Who must conclude a written contract for supply of agricultural products? | In Principle

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Who must conclude a written contract for supply of agricultural products?

Long-awaited regulations limiting the scope of the duty to conclude written contracts for supply of agricultural products went into force on 22 August 2017. Under the new rules, the requirement for written contracts applies only to supplies of defined groups of agricultural products from farmers operating in Poland.

How has it been?

A written contract for supply of agricultural products had to be concluded, as a rule, by every buyer, seller or intermediary involved in trading in agricultural products, because this obligation applied 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—in particular cereals, sugar, fruit and vegetables, milk and milk products, meat, apiculture products, and tobacco (as we discussed in the article “Special oversight of contracts for supply of agricultural products”).

From 11 February 2017, when the president of the Agricultural Market Agency assumed the authority to impose fines for the absence of written contracts or deficiencies in contracts (meaning in particular that the contract lacks some required element or was concluded at the wrong time), this obligation sparked massive criticism on the Polish agricultural market because of its broad and imprecisely defined scope. It turned out that as a rule, any supply of even the smallest quantity of agricultural products, at any stage of trading and processing, had to be documented by a contract in writing. This obligation was not only hard to comply with, but disproportionate to the main aim of the regulation. Thus legislative changes were called for which led to the amendment described here.

How is it now?

The aim of the amended provisions is to protect agricultural producers operating farms in Poland, and thus the scope of the duty to conclude contracts in writing has been limited to the first link in the chain of supply and processing of foods.

Now, whether a written contract is required is decided by three factors:

  • The status of the product, i.e. whether the product is listed in Art. 1(2) of Regulation 1308/2013 (with exceptions)
  • The status of the supplier, i.e. whether the supplier is a farmer operating a holding in Poland within the meaning of Art. 4(1)(a) of Regulation (EU) No 1307/2013 of 17 December 2013 establishing rules for direct payments to farmers under support schemes within the framework of the common agricultural policy
  • The status of the initial acquirer, i.e. whether the acquirer is a processor or distributor (not selling products to end customers).

An affirmative answer to all three of these questions means that the contract has to be concluded in writing. A negative answer to any of these questions eliminates this obligation.

The written contract need not be prepared in the form of a document. Electronic form is sufficient (e.g. an exchange of SMS’s or emails), without the need to use a qualified secure signature. The contract should be stored for two years following the end of the calendar year when the last supply in performance of the contract was made.

Will intermediaries play a greater role on the market?

The amended regulations mean that a producer of foods who buys raw materials from an intermediary and not directly from the farmer need not conclude a written contract with the intermediary. It is the intermediary who must ensure that all contracts with the content required by law are concluded. This will no doubt lead to a greater role being played by intermediaries on the agricultural market and an increased risk of liability for any violations of the regulations on the part of intermediaries contracting directly with farmers.

The fines for violating the regulations are still harsh. One of the demands of businesses was to differentiate the fines for violation of the regulations concerning conclusion of written contracts, but ultimately only two different situations were distinguished:

  • Acquisition of agricultural products without a contract—subject to a fine of 10% of the value of the transaction
  • Acquisition of agricultural products on the basis of a defective contract—subject to a fine of up to 5% of the value of the transaction.

It is also important to bear in mind the entry into force on 12 July 2017 of the Unfair Advantage Act (full title: the Act on Combating Unfair Exploitation of a Contractual Advantage in Trading in Agricultural and Food Products), which introduced an express ban on exploiting on the agricultural market a contractual advantage resulting from the disproportion in the economic potential of the parties to the contract and the market situation. This clearly demonstrates an increased risk of liability for participants in the agricultural market, particularly intermediaries.

Is avoiding the use of written contracts a safe solution?

Written contracts are not required for food producers purchasing raw materials from:

  • Sellers without the status of a farmer within the meaning of Art. 4(1)(a) of Regulation 1307/2013, or
  • Sellers with the status of farmers but not operating holdings in Poland (e.g. farmers from other EU countries).

Thus it cannot be excluded that some food producers who do not purchase raw materials directly from farmers in Poland will largely abandon the use of written contracts for purchase of raw materials and supply of products. But this could result in the absence of clear and predictable rules for cooperation with suppliers and customers, which are particularly important in practice when conducting agri-food production. Thus despite the lack of a legal obligation, contracts of this type should be prepared reflecting the individual needs of the parties (as the rigid contract scheme imposed by Regulation 1308/2013 does not apply then). The parties’ contracts should also be reviewed for compliance with the Unfair Advantage Act.

It remains to be seen how the amended regulations are interpreted by the National Centre for Support of Agriculture (KOWR), which from 1 September 2017 is assuming oversight of contracts in the agricultural sector from the liquidated Agricultural Market Agency, and whether that interpretation fosters the effective functioning of the agri-food market in Poland and the participants in that market.

Joanna Krakowiak, Wardyński & Partners