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Control of sales and outsourcing: opinion from the Advocate General in the Fruition case

Control of sales and outsourcing: opinion from the Advocate General in the Fruition case

The opinion from Advocate General Wahl (AG) in the Fruition case was published on 23 April. In this case the High Court of Justice of England and Wales (the High Court) asked the Court of Justice for a preliminary ruling on whether producer organisations in the vegetable and fruit sector may outsource essential activities and if so, what conditions are attached to this. The AG is of the opinion that essential activities may be outsourced provided producer organisations can exercise a certain degree of control over the contracted third parties in order to insure the effective performance of those activities.

The case
Fruition, a recognised English producer organisation in the vegetable and fruit sector, had concluded a marketing agreement with Northcourt Group Ltd (Northcourt). The 101 members of Fruition own almost 100% of Northcourt, which in turn owns 50% of the shares in Worldwide Fruit (WWF). Northcourt uses WWF as a marketing agent. WWF puts virtually 100% of Fruition’s products on the market. WWF is also responsible for organising transport, sorting, packaging and supervising the quality of the products, including general production control, on Fruition’s behalf. WWF also provides the technical services and invoicing. In fact WWF forms the heart of the entire organisation. WWF performs all the activities that a producer organisation would normally perform itself.

After the European Commission made comments on the construction, the Rural Payment Agency (RPA) decided initially to suspend Fruition’s recognition as producer organisation, and later to withdraw this recognition. Fruition contested that decision, asserting that pursuant to Regulation 2200/96, the ultimate control over the activities that a producer organisation leaves to third parties need not lie with the affiliated growers. Since the High Court was uncertain whether a producer organisation had to keep control of the activities of contractors engaged by it in order to satisfy the requirements for recognition according to Regulation 2200/96, and if so, to what extent, it decided to stay the proceedings and request a preliminary ruling.

The AG’s answers to the questions submitted for a preliminary ruling
Role of producer organisations
Before answering the questions submitted, the AG points out that based on Regulation 2200/96, producer organisations are the basic elements in the common market organisation (CMO), the decentralised operation of which they ensure at their level. The Regulation charges the producer organisations with certain tasks and grants them the relevant powers. Furthermore, producer organisations have access to significant public funding from the European Agricultural Guidance and Guarantee Fund (EAGGF). The AG states that a glance at the current legislation confirms that these considerations continue to hold true.

Possibility of outsourcing
Regulation 2200/96 was replaced in 2008 by Regulation 1234/2007. Regulation 1234/2007 contains explicit rules for the outsourcing of activities by producer organisations. Regulation 2200/96 did not contain any rules of this kind. The AG believes however that outsourcing is also possible under Regulation 2200/96.

Control of the outsourced activities
The overarching aim of the recognition rules applicable to producer organisations is, according to the AG, to ensure that producer organisations are capable of performing their essential activities in such a way that the underlying general interests can be pursued effectively and the public funds employed are not dissipated, misused or even diverted by fraud. Once recognised, a producer organisation remains the sole entity which is responsible to the national and EU authorities for the performance of those essential activities as well as for the use of the public funds received. The AG concludes from this that producer organisations must retain a degree of control over the contractors (and, as the case may be, the subcontractors) they have engaged to carry out the essential activities. The AG does point out that this requirement of control applies only with regard to the activities which a grouping of producers is required to perform in order to be recognised as a producer organisation.

Degree of control
In the AG’s view, the degree of control required under article 11 of Regulation 2200/96 is satisfied if the producer organisation has a genuine possibility to supervise its contractor’s activities and, where appropriate, to intervene in order to ensure that the essential activities of a producer organisation are carried out effectively. This power of oversight and intervention can be guaranteed in one of two ways:

  1. if the producer organisation is the sole owner of the contractor and this ownership structure remains unchanged for the entire period in which the contractor performs the tasks assigned to it by the producer organisation; or
  2. the producer organisation can have the required degree of control on grounds of a contractual agreement. The AG does not consider a written agreement between the parties to be necessary. An oral agreement could suffice as long as this is valid under national law.

Content of the outsourcing agreement
According to the AG, the outsourcing agreement must provide for the possibility for the producer organisation to give the contractors binding instructions, at least as far as the essential activities of the producer organisation are concerned. The mere possibility of intervention after the fact does not suffice. Nor is it enough for a producer organisation and the third party it has contracted to have a simple practice by which decisions are only taken by consensus. The producer organisation must actually be capable of preventing wrongdoing by a third party.

It is also interesting that the AG does not see any reason why the producer organisation need necessarily concern itself with the specific details of the day-to-day commercial operations entrusted to contractors. Regulation 2200/96 does not require that producer organisations must be able to interfere on all aspects arising in the ordinary course of their contractors’ business, nor that these contractors cannot enjoy a (more or less) ample margin of discretion in fulfilling the tasks assigned to them (such as the determination of sales prices and the choice of buyers). It is also not stated that a producer organisation cannot designate a contractor as agent or that it cannot be bound by contracts concluded by the contractor on its behalf as principal.

The AG does not even believe that it is necessary for a producer organisation to utilise its possibilities of exercising control in order to satisfy the degree of control required under Regulation 2200/96. The simple fact that these possibilities exist is enough in that respect. It is crucial however that a producer organisation retain the possibility of intervening, where appropriate, to ensure the effective performance of the essential activities under Regulation 2200/96.

Minimum level
The AG points out that the degree of control required by Regulation 2200/96 represents the minimum threshold considered essential by the EU legislature in order to ensure compliance with the rules laid down in that Regulation with regard to the functioning of producer organisations. Member states may introduce further rules requiring a more stringent degree of control and lay down provisions of a procedural nature or concerning evidence.

Conclusion
In the light of Regulation 1234/2007, it is not remarkable that the AG believes that a producer organisation may outsource essential activities to third parties. The fact that the AG believes that a producer organisation must exercise a certain degree of control over the contracted third parties in order to insure the effective performance of those activities is also not surprising. What is striking, however, is that the AG believes that contractors can enjoy a (more or less) ample margin of discretion in fulfilling the tasks assigned to them, such as the determination of sales prices and the choice of buyers. The same applies for the view that it is not necessary for a producer organisation to utilise its possibilities of exercising control in order to satisfy the degree of control required.

The AG’s opinion is only a recommendation to the Court of Justice, albeit one that carries a great deal of weight. So we will have to wait and see whether the Court of Justice follows this opinion. But what if the opinion is indeed followed? Will the Product Board for Horticulture in that case have to adjust the current requirements for outsourcing because these will then be more stringent than required? That remains to be seen. After all, in the AG’s view, the Product Board for Horticulture is authorised to stipulate stringent requirements.

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