1. Legal basis, scope and harmonisation character (Articles 1–2 and 8)

The Proposal takes the form of a directive, because a soft law approach was seen to risk “being ineffective in ensuring the desired minimum level-playing field”Footnote ¹² and a directive grants Member States flexibility in adapting the implementation of the requirements to their respective legal frameworks. The minimum harmonisation approach further allows Member States to provide for additional rules designed to combat UTPs going beyond the harmonised requirements (Article 8).

The original Proposal intended to grant protection to SME suppliers (including their producer organisations, such as cooperatives) in the food supply chain in sales to buyers that are not SMEs. The definition of SME is based on Commission Recommendation 2003/361/ECFootnote ¹³ and would have covered enterprises with less than 250 staff and less than €50 million turnover or €43 million balance sheet total. The notion of “supplier” is not limited to agricultural producers and their organisations, but covers any supplier, ie including manufacturers and distributors, thereby taking a very inclusive supply chain approach. Some Members of the European Parliament (“MEPs”) argued for a significant expansion of the Proposal’s scope, and the Agriculture Committee voted to include all actors in the food supply chain. This means that not only small- and medium-sized producers are protected against UTPs, but also big buyers. protecting all suppliers, regardless of their size, in sales to all buyers, again regardless of their size.Footnote ¹⁴ The current political agreement foresees a protection for SMEs and mid-range enterprises that have an annual turnover that is smaller than €350 million. Regardless of this threshold, Member States may still choose to extend the protection to businesses whose turnover is greater than €350 million in their national legislation, or take further measures.

The original Proposal applied to “food products”, covering not only agricultural products as listed in Annex I TFEU for the use as food, including fishery and aquaculture, but also processed agricultural products for food use. Following its review of the Proposal, the Council agreed to only expand the Proposal’s scope by including agricultural products other than food.Footnote ¹⁵ The current political agreement broadens this scope even further, by covering all agricultural products and ancillary services.

Overall, the material scope of the Proposal goes beyond the agricultural sector, which means that the Proposal will unfold effects in the entire agri-food chain – a potentially contentious choice given the legal basis.

2. Specific prohibitions (Article 3)

Taking up the regulatory solution chosen in the Unfair Commercial Practices to Consumers Directive 2005/29/ECFootnote ¹⁶ (“UCPD”), the Proposal includes a blacklist of prohibited practices. In contrast to the UCPD, however, the UTP Proposal does not put forward a general clause prohibiting UTPs. Further, the blacklist distinguishes between rules of mandatory nature, from which parties may not deviate, and prohibitions that may be contractually deviated from by the parties if they are expressed in clear and unambiguous terms.

One may speculate that the practices ultimately included in the original Proposal derive from the JRC Technical Report,Footnote ¹⁷ which in turn was based on the Report of the Agricultural Markets Task Force,Footnote ¹⁸ and partially complemented by the shorter list of UTPs identified by the EC Report in 2016 as “core types of UTPs broadly covered by all regulatory frameworks”Footnote ¹⁹ (drawing on the FSCI code and the annexed list of practices included).

The original Proposal unconditionally prohibits the following practices (per se prohibitions) First, it prohibits late payments, ie payments later than 30 calendar days after the receipt of the invoice or the date of delivery of the perishable food products, whichever is later. This prohibition is without prejudice to late payments and remedies as laid down in Directive 2011/7/EU; and the possibility to agree on value-sharing clauses.Footnote ²⁰ The amendments of MEPs would also prohibit payments later than 60 days for non-perishable products; last minute cancellations of orders for perishable products, defined as “such short notice that a supplier cannot reasonably be expected to find an alternative to commercialise or use these products”. MEPs have proposed the introduction of a clear deadline by prohibiting unilateral cancellation of an order of perishable products less than 60 days from the agreed delivery date;Footnote ²¹ unilateral and retroactive changes to the terms of the supply agreement concerning the frequency, timing or volume of the supply or delivery, the quality standards or the prices of the food products; and the imposition of payment for food wastage on the buyer’s premises not caused by the supplier.

