On 26 February 2020, Spain’s Official State Journal (the Boletín Oficial del Estado, or BOE) published Royal Decree-Law 5/2020, of 25 February, which adopts certain urgent measures in regard to agriculture and food (“Royal Decree-Law 5/2020” or the “Royal Decree-Law”), which, among other things, modifies Law 12/2013, of 2 August, on measures to improve the functioning of the food supply chain (“Law 12/2013”). These measures entered into effect on 27 February 2020.
According to the preamble to Royal Decree-Law 5/2020, its purpose is to adopt a series of urgent measures to prevent the closure of agricultural operations and to ensure an equitable distribution of costs in the primary sector. However, many of the modifications to Law 12/2013 made by Royal Decree-Law 5/2020 are applicable not only to commercial relations with the primary sector, but also with the other operators in the food supply chain. Royal Decree-Law 5/2020 also aims to act as a precursor to the upcoming “in depth” reform of Law 12/2013, which is due to be approved to transpose the provisions of the EU Directive on unfair trading practices in business-to-business relationships in the agricultural and food supply chain1.
Below we look at the main modifications made to Law 12/2013 by Royal Decree-Law 5/2020:
1. The content of food supply contracts2
Royal Decree-Law 5/2020 modifies the content of article 9.1 c) of Law 12/2013, in relation to the criteria that will be used to calculate the price of a contract when it is set on the basis of a variable component. Specifically, Royal Decree-Law includes examples of criteria that may be used to calculate the variable component of a contract’s price, including (i) the evolution of the market, (ii) the volume delivered and quality, or (iii) a product’s composition. However, given the confusing drafting of the provision, it is unclear whether those criteria should be included in a contract, as it states that the price will be set “solely on the basis of factors that are objective, verifiable, cannot be manipulated and that are expressly established in the contract”.
Of those factors, one of the criteria that should be used is “the effective cost of production of the product that is the object of the contract, calculated taking into account the costs of production that the operator has effectively incurred, borne or similar”. Royal Decree-Law 5/2020 also expressly forbids the use of “factors that refer to prices in which other operators or the operator in question has participated”.
In relation to the content of other food supply contracts, Royal Decree-Law includes a new paragraph j) to article 9.1 of Law 12/2013, according to which food supply contracts must contain “an express indication that the price agreed between the primary agricultural, livestock, fishery or forestry producer or a group thereof and its primary purchaser covers the effective cost of production”.
2. New abusive trading practices
The Royal Decree-Law includes two new articles (articles 12 bis and 12 ter) among the abusive trading practices in Chapter II of Title II of Law 12/2013, which refer to promotional activities and the need to prevent what is called “supply chain value destruction”:
Article 12 bis, in relation to promotional activities, establishes that those activities must be performed in compliance with the principles of (i) freedom of contract; (ii) mutual interest; and (iii) flexibility to adapt to the specific circumstances of the different operators. The second paragraph of this provision describes the content that terms related to commercial promotions must have, requiring the “explicit agreement of the parties”.
Specifically, the terms of commercial promotions between operators in the food supply chain must include, at least: (i) the promotion start and end date, (ii) the prices at which products in a promotion will be acquired (precios de cesión), (iii) the volumes involved, (iv) the type of promotion, (v) how the promotion operates and the geographical territory covered by the promotion, and (vi) an assessment of the results of the promotion.
Paragraph three of article 12 bis prohibits “promotional activities that are misleading as to the price and image of the products or that are detrimental to the perception in the supply chain as to the value or quality of the products”, but the Royal Decree-Law does not define what “misleading consumers” entails. However, the wording of the provision is similar in content to that of the Spanish Unfair Competition Law 3/1991, of 10 January (“SUCL”) and should be construed as a reference to the SUCL to determine when we are faced with practices that could be misleading as to the price and image of products3; this is because it cannot be inferred that specificities exist in the agricultural and food supply chain that justify a special provision not aligned with general criteria on unfair conduct.
Article 12 ter, in reference to “supply chain value destruction” – a concept not defined in Royal Decree-Law 5/2020 –, tries to establish a minimum purchase price which can, furthermore, only be set in good faith by the producer; it is our opinion that this option is not provided for or possible under the Spanish Constitution, the Treaty on the Functioning of the European Union or in the Spanish Civil Code.
According to this new provision, and with the aim of preventing “supply chain value destruction”, each operator “must pay the immediately preceding operator a price that is equal to or higher than the effective cost of production of the product that such operator has effectively incurred or borne”. This will undoubtedly generate significant issues with its interpretation, as it seems to allow one of the parties to a food supply contract complete discretion when setting an essential element of that contract: its price. In the administrative disciplinary arena alone, the principle of attributability would prevent an operator from being punished for having paid less than cost when it could not have known that cost and would very often be prohibited from knowing that cost due to the application of competition laws.
Furthermore, as occurs with the concept of “supply chain value destruction”, Royal Decree-Law 5/2020 does not define what should be understood as “effective cost of production”, nor does it identify the items that should be taken into account to calculate that cost.
Finally, the second paragraph of article 12 ter respects the freedom to set the price of resale or retail price in the case of operators that sell products directly to final consumers (primarily, food distribution companies), although they are prohibited from passing on to operators higher up the chain the business risk that they bear due to their commercial policy regarding the prices offered to the public.
3. Increased severity of offences and new offending conducts
Royal Decree-Law 5/2020 also modifies article 23 of Law 12/2013, whereby some offences that up to now constituted minor offences now constitute serious offences (such as failure to formalise food supply contracts in writing).
In addition, a series of practices have now been included among serious offences:
Failure to include a price in a food supply contract, in accordance with the new provisions in article 9.1 c).
The making of a modification to the price of a contract that is not expressly agreed by the parties.
The destruction of value in the food supply chain in accordance with article 12 ter.
- The performance of promotional activities that are misleading as to the price and image of products in accordance with article 12 bis. Article 23 remains silent as to the promotional activities that are detrimental to the supply chain’s perception of the value or quality of the products as referred to in new article 12 bis.
4. Publication of decisions that find infringement
Royal Decree-Law 5/2020 includes a new article 24 bis to Law 12/2013 on the publication of disciplinary decisions. The new article establishes that the public authorities will periodically publish decisions that find infringement provided that they are final in the administrative jurisdiction or, if an appeal has been lodged against them before the contentious-administrative courts, when they are rendered final.
The modifications made to Law 12/2015 by Royal Decree-Law 5/2020 primarily affect the content of food supply contracts (specifically, the manner in which to establish the price of those contracts) and practices that constitute abusive practices, which have increased as a result of the reform.
It cannot be ruled out that the Royal Decree-Law might trigger considerable debate surrounding the lawfulness of some of the provisions because they affect – both due to the form chosen and the content of the provisions – fundamental rights recognised in the Spanish Constitution and in the Treaty on the Functioning of the European Union.
The generic nature and the lack of definition given to certain concepts that were a feature of Law 12/2013 since it was approved have continued in the reform. As such, Royal Decree-Law 5/2020 contains generic concepts such as “destruction of value in the supply chain” or “effective cost of production” which it then fails to define.
- Despite its attempt to lay the groundwork for the transposition of the EU Directive on unfair trading practices in business-to-business relationships in the agricultural and food supply chain, the modifications made to Law 12/2013 by Royal Decree-Law 5/2020 do not bear much resemblance to the provisions of that directive other than provisions on the publication of decisions finding infringements, which that directive does establish.