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The most controversial provision of the Significant Market Power Act repealed. The rest of the act remains valid.

The most controversial provision of the Significant Market Power
Act repealed. The rest of the act remains valid.

Repealing the 3% limit

The duty to agree on a 3% limit of monetary payments by suppliers became part of the SMPA with the 2016 amendment. Pursuant to this provision, one of the essential parts of the agreements between a buyer having significant market power and a supplier of food products was the amount of all monetary payments by the supplier, the total amount of which may not exceed 3% of the annual sales of the supplier for the prior accounting period of 12 months for food products supplied to an individual buyer in the year in which the payment was made. The limit typically comprised payments by suppliers for marketing and logistic services and for reporting the sales of the goods.

The provision has been disputable since the very beginning, not only in terms of the lawfulness of its purpose but primarily due to the vagueness of its wording. The Office for the Protection of Competition (the “Office”) has attempted to overcome ambiguous interpretations of the provision over time by means of its explanatory statements.

The CC has now ruled that the provision on the 3% limit stipulated in the SMPA is not a reasonable tool to achieve the objective pursued (i.e. the protection of food suppliers) as it compels the contractual parties to agree on a fixed-sum cap, the maximum amount of which cannot be determined in advance.

The SMPA also stipulates that any supply between a supplier and a buyer with significant market power must be agreed upon in advance in writing. When the 3% limit was supposed to be agreed, however, the relevant accounting period has not yet passed (it has not usually even commenced); hence, the sales based on which the limit was to be calculated could not have been known at that time. Therefore, the parties could not have known the maximum permitted limit of monetary payments by the supplier at the time they were concluding the agreement.

In an effort to fulfil the statutory obligation, the parties ended up estimating annual turnover. Hence, the limits of monetary payments stipulated in agreements could, as a result, be higher (or lower) than 3% of the actual turnover. Pursuant to the provision concerned, buyers had to stipulate the 3% limit without knowing whether the indicated amount is in line with law. Moreover, the fulfilment of this obligation did not guarantee in any way that the amount of monetary payments at the end of the year would not exceed the intended limit. Furthermore, the SMPA did not provide for the obligation to comply with the limit.

The situation led the CC to the conclusion that the provision concerned fails to be a reasonable tool for achieving the objective pursued, i.e. the restriction of all monetary payments made by the suppliers. The wording of the obligation concerned is thus in conflict with the right to do business within the meaning of Article 26(1) and (2) of the Charter of Fundamental Rights and Freedoms.

The CC, however, ruled that the constitutional requirements are breached only as regards the method of determining the absolute value of the limit. The CC, on the other hand, confirmed the legitimacy of capping payments as a tool aimed at protecting suppliers, even within the framework  of a test of potential restriction of the right to do business.

The CC also admitted that lawmakers may lay down similar restrictions in the future.

Further issues addressed by the CC

In its judgement, the CC addressed several other aspects of the SMPA but did not repeal any other provisions. It found, for example, the actual purpose of the SMPA (the protection of suppliers as the weaker contractual party), the CZK 5 billion limit for the existence of the rebuttable presumption of significant market power and the Office’s investigative powers (sector inquiries, requests for information or inspections in business premises) to be constitutionally compliant.

The dissenting opinion of three judges, who pleaded for making the list of infringements stipulated in the SMPA exhaustive (i.e. removing the wording “primarily” from the provision concerned), is also interesting. However, it did not succeed among the majority in the plenary session. Nevertheless, the CC ruled that the general clause on the abuse of significant market power should be interpreted restrictively.

What next?

The provision that was causing problems both to buyers and suppliers has been repealed. The suppliers whose interests the SMPA should protect often considered it as a complication preventing them from freely agreeing, particularly on the scope of promotional events.

The price, however, still has to be proportionate to the value of the services provided to suppliers and the terms under which they are provided must be non-discriminatory – see Section 4(2)(b) and (i) of the SMPA. This has to be taken into account when reviewing agreements with suppliers in order to remove the artificial 3% limit and adjust the terms governing the provision of various services (especially marketing). The Office is likely to focus on this matter in the future. After all, the CC stated in its judgement that the legitimate objective for stipulating the limits on monetary payments (regardless of the unreasonable method by means of which the objective was implemented under the repealed provisions) should be the actual protection of suppliers against buyers demanding inadequate monetary payments without providing adequate consideration in return.

Although we view the judgement of the CC repealing the 3% limit as good news, we cannot avoid doubts that our enthusiasm will not last forever. There is another draft amendment of the SMPA on the table, in which the limit of monetary payments by suppliers is a very hot topic. This is despite the fact that the EU directive on unfair trading practices in business-to-business relationships in the agricultural and food supply chain, which should be implemented by this amendment, does not envisage such measure. Thus, it cannot be ruled out that the lawmakers will reintroduce the limit of monetary payments by suppliers into the SMPA, although in a “reasonable” manner. Nevertheless, we still hope that common sense will prevail, and this form of extreme intervention into standard business relations will be definitely removed.

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