29 Unfair trading practices in the food
supply chain
| Committee's assessment
| Politically important |
| Committee's decision | Cleared from scrutiny
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| Document details | Tackling unfair trading practices in the business-to-business food supply chain (36255), 12233/14, COM(14) 472
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| Legal base | —
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| Department | Business, Innovation and Skills
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Summary and Committee's conclusions
29.1 Although the business supply chain is an important
element in the European economy, the Commission has noted that,
as a result of changes over the last two decades, a small number
of players have acquired considerable negotiating power, which
in turn may lead to unfair trading practices. This problem was
first discussed at EU level in relation to the food sector in
2009, but the Commission subsequently put forward in January 2013
a Green Paper, which aimed to provide a more general assessment
of their impact, and posed a number of questions on which it invited
responses by 30 April 2013.
29.2 It has now brought forward this Communication
on tackling unfair trading practices in the food supply chain,
which has been identified by all stakeholders as a particularly
problematic area. This draws heavily on the earlier Green Paper
as regards the nature and impact of unfair trading practices,
and the legislative and non-legislative measures employed at EU
level and by Member States to address the issue. Whilst it does
not envisage any regulatory action at EU level, and does not intend
to prescribe a single solution to address this issue, it seeks
to encourage Member States to adhere to voluntary schemes, and
to suggest ways in which this might be done.
29.3 The Government says that, although the Commission
has not provided evidence which definitively confirms the benefits
of tackling unfair trading practices, it welcomes initiatives
to improve the balance of bargaining power in the food supply
chain, and it draws attention to the specific regime which the
UK has recently established for the grocery sector.
29.4 As we have noted, this Communication draws
heavily on its earlier Green Paper on this subject, which we reported
to the House in March 2013, and it clearly addresses a subject
of growing importance. That said, the Commission has made clear
that it wishes to avoid any EU legislation or an unduly prescriptive
approach, relying instead on encouraging Member States to pursue
voluntary schemes. Consequently, whilst we think it right that
this document too should be drawn to the attention of the House,
we do not believe it raises any issues requiring further consideration.
We are therefore clearing it.
Full
details of the documents: Commission Communication:
Tackling unfair trading practices in the business-to-business
food supply chain (36255), 12233/14, COM(14) 472.
Background
29.5 The Commission has identified the business-to-business
supply chain as an important element in the European economy,
but has noted that economic, social and demographic changes over
the last two decades have resulted in a small number of players
in the chain having considerable negotiating power, which in turn
may lead to unfair trading practices. This problem was first discussed
at EU level in relation to the food sector in 2009, and resulted
in the formation of a High Level Forum for a Better Functioning
Food Supply Chain, to establish an agreed set of principles and
to monitor developments.
29.6 However, as the Commission had also identified
unfair trading practices in various retail sectors, it put forward
in January 2013 a Green Paper,[127]
which aimed to provide a more general assessment of their impact,
and posed a number of questions about the definition, incidence
and impact of unfair trading practices; the effectiveness of the
regulatory and self-regulatory frameworks used to address them;
the need for further action at EU level; possible discrepancies
in the approach taken by Member States; and possible remedies
for the different types on unfair trading practice which had been
identified. It invited responses by 30 April 2013, and in the
light of which it said that it would announce the next steps by
mid-2013.
The current document
29.7 The Commission has now brought forward this
Communication on tackling unfair trading practices in the business-to-business
food supply chain, which (although their full extent and frequency
is difficult to assess) has been identified by all stakeholders
as a particularly problematic area, not least for small and medium
sized enterprises (SMEs), despite attempts in recent reforms of
the Common Agricultural Policy and Common Fisheries Policy to
strengthen the position of producers. It also notes that this
is an area in which concerns have been expressed by the European
Parliament,
29.8 Its underlying analysis largely reflects that
in the earlier Green Paper. Thus, it:
· defines unfair trading practices as arising
when one of the contracting parties unilaterally imposes terms
on the weaker counterpart, which it says can be due to various
factors, such as differences in the size of the parties and economic
dependency, and can arise, not only in the contract itself, but
during its negotiation, or in the post-contractual phase, when
potential problems can still emerge, even where the terms appear
to be acceptable;
· highlights the extent to which the cost
of switching to another business partner, or the lack of a suitable
alternative, has been a key factor in the development of unfair
trading practices, particularly where the weaker partner fears
that a complaint or litigation may not only prove costly, but
may also lead to the termination of a commercial relationship,
and it suggests that this needs to be examined when assessing
the appropriateness of enforcement mechanisms;
· considers the potential effects of unfair
trading practices, noting that, although these are difficult to
quantify, they can include an adverse impact on investment and
innovation by the weaker party, as well as on cross-border trade
and the proper functioning of the Single Market.
29.9 More specifically, the Commission highlights
four types of unfair trading practice — the retroactive
use of ambiguous contract terms; the unfair transfer of commercial
risk; the unfair use of information; and the unfair termination
of a commercial relationship. It goes on to say that this has
increasingly been seen as an important political issue, leading
many Member States to take action, but that they have done so
in different legislative or non-legislative ways, including areas
such as judicial redress, action by competition authorities, administrative
redress, voluntary dispute mechanisms, and ombudsmen. Also, the
powers of national competition and other enforcement authorities
vary, with some being unable to accept anonymous complaints, and
others to protect the anonymity of complainants throughout proceedings,
whilst others may be allowed to launch investigations only on
the basis of credible evidence.
