- Agricultural and food suppliers would be protected from unfair trading practices by a European Union directive applicable from 1 November 2021 at the latest.
- Among others, excessive payment deadlines, last-minute cancellation orders, unilateral contract modifications, obligation of non-sale payments, and threats of commercial retaliation have all been blacklisted.
- While current Hungarian regulations are similarly strict, preparations must be made for notable differences as well, according to DLA Piper Hungary.
Directive 2019/633 of the European Parliament and the Council of 17 April 2019 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain [hereinafter: Directive] has been accepted on 7 April 2019. The Directive safeguards suppliers from customers’ unfair trading practices in an extensive manner throughout the entire European Union.
Concerning the Directive’s date of implementation, Article 13 of the Directive makes it clear that Member States shall adopt and publish the laws, regulations and administrative provisions necessary to comply with the Directive, and shall apply the measures enacted until 1 November 2021.
The obligations imposed upon traders pursuant to Article 1 of the Directive, apply to supply agreements concluded after the date of application of the measures transposing the Directive in accordance with the second subparagraph of Article 13(1). Supply agreements concluded before that time must comply with the directive within 12 months of the publication of the Directive.
1. Do traders within Hungary need to worry about the changes implemented by the Directive?
In order to give an appropriate and thorough answer to the question above, one must compare the Directive’s relevant provisions with the Hungarian Act currently regulating this subject matter, namely the Act XCV of 2009 on the Prohibition of Unfair Trading Practices Applied Against Suppliers Relative to the Marketing of Agricultural and Food Products [hereinafter: Tfmtv.].
1.1 The question of personal scope
Irrespective of their revenue, Tfmtv.’s scope extends to (1) natural persons engaged in the production and/or processing of agricultural and food products, legal persons, unincorporated business associations, as well as producer organizations and producer groups and to (2) natural and legal persons, unincorporated business associations reselling agricultural and food products unaltered and without processing to final consumers, including the organization considered affiliated to these, as well as third parties providing services to such persons and organizations having regard to purchasing and selling the products, hence establishing direct commercial ties with the suppliers of such products.
In line with Tfmtv., suppliers can also be considered traders based on their activities, whereas producer organizations or producer groups are considered to be suppliers when selling goods and to traders when purchasing them.
“Purchasing alliance” is not defined in Tfmtv., however Section 2(2) of Act CLXIV of 2005 on Trade highlights that it shall mean an agreement between two or more companies with a view to implementing their buying and sales strategies, to perform all or part of their sales or purchases, or to coordinate their sales or purchasing activities.
In contrast, in its statutory interpretation issued on 30 January 2011 (this working paper did not have any binding effect, it could not be used at civil or administrative proceedings, thus it cannot be considered as an official statement), the Central Agricultural Office (CAO), the predecessor of the National Food Chain Safety Office (NFCSO), interpreted the term in a much broader way, not restricting it to an agreement, but extending it to concerted purchasing and alliance-like cooperation. According to the CAO, purchasing alliances are not formal, incorporated cooperation of the parties, however, those need to be scrutinized based on the content of the cooperation as well on the business rules and the contractual system.
Conversely, the Directive regulates B2B (Business-to-Business) relationships more strictly, utilizing revenue as a limiting factor.
Therefore, the Directive is only applicable to those unfair trading practices which occur in relation to the sale of agricultural and food products by:
- suppliers which have an annual turnover not exceeding EUR 2,000,000 to buyers which have an annual turnover of more than EUR 2,000,000;
- suppliers which have an annual turnover of more than EUR 2,000,000 and not exceeding EUR 10,000,000 to buyers which have an annual turnover of more than EUR 10,000,000;
- suppliers which have an annual turnover of more than EUR 10,000,000 and not exceeding EUR 50,000,000 to buyers which have an annual turnover of more than EUR 50,000,000;
- suppliers which have an annual turnover of more than EUR 50,000,000 and not exceeding EUR 150,000,000 to buyers which have an annual turnover of more than EUR 150,000,000;
- suppliers which have an annual turnover of more than EUR 150,000,000 and not exceeding EUR 350,000,000 to buyers which have an annual turnover of more than EUR 350,000,000.