The political agreement extended this list to include the sharing or misuse of confidential information, relating to the supply agreement; the refusal of a written contract by a buyer (or the refusal to provide sufficiently detailed supply terms); and the retaliation or threat of retaliation against the supplier.

The following trading practices are prohibited, if they are not agreed in clear and unambiguous terms at the time of conclusion of the supply agreement (conditional prohibitions): return of unsold food products to a supplier; charges as a condition for stocking, displaying or listing food products; suppliers paying for the promotion of food products sold by the buyer; and suppliers paying for the marketing of food products by the buyer.

The blacklist of conditional prohibitions appears to have sailed through the political negotiations unaltered from the original proposal, although MEPs of the Agriculture Committee had supported that buyers should not be allowed to sell products below the purchase price and then ask suppliers to bridge the gap, unless pre-agreed.Footnote ²²

All the prohibitions must be implemented by the Member States as overriding mandatory provisions, applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the supply agreement between the parties.

3. Enforcement (Articles 4–6)

The Proposal requires Member States to designate an enforcement authority. Complaints are to be addressed to the authority of the Member State in which the buyer is established, according to the Commission’s Proposal. The Council and the European Parliament propose, however, to allow suppliers to lodge complaints where they are established, even if the alleged UTPs occurred elsewhere in the EU. The Proposal requires Member States to allow confidential complaints that protect, where requested, the identity of the complainant and to grant standing to producer organisations and associations of producer organisations. The enforcement authorities must be vested with the necessary powers to start an investigation on their own. The Proposal further foresees coordination and cooperation between enforcement authorities.

4. Governance and institutional aspects (Articles 9–11)

The Proposal enshrines reporting obligations for Member States, and foresees for an evaluation by the European Commission after three years. For implementing measures, the examination procedureFootnote ²³ is proposed with the involvement of the Committee for the Common Organisation of the Agricultural Markets.

1. Legal basis

A major problem of the Proposal is the vulnerability, and possibly illegality, of the legal basis. The scope of the Proposal embraces the entire food sector, and it is therefore legally questionable whether it can be exclusively based on a CAP legal basis.

The current legal basis is exclusively based on Article 43(2) TFEU, according to which the European Parliament and the Council shall establish the common organisation of agricultural markets and other provisions “necessary for the pursuit of if the objectives of the common agricultural policy”.

The Union legislature and institutions have a broad discretion in pursing the objectives of the CAP.Footnote ²⁴ No hierarchy between the CAP’s objectives exists, and other Treaty provisions are also (increasingly more) relevant for the EU’s agricultural policy.Footnote ²⁵ Based on the wording of Article 39 TFEU, one could argue that the objective to ensure a fair standard of living for the agricultural community predominantly refers to income support and must be exclusively achieved through increased agricultural productivity (the word “thus” stresses the link between the second and first objective). However, this is not what happens in practice these days, as a fair standard of living for the agricultural community is mainly ensured through direct payments – which garners the lion’s share of the current CAP budget – and the Common Market Organisation (CMO) Regulation.Footnote ²⁶ In that regard, the provision of farm (income) support is often justified by referring to the unpredictable (mainly economic and weather) conditions that farmers face and that are beyond their control, the imposition of strict rules and practices concerning the environment, animal welfare and public health (the cross-compliance system), and the concern over perceived persistently low incomes among European agricultural producers.Footnote ²⁷ Nevertheless, ensuring a fair standard of living does not justify shielding agricultural producers from market forces completely, as the European Court of Justice has held that a fair standard of living is not to be interpreted as guaranteeing “a certain profit margin”Footnote ²⁸ or a “stable” standard of living.Footnote ²⁹

