Significant changes of the unfair trading practices in the agricultural and food supply chain in the Czech Republic. Are your existing agreements compliant?

The bill implements the Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain (the “Directive”).

The bill significantly amends the current laws preventing abuse of significant market power on the buy side in the food industry for the purpose of its resale in the Czech Republic or the provision of services related to the sale of food. Existing agreements must be amended to comply with the new regulation within 12 months from the entry into effect of the bill.

Significant market power

The regulation applies to customers with annual turnover exceeding EUR 2 million. In addition to customer annual turnover, supplier annual turnover is also of decisive importance for determining the scope of the Directive in relation to a specific business relationship. The customer has significant market power if:

Essential elements and form of agreements

If the customer has significant market power, agreements with the supplier must fulfil certain requirements.

In particular, the agreement must be in writing and must be concluded (i) either before the start of the supply or processing of agricultural and food products or (ii) before the receipt or provision of services.

The agreement must include:

• Purchase price:
  - Amount of the discount, method of discount calculation, method of payment, payment term.
  
  
• Product:
  - Determination of its quantity over a period of time or of individual deliveries.
  
  
• Related services:
  - Specification of services, prices, method of payment, payment term.
  
  
• Sales-related promotions:
  - Specification, estimated quantity, sale price, and duration. 

Unfair trading practices

The bill sets out an exhaustive list of prohibited trading practices and divides them into two categories – prohibited and conditionally prohibited practices.

Prohibited trading practices, such as:

• negotiation or enforcement of contractual terms that constitute a significant imbalance of rights and obligations to the disadvantage of the supplier,
  
  
• granting or obtaining of a payment, discount or other performance, the amount, subject matter and scope of which are not agreed in writing in advance,
  
  
• unequal treatment of a supplier consisting in different contractual terms for the purchase or sale of the supplier’s agricultural and food products for comparable consideration without any fair reason,
  
  
• unilateral changing of contractual terms concerning frequency, method, place or volume of the supply or delivery of agricultural and food products, quality standards, the terms of payment or price,
  
  
• tying of consent to the conclusion of an agreement to the condition of further performance,
  
  
• failure to comply with the mandatory written form of the agreement or failure to negotiate an essential element of the agreement,
  
  
• requirement of payments that are not related to the sale of agricultural and food products,
  
  
• threat or enforcement of retaliation in the event that a supplier exercises its contractual or legal rights,
  
  
• unauthorized acquisition, use or disclosure of a supplier’s trade secrets,
  
  
• conclusion or enforcement of a pricing condition which results in an invoice not containing a final price, 
  
  
• auditing of or use of other forms of control over the supplier by the customer,
  
  
• stipulation or enforcement of a payment for the deterioration or loss of agricultural and food products that occurs on the customer’s premises or after ownership has been transferred to the buyer (when not caused by the supplier),
  
  
• cancellation of orders of perishable agricultural and food products at short notice (less than 30 days before the delivery date), etc.

Conditionally prohibited practices, i.e., practices that are prohibited unless they have been previously agreed in clear and unambiguous terms between the supplier and the customer with significant market power:

• conclusion or enforcement of a payment:
  - for all or a part of the costs of any discounts on agricultural and food products that are sold by the customer as part of a promotion,
  - for advertising by the customer of agricultural and food products,
  - for staff for preparing premises used for the sale of the supplier’s products.

Offences

The bill also stipulates a list of offences. In particular, a customer with significant market power commits an offence by (i) using any of the unfair trading practices, (ii) failing to comply with an obligation agreed with the relevant authority, or (iii) failing to provide the relevant authority with complete, correct and truthful documents or information, including books of account, other business records or other documentation that may be of relevance for clarifying the subject matter of the proceedings.

The maximum fine is CZK 10,000,000 or 10% of the customer’s net turnover. The fine may be reduced by 20% provided that the accused entity admitted to having committed an offence and the relevant authority considers such penalty to be sufficient. 

The bill is at the beginning of the legislative process and may undergo significant changes. Currently, it should come into effect on the first day of the second month following its publication. The transitional period for agreements concluded before the date of entry into effect of the Act that conflict with the new statutory requirements is 12 months. After this period, the contracting parties are obliged to amend the existing agreements to comply with the new regulation. 

For more information, please contact Vojtěch Chloupek and Jiří Švejda.