29.10 It suggests that this high degree of divergence
in the level, nature and form of legal protection provided may
result in significant fragmentation of the Single Market, and
make it difficult for companies to identify the remedies available
in different Member States. At the same time, however, it notes
that, although several cross-sectoral instruments[128]
covering litigation generally also apply to unfair trading practices,
there is no specific EU regulatory framework or enforcement mechanism,
and that, although some provisions may partially address such
practices in business relations, this could create a patchwork
of rules, depending upon the specific practice involved and where
it takes place, so that companies are not able to benefit from
consistent protection across the EU.
29.11 It also suggests that there is a need to distinguish
between laws aimed at preventing unfair practices and competition
law, in that the latter may not capture all such practices, as
its principal focus is to address market power. On the other hand,
it believes that some protection may be afforded by the basic
principles of civil and/or commercial law, combined with the existence
in most Member States of the notion of a duty of fairness, and
that, where Member States have introduced specific national measures,
these can involve either legislation or codes of practice, and
may apply to specific sectors or across the board, leading to
problems within the Single Market.
29.12 However, the Commission makes clear that it
does not envisage any regulatory action at EU level, and that
it does not intend to prescribe a single solution to address this
issue, preferring instead to encourage Member States to adhere
to voluntary schemes, and to follow a common set of enforcement
principles, including the power to launch ex-officio actions,
to accept anonymous complaints, and to impose appropriate sanctions
(such as the recovery of damages, the imposition of deterrent
fines, and the public reporting of findings).
Supply Chain Initiative
29.13 More specifically, it draws attention to the
Supply Chain Initiative, a self-regulatory framework developed
in the context of the High Level Forum for a Better Functioning
Food Supply Chain, and underpinned by a set of good practice principles
agreed in 2011. However, it notes that the initiative currently
has three limitations — confidentiality is restricted to
aggregated disputes, so the "fear factor" remains for
individual businesses; access to dispute resolution mechanisms
requires the agreement of both contractual parties; and there
are no sanctions or investigations for breaches of the principles
of good practices (which has inhibited participation by farmers
and meat processors). In order to fill this gap, it proposes to
supplement the Initiative with independent enforcement measures.
In addition, it encourages undertakings to sign up to the Initiative,
and to promote it to their business partners (and to inform them
of their rights and obligations): and it invites the Initiative's
governance group to build awareness among SMEs, and to drive and
facilitate the creation of a national platform in each Member
State.
Principles of good practice
29.14 The Commission draws attention to the principles
of good practice[129]
in the Supply Chain Initiative, which it says provide a useful
basis for identifying unfair practices. It encourages Member States
to examine whether their current national regulatory framework
and enforcement mechanisms for addressing unfair trading practices
are appropriate, taking into account best practice in other Member
States; to encourage undertakings to join voluntary codes of conduct;
and to assess whether their framework could rely on a list or
practices or a general provision which allows for possible breaches
of the principles to be addressed, and to join voluntary codes
of conduct at national and EU level.
National enforcement
29.15 Finally, the Commission looks at ensuring effective
enforcement at national level. It invites Member States to assess
the effectiveness and credibility of their mechanisms, particularly
as regards the preservation of confidentiality for individual
companies; says that national enforcement mechanisms, which could
include dedicated bodies, should be enabled to cooperate effectively
at EU level in order to address practices applied across borders
and to avoid possible regulatory arbitrage; and suggests that,
in developing and applying enforcement measures, Member States
should act proportionally, bearing in mind any impact for stakeholders
and consumer welfare, and apply the same enforcement criteria
and practices to domestic and foreign market operators.
The Government's view
29.16 In her Explanatory Memorandum of 18 August
2014, the Minister for Employment Relations and Consumer Affairs
(Jo Swinson) says that, although the Communication does not contain
any legislative proposal, it sets out policy initiatives likely
to have an impact on the UK's food supply chain. She also observes
that, although the Communication suggests that restricting unfair
trading practices could have substantial benefits since some are
known to be harmful and can lead to increased costs and risks
to the smaller supplier, the available evidence does not definitively
confirm this. She also notes that, in dealing with the potential
benefits and costs of reducing unfair trading practices, the Communication
only takes account of direct costs but not wider costs, such as
the impact on end consumers.
29.17 Nevertheless, the Minister says that the Government
welcomes initiatives to improve the balance of bargaining power
in the food supply chain through, for example, co-operatives or
greater collaboration, and she draws attention to the specific
regime which the UK has recently established under the Groceries
Code Adjudicator Act 2013, which applies to the ten largest grocery
retailers in the UK and to their commercial relationships with
their direct suppliers, and which addresses some of issues highlighted
in the Communication. She says that the Government will monitor
the effectiveness of the new regime, and that, as concerns about
unequal retailer-supplier relationships arise more widely across
the economy, it has asked the new Competition and Markets Authority
(which also has responsibility for the potential or alleged anti-competitive
effects of retailers' pricing practices) to look at longer-term
potential competition concerns in business-to-business markets,
including the effect of differences in bargaining power between
firms in the supply chain.
Previous Committee Reports
None.
127 (34655), 6122/13: see Thirty-fourth Report HC 86-xxxiv
(2012-13) chapter 7 (6 March 2013). Back
128
Including Directive 2002/8/EC on legal aid; Directive 2008/52/EC
on mediation; Regulation (EC) No. 44/2001 on jurisdiction of the
courts and recognition and enforcement of judgements in civil
and commercial matters; and Regulations (EC) 1896/2006 and 861/2007
establishing uniform European Court procedures for uncontested
and small claims respectively. Back
129
These include the need for written agreements, for predictability,
for compliance with agreements, for exchange of information, for
confidentiality, for bearing responsibility for risk, and for
requests to be justifiable. Back
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