When performing a repeated assessment of the market inquiry, the Competition Council of Latvia (CC) found that retailers have only partially taken the CC’s recommendations related to the imposition of unfair and unjustified sanctions on suppliers into consideration. Considering the unequal relationship between retailers and their suppliers, the CC calls on policymakers to provide more detailed rules on prohibited trading practices in order to reduce the risks of violations of the Prohibition of Unfair Trading Practices Law (PUTPL) by buyers, including retailers.
In 2022, the CC carried out a market inquiry assessing the sanctions stipulated in retailers’ contracts and imposed on their suppliers; here, it identified eight risks and invited retailers to address them in their everyday dealings with suppliers. In order to ensure that individual retailers complied with the PUTPL rules when applying sanctions, the CC performed repeated market inquiry, individually inviting retailers to perform a self-assessment regarding the provisions included in the contracts concluded with the suppliers, referring to the CC’s previous market inquiry and the PUTPL risks identified therein. When performing repeated research, the CC requested information from six retailers and obtained information from nine suppliers and their associations.
The CC notes that there is a stark difference between the views of retailers and their suppliers on the risks identified by the CC with regard to the trend in the application of a contractual penalty. In 75% of cases, retailers consider that the risks identified do not apply to them at all, and only in 6% of cases do they attribute the risks identified by the CC to themselves. In contrast, 34% of the suppliers of agricultural and food products consider the risks identified by the CC to apply to these retailers, while 43% consider that they do not apply at all.
The most significant differences between the opinions of retailers and their suppliers were on the risks established by the CC regarding the trend to apply a contractual penalty to buyers and the indication of the maximum limit of the contractual penalties in contracts. Differences of opinion also exist regarding the difference in contractual terms for promotional and non-promotional goods and on the communication provided for in contractual terms in the case that the supplier of agricultural and food products is unable to deliver the goods. The CC also notes that both retailers and suppliers lack a common understanding of the definition in order to avoid the repeated application of contractual penalties – each retailer has chosen its own preferred methodology for applying sanctions, making it difficult for suppliers to adapt.
Juris Gaiķis, Chairman of the CC: “We are observing that operators of the food and agricultural product supply chain are listening to the CC’s assessments and making changes to strengthen fair trading practices. In the almost two years since the previous market inquiry, all retailers have reviewed the rules for the application of contractual penalties that they impose on their suppliers for breaching the provisions of contracts. However, despite the overall positive trend towards a reduction in the level of contractual penalties, market inquiry data shows that the level of sanctions imposed by retailers on their suppliers remains economically significant, exceeding several million euros per year. The CC calls on retailers, in particular, to remember the importance of good faith and fair dealing in the application of sanctions.”
The CC welcomes the fact that retailers’ contracts clearly provide for communication in the event of force majeure circumstances. However, there is still confusion about communication outside of force majeure circumstances. The market inquiry performed confirms that suppliers do not have the freedom of choice to announce a reduction in order volumes in situations where they cannot supply the volume determined by the retailer. At the same time, contracts still provide for disproportionately long notice periods for the supplier to inform the retailer of its inability to fulfil an order in the required amount, or time. In the view of the CC, the above-mentioned problems can be solved by developing and incorporating a definition of “agricultural and food product order” in the PUTPL, thereby bringing clarity to the understanding of the order within the scope of the PUTPL and establishing a common interpretation of the term throughout the agricultural and food product supply chain. At the same time, strengthening the definition in the PUTPL would help in assessing the fairness and justification of sanctions. Also, in its proposals for the amendments of PUTPL, which were based on the CC performed market inquiry of the “retail market for eggs, fish, milk, meat, cereals and bakery products”, the Ministry of Agriculture has already developed and included such a definition.
The CC stresses that it will continue to monitor retailers’ practices towards suppliers to ensure that they are in line with the PUTPL, encouraging retailers to comply with the PUTPL in good faith and to conduct a self-assessment of their own practices by assessing the relationship of the terms of the contracts they concluded with the suppliers to the problems identified in the market inquiry.