When the power is with you # VI: What impact does the amendment to the SMPA have on the provision of discounts and promotions?

The full effectiveness of the amendment to the Act on Significant Market Power and Unfair Commercial Practices (SMPA) is just a few days away. That is why we are here with the sixth and final part of the SMPA miniseries, in which we will touch upon further questions related to contracting under the SMPA. We will focus on the impact of the amendment on the provision of discounts and promotions.

As of 1 January 2024 all buyers with significant market power should fully adapt to the provisions of the amended SMPA. In particular, to adapt their contracts with suppliers of food and agricultural products concluded prior to 2023. Contracts concluded this year are covered by the SMPA amendment from the date of their conclusion. 

Our miniseries can be seen as a reminder of the most principal issues that buyers (whose numbers have grown significantly with the amendment - see our article) should not forget in their contracts – no matter if they are currently concluding them or just checking whether they comply with the applicable legislation.

The provisions on discounts and promotion events have also seen amendments. If you want to know how contractual parties can determine the level of prices and discounts in situations subject to the SMPA and how the buyer must proceed when negotiating promotional activities, read the following lines.

Discounts primarily in advance

First of all, it is necessary to clarify what is considered a discount from the point of view of the SMPA and the Office for the Protection of Competition (Office). In general terms, it is a price advantage provided to the buyer by the supplier, which can take many forms and be set as a specific amount or as a percentage from the purchase price. A discount can typically be a quantity discount, discounts for the purchase of several products or, for example, discounts linked to special offers. 

The basic prerequisite for granting a discount is, according to the Office, that the buyer must “deserve” such discount[1]. According to this interpretation, the discount is always provided in return for something. And that something has to be explicable. In this sense, a negotiated adjustment of the purchase price in the form of a percentage discount from the list price is not a discount. It is considered part of the purchase price arrangement (there is no need to address it in terms of meeting the following rules)..

An agreement on discount must fulfil the statutory requirements. Even in the case of discounts, it is necessary to be as transparent as possible. That means that the parties need to agree in advance on the amount of the discount or at least the method of determining it and the agreement must be in writing. All discounts must then be reflected in the invoice for the purchase of the respective goods (either included in a net purchase price or by indicating a specific amount that is deducted from the basic purchase price). Put simply, the aim is to ensure that the supplier knows already at the moment of invoicing how much they will get for its goods after deducting all discounts.

The only exception the act lays down relates to volume discounts (bonuses), where the final amount of the discount can only be determined at the end of a certain period, depending on the volume of goods sold during that period. The Office sees such discounts as an incentive tool for suppliers to secure higher sales of their goods[2].

Parties may only negotiate a volume discount if it is not clear in advance whether or in what amount it will be granted – the condition for the discount is that a certain sales target has been reached in a month, quarter, year or other period. The amount of the discount should be justifiable when compared to the benefit attained by the supplier. At the same time, do not forget that volume discount arrangements must be made in writing and arranged by the parties in advance.

In practice, all this means only one thing – the discount must always be agreed in advance as adequate consideration and duly justified. 

How long did you want it for? Two weeks?

The above rules on discounts applied more or less in the same form also before the amendment (only to a narrower range of buyers). However, the amendment to the SMPA has also introduced more specific obligations in the area of promotional events and special offers. The Office clarifies in its explanatory opinion what such events and offers mean[3]. In general, these are events that are linked to a discount given to the buyer to promote the supplier’s products, typically discount sales.

The SMPA requires that the buyers sufficiently specify the event, particularly with regard to the estimated quantity of products to be sold, their purchase price and the duration of the event. Such specification must again be made in advance and in writing in the contract between the supplier and the buyer (this may be done by a separate contract for such promotion). The aim is to identify the range of goods that will be purchased as part of the sales event so that the supplier can prepare in advance for the increased volume.

As to the quantity of products sold, since the parties clearly cannot know the exact figure, they can make a qualified estimate. In practice, the basis for this estimation may be the sales history of the buyer or the number of products that he normally sells. According to the Office, it is also possible to use the services of a third party – an expert, who will make the estimate[4]. Nevertheless, the SMPA does not lay down such obligation and we see it as a rather theoretical concept. In any case, it is not possible to make a wild guess. The basis of the estimate must be reasonable. 

The contract must also include the purchase prices for the promoted products or the method how to quantify it. In case of the promotional activities, the purchase price can be settled after the event by retroactively correcting the discounts already refunded, or on the other hand by granting a discount only after the event (the Office views such discount as a form of volume discount. The reason is to ensure that the supplier has better control over how much it pays in total during the event).

The last key provision concerning promotions that the contract between the buyer and the supplier must contain is the duration of the event. The supplier should know when the promotion starts and ends, also to be able to plan promotions with other retailers.

And here we are at the end

We are aware that it may be very difficult to become familiar with the new SMPA regulation. We hope that in our six-part series, we have been able to give you an overview of who is covered by the SMPA amendment, what the requirements of written form entail and what specific rules and limits apply to the payment period of the purchase price, the provision of services and the negotiation of discounts. 

We are not able to cover here all issues arising from the contractual process under SMPA. We also did not aim to describe in detail what unfair commercial practices a buyer with significant market power may commit. This would be worth another series of its own. However, if you wish to know more, please do not hesitate to contact us at any time. Our team of experts is at your disposal. 

WHAT TO REMEMBER?

• From 1 January 2024, it is necessary to fully act in line with the amended SMPA and to ensure compliance of all contractual documents, including older contracts that are still effective.
• Any discount arrangement requires transparency – indicating the level or the method of determining the discount in advance.
• If you are negotiating a promotion, the contract must always stipulate the quantity of products sold, their purchase price and the duration of the promotion.