What is the reason for the Hungarian regulation’s broader personal scope?
In my opinion, the reason is the following: if suppliers with a higher revenue would be excluded from the scope of Tfmtv., it would disadvantage those small and medium-sized suppliers that would remain under the scope of the Act, as traders would have to deal with them in a more careful manner in line with the provisions of Tfmtv. Therefore, besides safeguarding such suppliers, Tfmtv. would put them in a competitive disadvantage against their competitors outside of the scope of Tfmtv.
When it comes to definitions, there is no substantive difference between the provisions of Tfmtv. and the Directive. The wording of both regulations extends to producers, producer organizations and their associations. It must be emphasized here that not only producers but also distributors are safeguarded thereunder.
The Directive broadly defines the other contractual party as buyer. A buyer is any natural or legal person irrespective of their place of establishment, or any public authority in the Union, who buys agricultural and food products; the term ‘buyer’ can include a group of such natural and legal persons.
Conversely, pursuant to Tfmtv. which puts emphasis on reselling products, a trader is any natural or legal person (or in the case of joint purchasing all companies belonging to a purchase group) acting as a reseller of agricultural and food products purchased from suppliers directly or indirectly within the framework of gainful activities unaltered and without processing.
The only substantive difference between the two approach is that, while the personal scope of Tfmtv. only extends to retail businesses, the Directive also extends to wholesalers, thus to natural or legal persons reselling products unaltered and without processing to traders or processors and providing warehousing, transportation and related services. The Directive does so by not regulating the type of buyers to whom the buyer must resell the products. However, both the Directive and Tfmtv. are identical in that sense that their scope does not extend to agreements between suppliers and consumers.
It is also important to emphasise that paragraph 31 of the Directive’s preamble declares that: “Complaints by producer organisations, other organisations of suppliers and associations of such organisations, including representative organisations, can serve to protect the identities of individual members of the organisation who consider that they are affected by unfair trading practices. Other organisations that have a legitimate interest in representing suppliers should also have the right to submit complaints at the request of a supplier and in the interest of that supplier, provided that such organisations are independent non-profitmaking legal persons. The enforcement authorities of the Member States should therefore be able to accept and act upon complaints by such entities, while protecting the procedural rights of the buyer.”
Concerning the right to submit a complaint, Article 5(2) of the Directive provides that: “Producer organisations, other organisations of suppliers and associations of such organisations, shall have the right to submit a complaint at the request of one or more of their members or, where appropriate, at the request of one or more members of their member organisations, where those members consider that they have been affected by a prohibited trading practice. Other organisations that have a legitimate interest in representing suppliers shall have the right to submit complaints, at the request of a supplier, and in the interest of that supplier, provided that such organisations are independent non-profit-making legal persons.”
This means that the Directive makes the right of producer organisations and organisations of suppliers to submit a complaint conditional upon whether any member of them, who considers himself as one who is adversely affected by the market practice prohibited by the Directive, specifically requested such organisations to submit such complaint.
In contrast, Tfmtv. does make the supplier organizations’ right to bring proceedings conditional upon the request of their members, as Section 5(1) therein clearly states that the members shall be considered clients in administrative proceedings. However, this procedural right does not affect the right of the supplier to enforce its claims directly.
1.2. The prohibition of unfair trading practices
While Tfmtv. does not differentiate between unfair practices of distributors based on their gravity, the Directive classifies them into the following multi-stage categories:
1.2.1. Blacklist practices
These include cases where the buyer:
- pays the supplier later than 30 days after the end of an agreed delivery period in which deliveries have been made for perishable agricultural and food products,
- pays the supplier later than 60 days after the end of an agreed delivery period in which deliveries have been made for other agricultural and food products,
- cancels orders of perishable agricultural and food products at such short notice that a supplier cannot reasonably be expected to find an alternative means of commercialising or using those products,
- unilaterally changes the terms of a supply agreement for agricultural and food products,
- obliges the supplier to make payments that are not related to the sale of the agricultural and food products of the supplier,
- requires the supplier to pay for the deterioration, loss, or both of agricultural and food products that occurs on the buyer’s premises or after ownership has been transferred to the buyer, where such deterioration or loss is not caused by the negligence or fault of the supplier,
- refuses to confirm in writing the terms of a supply agreement between the buyer and the supplier for which the supplier has asked for written confirmation,
- unlawfully acquires, uses or discloses the trade secrets of the supplier,
- threatens to carry out, or carries out, acts of commercial retaliation against the supplier if the supplier exercises its contractual or legal rights,
- requires compensation from the supplier for the cost of examining customer complaints relating to the sale of the supplier’s products despite the absence of negligence or fault on the part of the supplier.
