In December 2014, Coles settled two separate proceedings commenced by the ACCC by admitting that it had engaged in “unconscionable conduct” in dealing with small food and grocery suppliers in contravention of the Competition and Consumer Act 2010 (CCA). Coles settled the cases for $10 million.
Although the settlement meant that the law on unconscionable conduct was not tested by contested hearing, the proceedings are significant because they:
- reinforce that unconscionable conduct applies in a “business to business” context - not simply for the protection of consumers;
- highlight that unconscionable conduct is no longer a traditional “defence” but can be used as a sword for “unfair business conduct”;
- demonstrate the ACCC’s willingness to allege unconscionable conduct against companies with substantial market share instead of a misuse of market power (which has traditionally been difficult to prove); and
- show that where a party engages in other unfair tactics or conduct such as conveying misleading impressions, engaging in undue pressure or making unreasonable commercial threats, the conduct in question may be more likely to constitute unconscionable conduct in contravention of the CCA.
More recently in the grocery sector, the ACCC has commenced an investigation into whether Woolworths has engaged in unconscionable conduct in its dealings with suppliers. In addition, two private suppliers have commenced legal proceedings against Metcash alleging unconscionable conduct. If decided, these cases may provide some further guidance on the law of unconscionable conduct.
What were the allegations against Coles?
The first proceeding – Coles seeks financial contribution from suppliers for changes to Coles’ supply chain
The ACCC alleged that Coles took advantage of its superior bargaining position in negotiating with 200 small suppliers by adopting undue pressure and unfair tactics and providing misleading information to those suppliers.
In particular, the ACCC claimed that:
- Coles as a customer was a significant part of each supplier’s business.
- Coles wanted to make changes to its supply chain to reduce costs. To fund the changes Coles charged suppliers a small percentage of the total amount it paid suppliers for their groceries.
- Coles’ justification for the payment was that suppliers would benefit from the new system and it represented that the payment to be made by suppliers reflected the value of the benefits they would receive from the changes.
- Coles had never in fact calculated those benefits for any supplier but led suppliers to believe that it had made such calculations. It never discussed the value of benefits with suppliers – it just unilaterally determined them.
- When seeking agreement from suppliers, Coles did not negotiate the payment but applied unfair tactics including:
- requiring suppliers to sign on short notice; and
- making threats such as that if a supplier did not sign, Coles would not acquire the supplier’s groceries, would prevent access to systems, would not promote the supplier’s products and/or would not allow participation in category reviews.
The second proceeding – seeking additional payments from suppliers
The ACCC claimed that Coles undertook the following course of action outside of its agreed trading terms with five particular suppliers:
- pursued agreements to make suppliers pay for the difference between the profit Coles actually made and what it wanted to make on selling a supplier’s products, known as “profit gaps”;
- pursued agreements with suppliers for amounts Coles claimed as “waste” on a supplier’s products and price “markdowns” used by Coles to clear goods; and
- imposed large fines or penalties on suppliers for short or late deliveries.
The ACCC alleged that Coles took advantage of its superior commercial bargaining power by:
- extracting additional payments for which Coles knew or ought to have known it had no legitimate basis;
- imposing fines / penalties for factors outside the control of suppliers and which were far greater than the value of the goods or the loss that Coles had suffered;
- failing to provide adequate information to suppliers; and
- applying undue pressure such as threatening suppliers with dropping products or applying extra charges in the future.
What did the judge say?
In approving the settlement, Justice Gordon said:
“Coles’ conduct was of a kind which merits severe penalty. But for Coles making the admissions it has now made and acknowledging the gravity of its contravening conduct, the conduct and circumstances in which it was committed would have warranted imposing penalties at or close to the maximum the law permits”.
What is “unconscionable conduct” under the CCA?
The CCA prohibits companies engaging in conduct in supplying or acquiring goods or services that is, in all of the circumstances, unconscionable. The term “unconscionable” is not defined under the CCA but the court may have regard to a number of matters in determining whether a corporation has engaged in unconscionable conduct including:
- the relative strengths of the bargaining positions of the parties;
- whether the complainant was required to comply with conditions that were reasonably necessary for the protection of the supplier’s/acquirer’s interests;
- whether the complainant was able to understand any relevant documents;
- whether any undue influence or pressure was exerted or any unfair tactics were used;
- the requirements of any applicable industry code;
- whether there has been an unreasonable failure to disclose any intended conduct of the supplier/acquirer; and
- the extent to which the supplier and acquirer acted in good faith.