Since the Proposal aims to increase the profitability of agricultural producers by improving their bargaining positions vis-à-vis other market participants, it fits well into the overall development of the CAP, specifically with a view to the gradual shift from a market management approach to a (more) market-oriented approach.Footnote ³⁰ There are a number of noteworthy differences and similarities between the Proposal and other instruments that, inter alia, aim to ensure a fair standard of living for the agricultural community. Unlike the direct payments system, the Proposal allows market forces to actually determine agricultural incomes; while similar to the CMO Regulation and its legislative predecessors, the Proposal intervenes in economic relationships of the agricultural sectors’ market participants and recognises the role of cooperatives and other producer organisations in these processes. Lastly, it is noteworthy that the Commission’s recently presented plans for the post-2020 CAP and the Proposal do not necessarily coincide with other aspects of the UTP Proposal. While this Proposal addresses the divergence of Member States’ regulatory approaches affecting agricultural producers and is introduced in response to concerns related to farmers’ profitability, the plans for the post-2020 CAP would – if adopted – provide Member States with more flexibility in determining how to achieve the objectives that are set out (and therefore lead to a less uniform regulatory approach to the agricultural sector across the EU) and would impose a further reduction of direct payments to agricultural producers.

While the Proposal certainly in part aims to achieve a better standard for the agricultural sector, there is an important collateral impact on the general food supply chain, which would have been partly a matter for internal market law and in other parts competition law. The use of Article 43 juncto Article 39(1)(b) TFEU as a sole legal basis is hence (still) not sufficiently motivated, especially because the scope of the Proposal goes beyond UTPs in relation to the sales of agricultural products by farmers to direct buyers.

2. Relationship with EU competition and consumer law

The Proposal creates tension in the relationship with and applicability of general EU competition and consumer law. According to the Proposal, rules on UTPs are complementary to competition law, as UTPs cover situations of unequal bargaining power. The Proposal focuses on the bilateral imbalance of power between market participants, unlike competition law rules on the abuse of dominance that are geared to address practices that have an effect on the overall market. The prohibited practices are, indeed, mindful of this separation, due to their specificity in combination with the fact that the original Proposal only foresaw protection of SMEs.

It should be highlighted that the competition law regime inside of the CAP follows specific rules.Footnote ³¹ Article 42 TFEU stipulates that EU competition law only applies to the extent determined by the European Parliament and the Council within the framework of Article 43(2). EU secondary legislation, in turn, declares competition law to be applicable, except for explicit exemptions in legislative instruments. The CJEU confirmed that Article 42 TFEU “recognises that the common agricultural policy takes precedence over the objectives of the Treaty in the field of competition and also recognises the EU legislature’s power to decide to what extent the rules on competition are to be applied in the agricultural sector”.Footnote ³² From a legal point it seems, therefore, questionable whether it is permissible to use a legal base from a sector that is exempt from overall competition law, in order to also regulate competition in non-exempt sectors of the agri-food supply chain. It remains to be seen whether a court would accept such a new approach or whether (together with the concerns voiced above) the Proposal on UTPs may trigger an agricultural equivalent to the Tobacco-judgment concerning (current) Article 114 TFEU.Footnote ³³

The other area of law that is discussed in relation to the Proposal is that of consumer law. EU consumer law concerns business-to-consumer regulation, while the Proposal at hand covers business-to-business relations. Relationships with EU consumer law are hence legally, if at all, difficult to establish. A similarity is that both types of regulations are concerned with imbalances of power in bilateral relationships. The tools applied to regulate UTPs can hence be compared to the tools used in business-to-consumer relationships to tackle this kind of power imbalance. This rationale is particularly true for the original Proposal, as this concerned only SMEs. With the Proposal’s extended scope to all supply chain participants, this rationale is extinguished, overlapping more and more with regular competition law.