In these cases, there is an infringement without any further examination of contributing circumstances.
When comparing these with cases listed under Section 3(2) of Tfmtv., the following conclusions can be drawn:
- does not differentiate between perishable (i.e. agricultural and food products that will likely become unfit to sell 30 days after their manufacture or processing due to their nature) and non-perishable food products, although it universally sets a 30-days payment deadline counted from the moment the trader or any person acting on behalf of or for the trader has taken possession of the product, if the supplier delivers the invoice properly made out to the trader within 15 days from the date of delivery of the product. It is important to highlight that neither the Directive nor Tfmtv. implies that traders shall make payments which are due on public or legal holidays to the suppliers the following working day. Traders shall make such payment prior to those days. It must also be highlighted that the “sconto” (price reduction by way of discount for early payments) is not prohibited under the Directive, whereas according to jurisprudence of the NFCSO in this field it is considered to be an unfair trading practice. However, under Tfmtv., requiring a price reduction for the trader if making payment within the period of payment stipulated is prohibited.
- The prohibition of order cancellations, unilateral amendment of supplier agreements and of the lack of written confirmation are also included in Tfmtv. Based on the working paper of CAO and jurisprudence based on Tfmtv., the following is a non-exhaustive list of contractual terms which result in a unilaterally advantageous risk-sharing:
- empowering the trader to unilaterally interpret any conditions of the contract,
- empowering the trader to determine whether the fulfilment of its obligation is in conformity with the contract,
- enabling the trader, but not the supplier to withdraw from the contract or terminate it any time,
- precluding the supplier from reclaiming its provided but unpaid services, not including the case where the termination of the contract occurred due to a breach of the contract by the supplier,
- precluding or limiting the supplier’s possibility to fulfill its contractual obligations by way of a set-off,
- allowing the debtor to take over the debt of the trader without the consent of the supplier
- excluding or limiting the liability of the trader for the contributor he uses,
- excluding or limiting the supplier’s ability to pursue claims based on legislation or an agreement between the parties, unless it is replaced by another statutory dispute resolution mechanism,
- changing the burden of proof to the detriment of the supplier,
- classifying a particular behaviour of the supplier as making or failing to make a declaration of contract, and at the same time imposing an unreasonably short time-limit for the conduct of the behaviour and imposing unreasonable formalities for the supplier’s declaration,
- obliging the supplier to pay an excessive amount of money (penalty/liquidated damages) in the event of non-performance or non-contractual performance by the supplier.
- Payment of costs not related to the purchase of the product appears also in Tfmtv. in a more sophisticated way, namely (1) the direct/indirect devolution of costs which are in the business interest of the trader (for example, the costs of transport from one logistics unit to another logistics unit or to the shop), (2) those imposed for the service not actually provided, (3) for activities related to the sale by the trader to final consumer and activities not providing additional services to the supplier and, (4) those which prohibit charging-upon the supplier any fees not claimed by, or not in the benefit of, the supplier, or claimed by the supplier and actually provided by the trader in an amount disproportionate to the services related to the distribution of the product.
Damage or loss following the transfer of ownership is set forth more specifically in Tfmtv., primarily by regulating the mandatory buy-back or take-back obligation of the supplier, and also by expressly prohibiting passing upon the supplier the costs incurred in consequence of any legal action taken against the trader by an authority for any infringement on the trader’s part. However, it can be noted that the Directive generally has a much broader definition, thus providing a high level of protection to suppliers. At the same time provisions on the protection of business secrets are set forth in Act LIV of 2018 on the Protection of Business Secrets and its scope extends also to the supplier-trader relationship.
