Special oversight of contracts for supply of agricultural products | In Principle

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Special oversight of contracts for supply of agricultural products

On 17 February 2017 the president of the Agricultural Market Agency issued a set of instructions entitled “Conditions for Monitoring of Contracts for Supply of Agricultural Products.” The document includes guidelines for the content and procedure for conclusion of such contracts and the rules for monitoring compliance with the obligation to conclude contracts in writing between buyers, sellers and intermediaries trading in agricultural products in Poland.

Written contract, but what kind of contract?

The obligation to conclude contracts for supply of agricultural products in writing has existed since 3 October 2015, but it was not until 11 February 2017 that the president of the Agricultural Market Agency was vested with the authority to impose fines for the absence of written contracts or the use of defective contracts (particularly when the contract does not contain all the required elements or is concluded at the wrong time).

In practice, a contract for supply of agricultural products should generally be concluded by all buyers, sellers and intermediaries trading in agricultural products, because this obligation applies to a very broad catalogue of products listed in Annex I to Regulation (EU) No 1308/2013 of 17 December 2013 establishing a common organisation of the markets in agricultural products—particularly cereals, sugar, fruit and vegetables, milk and milk products, meat, apiculture products, and tobacco. The fact that the cooperation is not ongoing does not provide relief from the obligation, because it applies even to one-time supplies (only producers making direct supplies, and members of production cooperatives supplying products to their own cooperatives, are exempt).

Particular attention should be paid to the content of the contracts. The mere fact that a contract is concluded in writing affords no protection against the risk of liability, because the contract must meet strictly defined conditions, depending on the type of product covered by the contract. The minimum content typically includes price, quantity, quality, duration of the contract and procedure for termination, terms and conditions of payment, the arrangements for collecting or delivering the agricultural products, including inspection of quantity and quality and complaint procedure, and rules applicable when deliveries cannot be made because of force majeure.

The buyer’s risk

Contracts for supply of agricultural products will be monitored by the directors of the field offices of the Agricultural Market Agency for compliance with the obligation to conclude contracts in writing and for possible defects in the content of the contracts. In addition, from 12 July 2017, the president of the Office of Competition and Consumer Protection (UOKiK), using designated organisational units of UOKiK, will be entitled to verify whether contracts contain provisions deemed to be contractual practices unfairly exploiting a contractual advantage.

A buyer of agricultural products can be liable for lack of a contract, defects in the contract, or the unfairness of certain contractual provisions. The fine for absence or defectiveness of contracts will be set at 10% of the payment for the products supplied without a required contract or on the basis of a defective contract. And if contractual provisions are found to constitute an unfair contractual practice, the president of UOKiK will be authorised to impose a fine of up to 3% of the turnover achieved by the undertaking in the preceding financial year. The buyer must therefore ensure that it concludes contracts with its suppliers in the proper form and with complete content, not only protecting the buyer’s interests but also reflecting the valid expectations of the other party and maintaining the proper contractual balance between the parties. In practice this task may not prove so easy.

Most common traps in contracts for supply of agricultural products

Under Appendix 2 to the guidelines issued by the president of the Agricultural Market Agency, it should be anticipated that the directors of the agency’s field offices will pay particular attention to the key elements of contracts, such as the price, duration and termination procedure.

The contract must be concluded prior to realisation of the first supply. The field office directors have broad inspection authority, including the right to access the premises of buyers and suppliers of agricultural products, and the right to review documents and demand information connected with the subject of the inspection. They will probably scrupulously verify whether any deliveries were made before the contract was concluded in writing.

Theoretically, the contract can provide a fixed price, but in the case of contracts for future goods (crops prior to harvest or livestock prior to birth), this possibility will not really apply in practice. Thus the contract should specify how the price will be calculated on the basis of changing market conditions. The solution applied should allow the price to determined precisely but simply, eliminating the risk of disputes in this respect.

The rules do not specify whether contracts must be concluded for a definite period set in advance or for an indefinite period with some procedure for terminating the contract. It is up to the parties to determine the optimal mechanism in this respect. In light of the approaching entry into force in July 2017 of the regulations combating unfair contractual practices, particular attention should be paid to avoiding contractual imbalance and the risk that the contract would be interpreted as awarding one of the parties the exclusive right to terminate the contract or conditioning conclusion or continuation of the contract on accepting or complying with requirements unrelated to the subject of the contract. In this respect, not only the literal wording of contracts will be examined, but also how they are applied in practice.

Anticipating that most of the information about infringements of obligations concerning conclusion of appropriate contracts for trading in agricultural products will come from the market, the president of the Agricultural Market Agency included in Appendix 3 a form for notifying the agency of suspected violation of the regulations governing the obligation to use written contracts for supply of agricultural products.

What to do now and what to expect in the future?

It cannot be ruled out that in the future further regulations will be issued limiting the freedom of contract in the agricultural sector. These could apply in particular to minimum contract duration periods, advance periods for conclusion of contracts prior to the first delivery, or periods for conclusion of contracts for specific agricultural products (like the periods now in force for contracts for supply of tobacco, which much be concluded by 15 March of each year). Hopefully, the desire to protect agricultural producers (comparable to some degree to the protection provided to consumers), while in itself reasonable, will not result in upsetting the contractual balance in the other direction, because under the literal wording of the regulations only buyers are liable for the absence of contracts or for shortcomings in the contracts. What if a contract is not made in writing, or is incomplete, because of the negotiating demands of the agricultural producer?

One thing is already certain: in connection with the current regulations as well as the regulations coming in July concerning unfair contractual conditions, buyers of agricultural products should devote attention to establishing rules for conclusion of contracts with agricultural producers and develop forms for contracts of this type (using the model of a supply contract, output contract or mixed contract, perhaps also using a framework approach). General conditions of contract and for deliveries should also be developed, greatly streamlining the process of concluding contracts with counterparties. These solutions should be carefully considered and drafted, because once adopted they can be used by agricultural traders for many seasons going forward.

Joanna Krakowiak, Life Science & Regulatory practice, Wardyński & Partners