3. Lack of solid empirical evidence

Solid empirical evidence on the prevalence of UTPs (in various food sectors and in various links of the food supply chain) and on cross-border aspects of UTPs is lacking.Footnote ³⁴

The Commission argues that the Proposal is specifically “necessary” in order “to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture” within the meaning of Article 39(1)(b) TFEU. In doing so, the Commission heavily relies on the claim that UTP-related costs are likely to be systematically passed back along the food supply chain to farmers (“trickle-down effect”), in order to address UTPs in a comprehensive manner and to target them along the chain.Footnote ³⁵ At the same time, the Commission’s claim about the so-called trickle-down effect is not well substantiated. The Impact Assessment relies on a few case studies, but recognises that there is little empirical evidence going beyond these studies, which makes it difficult to establish the overall harm caused by UTPs.Footnote ³⁶ Hence, there is no compelling evidence that the envisaged rules on UTPs are appropriate, let alone proportionate, to the achievement of the CAP objective pursued.

This is aggravated by the fact that the food and agricultural sector is made up of a number of distinguishable supply chains, such as arable farming, greenhouse horticulture, fruit, dairy, pig, poultry, eggs etc.Footnote ³⁷ These use highly divergent mechanisms to establish prices, for instance daily or weekly trading, contracts, and pools. In addition, the organisation and market structure in sales largely varies, in how organised a given sector is, the size of cooperatives, and the kind of cooperation in place between individual primary producers.Footnote ³⁸ In the face of such diversity, empirical evidence about both the prevalence of UTPs and the effectiveness of the suggested prohibitions is difficult to obtain.

4. Regulatory design

A major concern is the Proposal’s regulatory design. The set of prohibited trading practices may seem an arbitrary choice. Generally, UTPs can be categorised in pre-contractual behaviour; contract terms definition; enforcement of contractual duties or clauses; and post-contractual behaviour.Footnote ³⁹ Some practices that can relatively clearly be identified as potentially problematic are not covered by the Proposal. Such is the case for “Imposing private standards relating to food safety, hygiene, food labelling and/or marketing standards, including strict verification procedures”.Footnote ⁴⁰ In the original Proposal, none of the proposed prohibitions related to the unfair use of confidential information, which is a generally recognised UTP. This has now been changed and it can be welcomed that the current political agreement foresees this practice as a mandatory blacklisted prohibition. The advantages of a closed list of specific prohibited practices lie in legal certainty and work against fears of over-regulation. At the same time, the quest for specificity may result in an ad hoc coverage of a rather limited number of UTPs.

A second major regulation design choice is the omission of general clauses. General clauses are at work in the UCPD framework, and a similar option could have been included in the Proposal, for instance prohibiting generally aggressive practices, the abuse of bargaining power, unfair transfer of commercial risk, the unfair breaking off of negotiations, or unfair use of confidential information. The UCPD also has a general clause imposing behaviour in accordance with professional diligence requirements. While general clauses are practically harder to operationalise, they could have allowed enforcement authorities over time to cognise potentially unfair practices. As the Proposal also includes a review clause, such an adjustment of the practices is a realistic possibility during the review processes. It may be hoped that the review process will take into account the experiences made by the enforcement authorities. For this to work properly, enforcement authorities will need to systematically trace and report UTPs even beyond those included in the UTPs blacklist.

5. Enforcement structure

The Proposal shows tension in its enforcement structure, as its rationale to protect SMEs is hard to reconcile with the expansion of the scope to mid-range enterprises. Overall, the Proposal creates a public enforcement approach, ie facilitating the enforcement by public authorities as opposed to private enforcement between participants in the supply chain. For instance, a study on UTPs in the food supply chain documented that in 15 countries there is a public authority that could investigate violations ex officio, while 11 countries allowed for confidential complaints.Footnote ⁴¹

The reliance on public law enforcement is notable, as in business-to-business relations, businesses are usually seen to be the major driver to enforce fair competition. The reason for why the Proposal deviates from this approach is described as the “fear factor”, where businesses do not engage in litigation, as they fear being excluded from future transactions with a buyer.Footnote ⁴² While such a “fear factor” has been shown in relationships of SME towards bigger market players, it is questionable whether this rationale still holds true with the Proposal’s widened scope to also cover mid-range enterprises in the supply chain.