There is no explicit prohibition in Tfmtv. of the threat of commercial repressive measures or of the obligation to indemnify the consumer for the costs of investigating consumer complaints related to the sale of the supplier’s products. These may be qualified as “unilaterally favourable risk-sharing conditions” or “costs of the trader’s business interest”. At the same time the trader’s conduct preparing or executing the repressive measures may be considered as a “unilateral amendment of a contract by the trader which is not objectively verifiable and cannot be attributed to an external event of the trader”.
1.2.2. Grey list practices
These statements of fact do not mean a breach of law per se, for the establishment of the statements of fact it is necessary to exclude that the conditions relating to them were not fixed in advance in writing by means of obvious and clear provisions (or by a supply contract or further written contracts).
This includes practices where the buyer:
- returns the unsold agricultural and food products to the supplier without having to pay for these unsold products, the disposal of these unsold products, or both,
- makes the payment by the supplier conditional on the storage, presentation or listing of agricultural and food products and the marketing of such products,
- obliges the supplier to pay all or part of the discount cost of the agricultural and food products purchased by the buyer through a promotion,
- obliges the supplier to pay for the advertisement of agricultural and food products by the buyer,
- obliges the supplier to pay for the services related to the market sales of the agricultural and food products by the buyer,
- charges the supplier for the work done by the interior design staff to sell the supplier’s products.
If we compare these statements of fact with the ones listed in Article 3(2) of Tfmtv. the following conclusions can be drawn:
- also prohibits the suppliers’ mandatory buy-back or take-back obligation of unsold products. However, in relation to the prohibition of unilateral buy-back, the question may arise if the conclusion of a commission contract may also constitute unfair distributor conduct, as the trader does not bear the economic risk of a failed purchase.
- Making the listing of products subject to payment by suppliers may be considered a violation per se of Tfmtv., therefore even if the supplier and trader have made an agreement, it will not render the provision lawful.
Beyond this fee the service charge (a fee for maintaining a determined range of products), expansion contribution, administrative cost, contribution, birthday contribution, contribution towards the costs of family events, cooperation fee, partnership fee, and the scheduled delivery fee may be considered unlawful due to the fact that there are no services provided by the trader.
- Charging fees for in-store and out-store/outdoor promotions (this may include for example non-periodic advertising publications and other external unique appearances such as shopping trolleys, vehicle surfaces, etc.) are not prohibited under Hungarian law, however it is important to note that the contractual fulfilment of such actions must always be proactively verified by the trader to the supplier within a reasonable time after the service has been performed. Regarding the in-store promotion fees, it should be also noted that paying a fee for placing a product in a prominent place (gondolavég, repositioning, such as at the store entrance or on pallets, designing pallet islands) or paying for the presentation of the product count as fair conducts of the trader, provided these are fair services and the fees are proportionate.
- As far as advertisement of products is concerned the same applies to the marketing fee, which ensures the advertisement is according to the supplier’s imagination and the advertising of its products is in periodical advertising publications. The basic requirement for both conditions is that their inclusion in the net purchase price (“netting”) is not in itself unlawful, provided it is not done in a manner that can be considered as unfair distributor conduct (e.g. threat of unlisting) and is based on an agreement between the supplier and the trader. The other requirement is that they should be proportionate with the scope of service provided. The proportionality of the fees charged for services must be individually assessed by examining all circumstances in which the service is provided (for example the extra turnover generated by the marketing activity in the marketing service etc.). At the same time, this does not mean that promotion fee and marketing fee may only be calculated as a determined percentage of the (extra) turnover.
- The discounts, are not prohibited by Tfmtv., but they are considered to be an unfair trading practice if the trader requires the supplier to contribute to any discount granted by the trader to final consumers, for a duration longer than providing such discount to consumers, or for a quantity greater than originally agreed upon, in whole or in part, or requesting the supplier’s contribution in excess of the discount granted by the trader to final consumers. The trader shall give account to the supplier on discounts and price reductions provided with the supplier’s consent, including the quantities involved, within thirty days from the final date of offering such discounts to final consumers. The base of accounting is the amount of the discount granted by the supplier, compared to the amount of discount given to the consumer by the trader. We get the amount of accountable, not further given discount, by subtracting the discount given by the trader from the discount provided by the supplier and the difference is positive.
