Introduction
Scope of application
Abusive practices
Comment
An amendment to the Czech Significant Market Power Act (the SMP Act) was recently signed by the president. The amendment, designed to harmonise Czech law with the EU Unfair Commercial Practices Directive, will come into effect on 1 January 2023.
Unfortunately, the Czech legislature has adopted a unique interpretation of the directive and made additional modifications. Hence, the Czech law governing trade with agricultural products will continue to be singular and will now extend from the retail level to the whole supply chain.
A fundamental issue that has existed since the SMP Act came into force in 2010 is the personal scope of its application. The regulator in this area, the Office for the Protection of Competition, has long interpreted the SMP Act as being applicable to any customer purchasing food for the purpose of resale whose annual turnover for the sale of food and related services exceeded 5 billion koruna (approximately £176 million) in the Czech Republic. This has been subject to plenty of criticism. When the deadline to transpose the EU Unfair Commercial Practices Directive expired in 2021, the Office had to start applying the so-called "relative concept", considering not only the absolute turnover of the customer but also the bargaining power of the supplier (which could often achieve even higher turnover than the customer).
Indeed, the EU Unfair Commercial Practices Directive grants significant market power to customers only if their turnover falls into a higher band, of six turnover bands, than the supplier's band. This regime was also envisaged in the original draft amendment to the SMP Act. Unfortunately, a modification suggested by members of Parliament and without much expert discussion – the so-called "absolute principle" granting significant market power to all customers whose turnover in the Czech Republic exceeds 5 billion koruna per year (as was applied before 2021) – was also reincorporated into the amendment. Moreover, the amendment also removed the link between turnover and food sales. There is now effectively a risk that a business which is only marginally active in the field of agricultural products (not only at the retail level but also at all other levels from production to distribution), but whose total turnover exceeds 5 billion koruna, will be always regarded as a customer with significant market power. It will likely be a question of practical application whether the Office will adopt this almost absurd approach, but in any event the amendment has not done any good in this respect.
In addition, the scope of the SMP Act now extends from retail to all levels of the agricultural supply chain. Instead of just eight supermarket chains, the SMP Act is now likely to apply to dozens or even hundreds of businesses. All of these companies will now have to ensure that their contracts with suppliers comply with the requirements of the SMP Act. Notwithstanding that discussion about the prospective benefits of the SMP Act has yet to be resolved, the amendment inevitably is coming into effect. Therefore, the companies concerned will be compelled to reflect this major change in their practice, bringing further regulation to their business to business relations.
Finally, the amendment to the SMP Act also changes the enumeration of abusive practices – that is, instances of misuse of significant market power (in post-amendment terminology, "Unfair Commercial Practices"). The vast majority of the practices prohibited by the current SMP Act have been carried over into the amended law, and several additional practices based on the EU Unfair Commercial Practices Directive have been added. These changes will also impose costs on retail chains and their suppliers in the form of contract modifications. For companies at other levels of the supply chain, contract modifications with suppliers will in most cases be unavoidable if they do not want to risk severe penalties under the SMP Act.
For now, it seems that the Office, along with many companies in the agricultural sector, will have to cope with the amendment to the SMP Act in its current form. As some of the rules are rather formalistic, these companies will effectively have no choice but to revise their contractual relations with their customers. Moreover, the SMP Act may impact companies who did not anticipate being affected.
For further information on this topic please contact Jan Kupčík at Schoenherr by telephone (+420 225 996 500) or email ([email protected]). The Schoenherr website can be accessed at www.schoenherr.eu. 7755379