The European Commission has today adopted a communication encouraging Member States to look for ways to improve protection of small food producers and retailers against the unfair practices of their sometimes much stronger trading partners. Before a food product reaches the consumer, many different market players (producers, processors, retailers, etc.) in the supply chain add to its quality and value. Due to developments such as increased market concentration, there are very different levels of bargaining power in the relations between the players in the supply chain. Whilst differences in bargaining powers are common and legitimate in commercial relationships, these imbalances can in some cases lead to unfair trading practices (UTPs).
Commission Vice-President for Internal Market and Services Michel Barnier said: "As consumers, we may all shop at our local retailers but the food supply chain clearly has a European single market dimension. There needs to be a level and fair playing field between SME food suppliers and retailers on one side and large multinational manufacturers and supermarkets on the other side. Unfair trading practices jeopardise this. The industry has already made important and valuable efforts to address unfair behaviour and should continue doing so. Member States should ensure that they have effective and consistent regulatory frameworks in place to build on and complement self-regulatory initiatives."
Unfair trading practices (UTPs) include:
avoiding or refusing to put essential commercial terms in writing
retroactive unilateral changes in the cost or price of products or services
transfer of unjustified or disproportionate risk to a contracting party
deliberately disrupting a delivery or reception schedule to obtain unjustified advantages or
unilaterally terminating a commercial relationship without notice, or subject to an unreasonably short notice period and without an objectively justified reason.
The food supply chain is not only crucial for the daily life and well-being of consumers but is also important for the economy as a whole, employing more than 47 million people in the EU, many in SMEs, and representing about 7% of the EU gross value added. The total market size of EU retail trade in food-related products is estimated at €1.05 trillion. The food supply chain has a strong international dimension and particular importance within the EU Single Market. Cross border trade among EU Member States accounts for about 20% of total EU food production. Estimates suggest that at least 70% of the total annual exports of agricultural products of EU countries go to other EU Member States.
The communication on UTPs suggests a number of stakeholder priorities to facilitate an effective EU-wide framework against such practices. It does not propose regulatory action at EU level but encourages Member States to make sure they have appropriate measures against UTPs in place, taking into account their national circumstances. The suggestions in the communication are based on three building blocks:
1. Support of the voluntary Supply Chain Initiative: Voluntary codes of conduct are an important cornerstone of fair and sustainable commercial relationships. Therefore, the Communication encourages operators in the food supply chain to join the existing Supply Chain Initiative launched in September 2013 and its national platforms. It also calls on the governance group of the initiative to maximise the participation of SMEs which are the key beneficiaries of the initiative.
2. EU-wide standards for principles of good practice: Those Member States that are already tackling UTPs at national level have chosen different approaches to do so. On the other hand, some Member States have not yet taken any specific action against UTPs at all. In order to address UTPs effectively throughout the EU, and particularly across borders, a common understanding of rules addressing UTPs would be beneficial. The Communication suggests that the principles of the Supply Chain Initiative could be the basis of such a common regulatory understanding.
3. Effective enforcement at national level: If the weaker party in a trading relationship is economically dependent on its stronger counterparty, it may often refrain from defending itself against UTPs through court litigation or voluntary resolution mechanisms for fear of compromising or losing its commercial relationship. To establish a credible deterrence factor against the use of UTPs, the Communication suggests minimum enforcement standards applicable throughout the EU.
The importance of fostering sustainable trading relationships by addressing UTPs was highlighted in the European Retail Action Plan of January 2013 (IP/13/78). The Commission's Green Paper on UTPs in the business-to-business food and non-food supply chain in Europe, published together with the action plan, initiated a broad debate and generated replies from a large variety of stakeholders. Today's Communication is taking that work forward.
UTPs may have harmful effects, especially on SMEs in the food supply chain. They may affect SMEs’ ability to survive in the market, make new financial investments in products and technology, and develop their cross-border activities in the Single Market. Moreover, there could also be some indirect negative effects along the supply chain for SMEs. For instance, an SME might not attempt to form a commercial relationship in the first place, for fear of UTPs being imposed on them. UTPs applied within the EU could also have direct or indirect effects on producers and companies outside the EU, including in developing countries.
A number of Member States recognised the harmful potential of UTPs and launched regulatory initiatives against UTPs or are planning to do so, which has led to regulatory divergence across the EU. In the context of the Commission's Forum on a Better Functioning of the Food Supply Chain, market operators acknowledged the problem of UTPs and developed a set of good principles for vertical relationships and a self-regulatory framework to implement these principles, the so-called Supply Chain Initiative.