A public company cannot be the victim of unconscionable conduct, the rationale being that the law seeks to protect consumers and small businesses from businesses with market power.
It has been generally understood that unconscionable conduct must be contrary to good conscience or involve some moral tainting and that something more than unfairness or unreasonableness is required. That is, unconscionable conduct is considered to be something more than simply unfair or hard bargaining.
The recent case of ACCC v Lux Distributors Pty Ltd  clarifies this approach. In that case, the Full Court of the Federal Court held that conduct will be “unconscionable” if it is “against conscience” by reference to the norms and standards of society rather than moral judgment. Although questions of morality could still be relevant in some instances, the court held that a high degree of moral fault or culpability is not required.
The decision in Lux appeared to increase the scope of unconscionable conduct provisions and their application to business to business dealings where questions of morality may be difficult to apply. By considering social norms and applying an objective “unfairness” test, companies would need to provide reasonable justifications for their conduct and demonstrate that their dealings with suppliers were reasonable and fair. Indeed, prior to settling the case, Coles had initially stated that its conduct was “part of ongoing commercial negotiations” which were “normal topics for business discussions” and that such “commercial negotiations can be robust, regardless of the industry or sector”.
The settlement of the two Coles proceedings however has taken the opportunity away for the judiciary to provide further guidance on when hard bargaining may constitute unconscionable conduct.
Alleging unconscionable conduct rather than a misuse of market power
The ACCC’s cases against Coles demonstrate that the ACCC is willing to allege unconscionable conduct rather than a misuse of market power for conduct that could potentially be in contravention of both prohibitions.
A misuse of market power however has traditionally been difficult to prove. It requires the applicant to demonstrate that a company has a substantial degree of market power in a market and that it took advantage of that market power for the purpose of damaging/eliminating a rival or deterring/preventing competitive conduct.
Establishing the proscribed anti-competitive “purpose” can be a difficult evidentiary task particularly where the relevant party can point to cost savings or efficiencies arising from the conduct. This may change if the outcome of the current Root and Branch Review is to adopt an “effects” rather than “purpose” test when examining whether alleged conduct constitutes a misuse of market power.
Unconscionable conduct, on the other hand, is a very broad concept that has no defined meaning and allows the court to look at “all the circumstances” before making a decision.
Bringing a claim for unconscionable conduct rather than misuse of market power has other procedural advantages. For instance, while expert economists are often retained by parties in misuse of market power proceedings to debate market definition, market power and even “purpose”, unconscionable conduct proceedings are unlikely to require substantial or any input from such experts. For this reason and others, unconscionable conduct proceedings are also likely to be heard faster than misuse of market power proceedings given the inherently less complex issues at hand.
Although the penalties for breach of unconscionable conduct provisions (maximum fine of $1.1 million for companies and $220,000 for individuals) are much smaller than the penalties for a misuse of market power (the greater of $10 million, three times the illegal gain or 10% group annual turnover for companies and $500,000 for individuals), multiple contraventions of unconscionable conduct provisions may add up to a sizeable figure.
What you need to know
If you have market power and the other party does not, you should:
- be careful when engaging in conduct with smaller businesses or consumers that may result in serious unfairness to those parties where such conduct is not reasonably necessary to protect your legitimate business interests.
- not apply any undue pressure/influence or employ any unfair tactics such as placing unwarranted time pressure to sign a contract or threatening commercial consequences.
- give the other party ample time to seek independent advice.
- provide complete and accurate information that is not misleading in any way.
- ensure your contracts do not include harsh, unfair or oppressive terms.
If you are a smaller business to your counter-party and believe that the other party is using their strong bargaining power in a manifestly unfair manner, you should create and maintain an evidentiary trail to ensure that you have sufficient proof of the conduct of the other party to the extent that you are considering legal recourse.