federal Office for Agriculture and Food
The provisions of the LmlkG will have a considerable influence on the trade practices that have previously prevailed in the retail trade. The responsible purchasing and sales departments will now always have to check whether the provisions of the LmlkG apply to the contract/supply relationship at issue. The standardised prohibitions and conduct shall not apply categorically. The provisions shall apply only to suppliers with an annual turnover not exceeding EUR 350 million and to buyers with an annual turnover exceeding EUR 2 million. A further condition is that the buyer’s annual turnover exceeds the supplier’s annual turnover, whereby the following lump sums are to apply:
Annual turnover of the supplier -> Annual turnover of the buyer
up to 2.000.000 euros -> over 2.000.000 euros
over 2.000.000 to 10.000.000 euros -> over 10.000.000 euros
over 10.000.000 to 50.000.000 euros -> over 50.000.000 euros
over 50.000.000 to 150.000.000 euros -> over 150.000.000 euros
over 150.000.000 to 350.000.000 euros -> over 350.000.000 euros
From a compliance perspective, the implementation of the UTP Directive means not only that all supply contracts and relationships need to be reviewed and, if necessary, adjusted, but also that new training courses will have to be conducted for employees (to raise their awareness) and existing control systems further developed.
Due to the high planning effort and the long lead times for some orders, there is already a need for action. Companies should make sure that they develop new processes and mechanisms at an early stage so that they are prepared for the changes that are already imminent in the spring. It is only through the timely implementation of new strategies and conduct that companies can avoid possible disadvantages when the UTP Directive enters into force.
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