Just a few days after the entry into force of the special tax on retailers (effective as of 1 May 2020), which may amount to as much as 2.5% of their annual turnover, the Hungarian Government further tightened the rules on the distribution of food products by significantly restricting traders' freedom to negotiate purchase prices.
Government Decree no. 180/2020. (4 May), effective from 5 May 2020 until the end of the pandemic-related state of emergency, has added a restriction to the existing regulation provided by Act XCV of 2009 (i.e. Act on the Unfair Trading Practices in the Food Sector; "UTP Act"). According to the amendment, it will be considered an unfair trading practice if the trader vis-à-vis the food product's supplier:
- unilaterally reduces the purchase price despite the supplier's objections, or
- seeks contractual amendments aimed at price reduction by threatening the supplier with the cancellation of orders, the reduction of the quantity of orders, the cancellation of discounts or promotional activities, or by other means causing material or moral loss to the supplier.
When it came to negotiations with suppliers, traders' constitutional right of contractual freedom was already limited by the former provisions of the UTP Act. Under those provisions, the traders cannot, either by mutual consent, legally agree with suppliers on the application of certain fees, services and contractual terms categorically prohibited by the UTP Act (e.g. logistical charge, listing fee, sharing of costs serving also the trader's interests, payment deadlines exceeding the statutory time period, etc.).
The newly introduced rules further limit the bargaining power of traders for the protection of suppliers: in order to avoid suspicions of undue influence through threats, traders need to consider both their negotiation strategy and their approach in communicating with suppliers very carefully.
This might pose some difficulties in practice. During annual negotiations with the suppliers typical in the retail sector, traders negotiate not only the purchase prices, but all other contractual conditions applicable for the post-negotiation period (usually a year-long period) as well. Examples include joint marketing activities, promotional campaigns, category management and other merchant services concerning products that the supplier requests, and the progressive bonuses applied, etc. As a result, in the framework of the annual agreement, the parties actually agree on a complex "package of conditions". Supplier prices form only one element but cannot be separated from the whole package, as additional elements are often designed with regard to the prices and the revenues; therefore, the prices and the other conditions interact with one another. This will likely be further affected by the newly introduced special retail tax on traders, which will certainly motivate traders to seek reductions in purchase prices.
It's therefore imperative that, in the future, during annual negotiations traders pay particular attention to ensuring that their negotiation position and the bargaining strategy applied vis-à-vis suppliers (especially taking into consideration the unequal bargaining position of smaller suppliers), is not, either indirectly, perceived to force or threaten suppliers in order to procure agreement.
This is all the more important because the new rules place the burden of proof on traders in certain supplier-trader relations. A trader must prove that a reduction in the purchase price was not obtained in an unfair, threatening manner in case a National Food Chain Safety Office (NÉBIH) procedure is initiated following a supplier's application. The burden of proof rests with the trader based on, on the one hand, its market power and thus on the extent of its bargaining power, and, on the other hand, on the bargaining power of the supplier.
The regulation assesses bargaining power based on annual turnover; accordingly, a trader is required to prove the lawfulness of the negotiations if:
- the turnover of the supplier does not exceed HUF 500 million, while the turnover of the trader exceeds HUF 1 billion;
- the supplier's turnover exceeds HUF 500 million, but does not exceed HUF 5 billion, while the trader's turnover exceeds HUF 20 billion;
- the turnover of the supplier exceeds HUF 5 billion, but does not exceed HUF 75 billion, while the turnover of the trader exceeds HUF 100 billion; and
- the supplier's turnover exceeds HUF 75 billion, while the turnover of the trader exceeds HUF 200 billion.
For the purposes of the calculation of the turnover, the turnover of all related undertakings must be counted together in the case of both traders and suppliers. In case of a joint procurement, however, the turnover of each of the traders within the joint purchasing alliance or the business association must be counted together as well as the turnover obtained by the traders that jointly concluded the commercial contract.
Finally, traders that come to the attention of NÉBIH due to the suspicion of threatening conduct will also be in a more difficult position because the UTP Act prohibits NÉBIH procedures being resolved by way of a commitment. This means traders have no way of resolving proceedings initiated against them by undertaking to subsequently modify their practices or offering compensation to their suppliers.
In light of the new rules, it will be advisable for traders to consider, taking into account the restrictions set out above, the balance between the prices and conditions they consider to be desirable or at least acceptable, ahead of commencing negotiations with suppliers, and to adapt their negotiation strategy accordingly.
By Peter Mezei, Associate, Baker McKenzie