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EXPERT OPINION: Dilemmas in regulating supplier-retailer contracts

written by Lajos Wallacher, lawyer at Squire Sanders

The Act XCV of 2009 on the prohibition of unfair commercial practices harmful to food suppliers entered into force in January 2010 and was amended at the beginning of this year.

The responsibility of enforcement lies with the Central Agricultural Office (MGSzH). So far the authority has closed seven cases, of which only one has ended with a commitment decision, the remaining six have resulted in heavy fines: HUF 780 million in total. Decisions imposing fines have been contested before administrative court; the suits are pending.

Predictability is a key notion when one thinks about the values of legislation and law enforcement. To make the implications of one’s behavior foreseeable is of utmost importance if the state wishes to create a safe legal environment for businesses, because it allows undertakings to invest without unnecessary risks.

On the other hand, the dynamics of economy require flexible rules and enforcement methods. This flexibility guarantees that individual decisions achieve the aims of the legislator notwithstanding changing business models and practices. The more rigid a rule is, the more predictability it provides, but unfortunately, the more unjust the result may be. It is not an easy task to strike the right balance.

The following examples emerged in the application of the said Act, and they illustrate how difficult it is to find the best solution.

Several provisions of the Act specifically aim at predictability and legal certainty.

For instance, the Act lists specific unfair terms. Regrettably, by doing so the Act leaves no room for individual, principles-based appraisal. For example, logistic services are deemed unfair. This provision tries to protect suppliers, but it may prove to be counterproductive. Presumably, SMEs can be better off if it is not their duty to deliver the goods to separate supermarkets. Consequently, in order for the enforcement authority to be able to take into account the relevant circumstances of an individual case, the application of the general, flexible rule, which says that services provided by retailers shall be deemed unfair if they do not serve the interests of the supplier at all, would be more effective.

It was an important step toward achieving predictability of enforcement policy when the MGSzH published a “working paper” in which it attached detailed explanatory notes to the provisions of the Act. It deserves cheers, because it is good to know in advance the interpretation of the law to be applied by the authority.

Unfortunately, this advantage was immediately annulled by a statement which said that the MGSzH was not bound by the working paper. This approach runs counter to the legal certainty requirement. The Constitutional Court has declared that where an authority adopts guidelines, it constitutes a self-imposed limitation of its discretion. Similarly, in EU law it is settled case-law that the European Commission may not depart from rules which it has imposed on itself by issuing guidelines. Therefore it is better to say less in guidelines, but stick strictly to the words that have been said.

The MGSzH may adopt commitment decisions. This means that if a retailer offers commitments to meet the concerns expressed to them, that is to say, it is ready to change its objectionable behavior, the MGSzH may decide to make those commitments binding toward it. In this case, the procedure will be closed without deciding whether there has been an infringement or not. On the other hand, the behavior made binding in such a way is surely in conformity with the Act. For this reason retailers may find a safe harbor if they copy the conduct that was approved by commitment decision. That is why it would be very useful for undertakings to be able to get acquainted with the full content of commitment decisions, which is not the case at the moment. The question of which rules should be applied where the Act is silent on a specific matter (e.g. how to calculate time limits) has surfaced on several occasions. In these situations predictability and legal certainty prefer the application of existing general rules instead of creating autonomous, new ones deduced freshly from the Act. To statutes that regulate contractual relationships it is the Civil Code (Ptk.) that should apply as a background, subsidiary act. Presumably, to resort to the Civil Code fulfills the expectations of the parties as well.

To sum up, both the Act and the enforcement practice have promising elements from the point of view of predictability and legal certainty, but some work is still to be done. At the same time, flexibility is equally desirable. In balancing these opposing values, the following can be proposed as a rule of thumb: to better regulate the economy, flexible legislation is needed, which simultaneously requires more predictable, more transparent law enforcement.

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This article appeared in the BBJ's retail focus on on July 15, 2011.