EU legislation predominantly focuses on protecting consumers from unfair commercial practices in their dealings with traders. In an unprecedented move, the EU Commission is mulling over legislation which would specifically tackle unfair trading practices in a business context.
Lack of written contracts endangers the weaker contracting party
Although EU competition law does provide redress for some unfair practices, it is not generally concerned with fairness in individual relationships between traders. Currently, there is no specific EU regulatory framework dealing with unfair trading practices in a business-to-business transaction.
This lack of regulation is due in part to the principle of freedom to contract, a cornerstone of any B2B relationship in a market economy. Parties are left to themselves to design and sign contracts the way they wish or the way which best suits their needs. Nonetheless, the European Commission realised that just as consumers require protection in a business-to-consumer transaction, safeguards to defend the weak contracting parties in a business context are required.
The imbalance in a business context arises when one of the contracting parties has a stronger bargaining position, as a result takes the lead in negotiations and imposes restrictive terms on the other. In brief, the stronger party is able to command the situation. Often the weaker party is unable to abandon an unfair business relationship due to the resulting costs that it would incur or the lack of alternatives available to it. In the supply chain, retailers as well as suppliers can be the victims of unfairness.
In order to tone down the resulting imbalance between traders in business-to-business transactions, a Green Paper was recently released by the European Commission. This paper addresses the B2B supply chain, a chain of transactions between undertakings that leads to the delivery of goods destined mainly to the general public for consumption or utilisation. It identifies seven common unfair trading practices that are by definition gross deviations from good commercial conduct and contrary to fair dealing.
These include failure to provide clear and sufficient information about contract terms, which make it possible for the stronger parties to impose additional obligations on weaker contracting parties. Contract terms need to be clear, transparent and unambiguous while contractual sanctions proportionate to the damage suffered.
Lack of written contracts endangers the weaker contracting party. When there is no lasting proof of the agreed terms, unfair trading practices can be more easily imposed.
The fairer option is agreements put in writing while oral contracts confirmed in writing by at least one contracting party after their conclusion.
Territorial restraints imposed by a supplier on a local retailer impeding the latter from sourcing identical goods from other member states is also considered as an unfair practice as this has the effect of allowing suppliers to maintain high prices when the retailer can source identical goods from neighbouring member states at a lesser price.
The Commission suggests that contracts can be terminated only after sufficient advance notice is given to the other party to enable it to recoup its investment. A mandatory minimum notice period has hitherto been alien to most jurisdictions in the EU, where the will of the parties prevails and the notice period is that provided for by contract and none else.
The Commission considers that mandatory notice periods or compensation in lieu may fairly operate to protect one party from unjustified and sudden termination of a commercial relationship by the other party.
The Commission’s intention is to create a regime similar to B2C contracts where the vast majority of the terms agreed to between traders are subject to a test of fairness when it comes to assessing their validity.
The Commission is seeking views by the end of April 2013 from all interested parties on the Green Paper and the possibility of effective enforcement at national and EU level to target and stem unfair trading practices.
After receipt of the contributions from stakeholders, the Commission will determine the next steps later this year.
There is likely to be substantial lobbying on the subject of such unfair consumer practices and the Green Paper is some time away from becoming a legislative proposal.
jgrech@demarcoassociates.com
Josette Grech is an associate with Guido de Marco & Associates and heads its European law division.