As a preliminary statement we can say that, unlike the Hungarian act, the Directive does not provide any legal framework for the application of bonuses. Tfmtv. states that it is prohibited to charge to the supplier – in any way or form – any quantity-based price reduction, commission or fee in connection with products sold by the trader, with the exception of any subsequent proportional price reduction in connection with the commercial attributes of the product granted to the trader as an incentive for increasing the quantity of products marketed, on the basis of extra sales achieved by comparison to previous sales levels established by the parties, or to an estimated level considered commensurate without taking into account the tax applicable to the product in question.
According to the practice of the National Food Chain Safety Office, it can be stated that the use of progressive bonuses is considered fair trading practice, where there is a realistic surplus by the trader towards to supplier. Therefore, it is contrary to the definition of progressive bonus if the trader sets an unjustifiably low minimum sales bar, thereby converting it into a fixed amount. The use of such progressive bonuses in this manner is unfair because it is not tied to an extra performance of the trader. In the case of extra sales, the entire volume (not only the exceeding quantity) may be considered as the base of calculating the bonus. Progressivity namely appears where the sales exceed the pre-established levels, therefore it applies as an incentive.
A bonus requested from a supplier as a rebate because of becoming a supplier of a purchasing alliance is considered unfair trading practice, considering it does not fulfill the criteria of a progressive bonus.
Tmftv. also contains the prohibition of selling below purchase price. Tmftv. states that, except for campaign not exceeding fifteen days is held for the clearance sale of inventories of goods – notified to the agricultural administration body in advance – due to the trader going out of business or changing profile, as well as reduced-value goods (including close-to-expiry products of which the trader has extensive quantities for unforeseen reasons), it is prohibited to offer products to final consumers at prices below the price invoiced by the supplier or, if produced by the trader himself, below cost.
Similarly, the Directive does not explicitly prohibit the contractual provision (unlike Tmftv.) where the trader imposes the most favourable provisions for itself compared to other traders. Tfmtv. further prohibits traders from not reimbursing the supplier the public health product charges payable by the supplier on products supplied to the trader; and the trader imposing any restriction as regards the lawful use of a trademark by the supplier; and from setting the retail price charged to the final consumer of products discriminatively, on the basis of the country of origin of products considered identical on the basis of their composition and organoleptic properties.
In addition, Tfmtv. requires traders with net sales of more than 20 billion HUF from the previous year to make available the standard contract terms and conditions for services they may provide to the supplier in connection with marketing his products in the form of a standard service agreement and they shall publish it in advance on their website, if they have one, or in their premises designated for use by customers if they don’t have a website, and shall send it to NFCSO as well.
The standard service agreement shall contain the contents of the trader’s services available to the supplier, the conditions for supplying such services, the highest fee chargeable for such services and the method used for calculating such fee, as well as the conditions for admission to, and removal from, the trader’s list of suppliers.
This provides transparency on the procurement side of the Hungarian commercial market, and contributes to the supplier (producer/distributor) welfare, as setting maximum charges can have a fee breaker effect in a short term.
In addition to the above, certain provisions of Tfmtv. on unfair distributor conduct may be consistent with the provisions of the Directive; but it can be stated that Tfmtv. explicitly regulates the traders’ pricing mechanisms (see prohibition on selling below invoiced purchase price or cost and prohibition of discriminatory pricing) while the Directive does not interfere in that at all. This raises the issue of violation of the fundamental principle of freedom of enterprise enshrined in the Fundamental Law of Hungary (see Article M, Section 1: “The economy of Hungary shall be based upon work as the very foundation of productivity, and upon the freedom of enterprise”.)
In conclusion, it can be stated, that the Directive will not bring any revolutionary changes in the Hungarian traders’ life as the current domestic rules are largely overlapping with the Directive and, in many cases, they regulate the issues covered by the Directive in a more stringent way.
Author: Péter Sükösd