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Contracts for supply of agricultural products under scrutiny

The EU’s Single CMO Regulation provides for heavy penalties for use of a form contract with even minor deviations from the formal requirements under that regulation. As a result, the National Support Centre for Agriculture may impose administrative fines of millions of zlotys on businesses.

The legal principle of freedom of contract allows the parties to a contractual relationship to shape the relationship as they see fit. But freedom of contract is subject to certain limitations, which may result from the nature of the specific legal relationship, principles of social policy, or simply provisions of generally applicable law, in particular the growing number of regulatory provisions.

Regulation (EU) No 1308/2013 establishing a common organisation of the markets in agricultural products, known as the “Single CMO Regulation,” is an example of such a situation. The European Parliament has stipulated that contracts between farmers and processors or distributors of agricultural products must meet specific requirements (as we have discussed on this site). Recently, Poland’s National Support Centre for Agriculture (KOWR) has stepped up its efforts on compliance with these rules.

A risk of heavy fines

The amount of sanctions for possible infringements is specified in the Act on Organisation of Certain Agricultural Markets of 11 March 2004. The construction of administrative fines provided for in this act is based on a percentage of the payment, which under the VAT Act should be understood as everything that the producer has received or is due to receive in respect of sales from the buyer or a third party, including grants, subsidies and other such payments received by the producer having a direct impact on the price of goods supplied by the farmer.

Depending on the type of breach of specific contracting rules, the first purchaser (processor or distributor) will incur a different penalty, i.e.:

  • 10% of the payment, in case of contracting without a contract prepared in written, document or electronic form
  • 1% or 4% of the payment for each unfulfilled condition, if a contract is concluded but does not meet all the mentioned conditions (in total, a maximum of 5% of the payment)
  • 5% of the payment, in the case of using a contract not meeting the conditions provided for the sugar sector.

It is precisely because the penalties are not specified in amount but as a percentage of the value of contracts that the financial risk for an undertaking buying agricultural products directly from farmers is significantly increased. The mechanism for calculating penalties is such that, in principle, for each alleged infringement, the penalty is at least 1%, and the aggregate value may be as high as 10%. This applies even to minor deviations from formal requirements, and in principle the possibility of moderating the penalty is excluded.

Protection of undertaking’s rights

The authority competent to impose an administrative fine is the director of the local field office of KOWR based on the location of the buyer or applicant. Most often, the procedure is initiated as a result of an inspection conducted at the premises of a given business, from which minutes are prepared.

Businesses should defend their rights at all stages of the proceedings

Inspection stage. The inspected entity may lodge objections to the minutes within a time limit specified by the authority if the entity does not agree with the findings. It is worth doing so, because if there are multiple allegations, reducing their number at the inspection stage may have a real impact on the amount of the penalty (if imposed). The provisions on the compulsory content of contracts and the method of contracting with farmers are extremely case-based, which increases the risk of deviation from formal requirements, and even a minor deviation can result in imposition of a very heavy administrative penalty.

Proceedings for imposing an administrative penalty. At this stage, the undertaking still has a chance to defend its rights and limit the risk of imposition of a high administrative penalty. If it turns out that the alleged deviation from the formal requirements can be removed, e.g. by introducing a modified model contract for the supply of agricultural products, it is an option worth considering, as this way the purpose of the procedure can be achieved voluntarily.

Appellate proceedings. The decision of the field office may be appealed to KOWR. Although Regulation 1308/2013 contains case-based provisions concerning requirements of formal contracts with farmers, it must be remembered that the aim of the EU provisions is to protect the interests of farmers. If deviations from the detailed formal requirements do not detract from the protection of farmers or are even beneficial for them, KOWR may take this into account as the central body protecting all participants of the agricultural market, and modify the decisions of the field offices accordingly, in particular by refraining from imposing a penalty.

Refraining from imposing a penalty

The possibility of refraining from imposing a penalty is provided for in Section IVa of the Administrative Procedure Code. Thus, an authority may issue a decision refraining from imposing an administrative penalty and merely cautioning the undertaking. This is possible as long as:

  • The gravity of the infringement is negligible and the party has ceased to infringe the law; or
  • For the same behaviour, by a final decision, another authorised administrative body has previously imposed an administrative penalty on the party, or the party has been legally punished for a misdemeanour or petty fiscal offence or legally sentenced for a crime or tax offence, and the previous penalty meets the purposes for which the administrative penalty would have been imposed.

According to a well-established view, an administrative penalty is primarily disciplinary rather than punitive in nature, which distinguishes it from a fine imposed under criminal law (Constitutional Tribunal judgment of 18 April 2000, case no. K 23/99). Thus, if the authority has amicably achieved the purpose of the pending proceeding, imposition of an administrative penalty becomes moot. In an era of increasingly restrictive regulatory provisions and growing penalties, this solution is particularly important for commercial practice and protection of honest traders.

Joanna Krakowiak, attorney-at-law, Life Science & Regulatory practice, M&A and Corporate practice, Wardyński & Partners

Paulina Wojtkowska, Environment practice, Wardyński & Partners