In a remarkable turn of events, the Australian Competition and Consumer Commission (ACCC) and Coles have reached an agreement to settle the two cases filed against the retailer this year for alleged unconscionable conduct in its dealings with suppliers. Coles has agreed to pay pecuniary penalties, totalling $10 million, and to establish a process to refund certain payments made by suppliers.

If approved by the Federal Court, it will be the largest penalty imposed to date under the Australian Consumer Law (ACL) and a landmark case for the ACCC in testing the boundaries of the unconscionable conduct provisions.

The facts

Both of the ACCC’s cases relate to conduct dating back to 2011. The first was filed in May 2014 and focused on rebates paid by suppliers for improvements Coles said it made to the supply chain in connection with its Active Retail Collaboration program. The ACCC alleged that Coles provided misleading information to its suppliers about the benefits of the supply chain improvements and used undue influence and unfair tactics in getting suppliers to agree to pay the rebates. The allegations related to Coles’ dealings with 200 of its small suppliers.

The second case was filed in October 2014 and related to Coles’ dealings with five suppliers. The ACCC alleged that Coles, without any contractual basis, requested the suppliers to pay for ‘gaps’ in its expected profits on the sale of certain goods; requested payment for goods that were ‘wasted’ or marked down in price after Coles had accepted the goods; and imposed monetary penalties on suppliers for incomplete or late deliveries.

Coles initially denied the allegations and vowed to vigorously defend the legal proceedings. Yet in a dramatic about-face, Coles has now agreed to settle the cases admitting to 15 instances of unconscionable conduct.

Under the proposed settlement, which was jointly submitted by the parties to the Federal Court for approval yesterday, Coles would pay penalties of $3.7 million in the first case and $6.7 million in the second. Coles has also agreed to provide the ACCC with a court-enforceable undertaking which provides for a process of independent review of refund claims by suppliers who consider that they did not receive benefits for the rebates paid under the ARC program. The process will be led by former Victorian Premier Jeff Kennett, who has recently taken on the role of Independent Arbiter under Coles’ new Supplier Charter.

The law

The ACL prohibits businesses from engaging in unconscionable conduct whether in dealings with consumers or other businesses. Although previously the unconscionable conduct provisions only applied to business to business dealings where the value was under $10 million, this monetary threshold was removed in late 2008.

The ACL does not define ‘unconscionable conduct’, but does include a series of criteria to which the courts may have regard in determining whether a business has breached the law. This includes, amongst other matters, the relative strengths of the bargaining positions of the parties, whether the weaker party was obliged to comply with conditions that were not legitimately necessary to protect the stronger party, and whether there was any undue influence, pressure or unfair tactics.

The case law that has developed over the years indicates that unconscionable conduct requires something more than unfairness and that there must be an element of moral wrongdoing that is contrary to contemporary standards of society.

Implications

The cases against Coles are the most high profile and ambitious cases that the ACCC has pursued for unconscionable conduct and signal a willingness to take a more aggressive stance to regulating commercial dealings. Until now, ACCC action in this space has focused on business / consumer or franchisor / franchisee relationships where there is evidence of a deliberate course of conduct usually involving deception and other breaches of the ACL.

A central feature of the ACCC’s cases was the fact that Coles is a very large participant in a highly-concentrated industry. The ACCC alleged that these market conditions put Coles in a vastly superior bargaining position which it took advantage of to the detriment of suppliers. This sends a strong message to large businesses that conduct which they may otherwise regard as ‘tough commercial practices’ can quickly cross the line into the realm of unconscionable conduct when dealing with small business players. The Federal Court’s judgment will be eagerly awaited to provide further guidance on where precisely this line falls for businesses in their everyday commercial dealings.