Between 2021 and 2022, the Czech Office for the Protection of Competition (“Office”) carried out an extensive investigation into the food and agricultural sector. Its aim was to analyse trade practices within food purchasing and redistribution markets. These were then evaluated against the upcoming new regulation of trade practices in these sectors. The Office’s investigation report shows which practices will have to be changed, offering some guidelines on compliance. This article outlines the key takeaways.
The EU Directive 2019/633 on unfair trading practices in B2B relationships in the agricultural and food supply chain (“Directive”) is yet to be implemented in the Czech Republic. In April, we wrote about the proposed implementation bill (see here), which is currently in Parliament. One of the major changes is that more businesses within a supply chain will need to comply. Despite the delay in implementation, the Office evaluated the investigated market practices against the standards required by the Directive and proposed legislation.
Supply contract form and content
The first deficiency identified in the Office’s report is frequent reliance on oral contracts, especially at the lower levels of the supply chain. The proposed bill intends to introduce stricter rules than the Directive and require contracts between the relevant purchasers and suppliers to be made in writing. The written form requirement is intended to secure transparency and protect weaker business parties. It is therefore advisable to avoid oral contracts within the supply chain in order to mitigate possible allegations of unfair trade practices.
In meeting the statutory content requirements of supply contracts, attention should be paid to the negotiated payment deadlines. The effective provisions of the Act on Significant Market Power (no. 395/2009 Coll.) already require payment deadlines no longer than 30 days after invoice receipt, in line with the Directive. However, the Office investigation finds that this is often not met in practice. At lower levels of the supply chain, onto which compliance will extend after implementation of the Directive, payment deadlines of up to 120 days were found.
Another observation by the Office concerns the practice of negotiating the application of foreign legal codes onto supply contracts and the competence of foreign courts in cases of conflict. While generally allowed under private law, such provisions must still never lead to a significant disbalance of rights and obligations between contracting parties. In certain cases, these can be considered unfair market practices.
The risks with charging for unrelated services
A crucial aspect to observe are the related services provided in connection with supply contracts. These may relate to, for example, the processing and supply of product master data or accounting operations. Product data supply is typically realised through unpaid cooperation between the purchaser and supplier. However, the Office notes the rise of paid innovative product data services which suppliers are charged for. Similarly, while basic accounting services associated with supply contracts are typically provided without a separate charge, “premium” accounting services (such as data error monitoring) are sometimes provided at an extra cost to the business partner.
It is important to keep in mind that the provision of such paid services may be prohibited, especially if only vaguely related to the supply contract. If provided, a service should always be materially connected to the actual purchase or sale of food products, particularly if charged separately. The conditions for providing the service should not lead to a disbalance of rights and obligations between the contracting parties and must be applied to suppliers without discrimination. Lastly, a supply contract should not be made conditional on the acceptance of these services.
In summary, it is important to critically assess a business’s market power and what possible consequences it may have on supply contract provisions with business partners to avoid possible unfair market practice findings.
The full report of the Office’s investigation can be found here (in Czech).