Negotiations gone wrong   

Scrutiny over commercial contracts under Article 37a Protection of Competition Act

Ever since Article 37a - abuse of stronger bargaining position, was introduced in the Protection of Competition Act (‘PCA’), all (re-)negotiations of commercial contracts have to be reviewed from the perspective of competition law.

Article 37a, para 1 of the PCA prohibits any act or omission of an undertaking with a stronger bargaining position, which contravenes good-faith commercial practice and impairs or may impair the interests of the weaker contracting party and the interests of consumers.

Bad-faith acts or omissions are those, which have no objective economic justification, such as:   

► unjustified refusal to supply or purchase goods and services,

► imposing unjustifiably burdensome or discriminatory terms, or   

► unjustified termination of commercial relations.      

According to the legal definition in § 1, item 2 of the Supplementary Provisions of the PCA, "good-faith commercial practice" means the rules determining the market behaviour resulting from the Bulgarian legislation and ordinary commercial relations and not infringing good morals. The analysis of the provision shows that the conduct of an entity is contrary to good-faith commercial practice, both when it violates statutory rules governing the conduct of a particular business, and when such are absent, but the standard commercial relations and good morals have determined the rules of fair trade and fair competition for the relevant market.(1)

More and more countries have introduced similar provisions in their legislation (‘abuse of economic dependence’). Here are some key takeaways from the latest developments in the Bulgarian case law.

1. Temporal scope of the prohibition

The doctrine and the now established case law(2) affirm that the assessment under Article 37a PCA should cover actions of negotiation, including the conclusion of a contract, respectively the refusal to conclude – effected after the day of entry into force of Article 37a PCA.

2. Stronger bargaining position

According to Article 37a, Para. 2 of the PCA, the existence of a stronger bargaining position should be ascertained in view of:

► the characteristics of the structure of the relevant market;

► the specific legal relationship between the undertakings concerned;

► the degree of dependence between the latter;

► the characteristics of the activity of the companies and its scale;

► the probability of finding an alternative commercial partner, including the existence of alternative sources of supply, distribution channels and /or clients.   

Case law review

The contractual position of a party should be considered in view of the above-mentioned criteria on a case-by-case basis.

When has a company been found to possess “stronger bargaining position”? Examples for this include:

► When its counterparty is a sales representative which is obliged to perform its activity exclusively in favour of the principal, since it is bound by contractual clauses prohibiting competitive activity(3);

► The notion of “stronger bargaining position” is related to the concept of "economic dependence" and in particular to the need to establish interdependence in relations between undertakings. As a result of this interdependence, one party (which may be both the supplier of goods / services and the buyer) is placed in a weaker position compared to its trading partner. It can be assumed that in a stronger negotiating position, one party in a negotiation or contractual relationship may unreasonably, in the light of good-faith commercial practice, force the other party to follow certain behaviour or agree to certain conditions(4)    

Insofar as the existence of a stronger bargaining position is determined in view of the characteristics of the structure of the respective market, the use of inappropriate indicators for market definition, respectively not taking into account and not discussing all relevant indicators, constitutes incorrect application of substantive law.(5)

When are contract clauses not unjustifiably burdensome and when is an objective economic justification present?

► when the commercial terms have been introduced in stages, by negotiation and by mutual agreement, and the company with stronger bargaining position has provided the relevant information and justification to its counterparty for each stage(6);

► when there is justification of the proposed price with an analysis of the relevant market based on official data of the National Statistical Institute, public information from authorities, studies, etc.(7);

► when a company is the only one, granted with exclusive rights for the territory of the country to sell and perform after-sales service of products […], including offering trained service specialists – in these cases it is at that company’s discretion to perform direct sales of spare parts, consumables and service to end users on the territory of the country, or to sell to intermediaries / intermediate suppliers, such as its counterparty(8).   

3. Abuse of stronger bargaining position - examples

► no commission payment to cash payment services provider(9)  (in this case the Commission on Protection of Competition (‘CPC’) noted that commercial transactions are in principle performed against consideration);

► reaping benefits beyond the normal commercial relationship or forcing the competitor to withdraw from the relevant market, e.g. imposing unjustifiably burdensome conditions in the form of an increase in the contract price, which in turn leads to termination of the contractual relations between the parties.(10)

(1) Judgment №74 of 14 January 2020, adm. case №1164/2019 of the Administrative court Sofia – district;   

(2) Judgment №3810 of 15 March 2019, adm. case № 4071/2017 of the Supreme Administrative Court;   

(3) Judgment №10033 of 22 July 2020, adm. case №15507/2018 of the Supreme Administrative Court;   

(4) Judgment №689 of 17 September 2020 of the Commission on Protection of Competition;   

(5) Judgment №15672 of 19 November 2019, adm. Case 8224/2019 of the Supreme Administrative Court;    

(6) Judgment №10033 of 22 July 2020, adm. case №15507/2018 of the Supreme Administrative Court;      

(7) Judgment № 2774 of 20 February 2020, adm. case №6369/2020 of the Supreme Administrative Court;    

(8) Judgment №74 of 14 January 2020, adm. case №1164/2019 of the Administrative court Sofia – district;   

(9) Judgment №466 of 11 June 2020 of the Commission on Protection of Competition;      

(10) Judgment №10453 of 29 July 2020, adm. case № 12795/2019 of the Supreme Administrative Court;