On 4 February 2010 the Groceries (Supply Chain Practices Market Investigation) Order 2009 (the Order) comes into effect.

Major supermarkets, and possibly other retailers, will be obliged to have in place written terms with the majority of their suppliers of goods for resale, many of which terms are now prescribed by legislation.

Suppliers should urgently review their contractual strategy with retailers and be aware of the new rights and the new levers that they have been given for negotiations. While retailers need to urgently review their contractual strategy with grocery suppliers and consider what changes they should be making.

The normal routes for enforcement through the Enterprise Act and Office of Fair Trading (OFT) are available in relation to the Order. Specific penalties for non-compliance are not specified by the Order. The recent announcement that a Grocery Supply Code of Practice Ombudsman (Ombudsman) is to be established suggests that fines for retailers acting in breach of the Order may be implemented soon.

1. Who is affected?

Any supplier (anywhere in the world) of "Groceries" for resale in the United Kingdom to any retailer.

"Groceries" is defined as food and drink (other than that sold for consumption in the store), pet food, cleaning products, toiletries, and household goods. Items such as clothing, pharmaceuticals, DIY products, electrical appliances and certain other products listed in the order are not included.

Designated retailers are subject to the stringent rules contained in the Order. These are retailers with a turnover of more than £1 billion per annum in respect of the supply of Groceries in the UK, and includes a named list of suppliers including Asda, Co-op, M&S, Morrisons, Sainsbury, Tesco, Waitrose, Aldi, Iceland and Lidl (and their subsidiaries). As the definition of Groceries is so wide, companies such as large take-away chains or sellers of toiletries could be designated in the future by the OFT.

Retailers which are not Designated Retailers will not be affected by this Order (although they will need to comply with the historic Supermarket Code of Practice). However, they can of course volunteer to comply with the new Code if they wish.

2. Summary

The Order details the obligations which will be placed on Designated Retailers.

In summary:

  1. All Designated Retailers have to comply with the Order and Code. These are more stringent and intrusive obligations, which will significantly impact their relationship with all suppliers of Groceries. The legislation is clearly designed to redress the balance of power between Designated Retailers and such suppliers - see point 3 below.
  2. The Order creates the post of Ombudsman (whose role and powers have yet to be fully established).

3. New Obligations on Designated Retailers

The Order sets out a code of practice to be followed by Designated Retailers in their dealings with suppliers. The Code recognises that there is an imbalance in bargaining power between large supermarket chains and their suppliers, as highlighted in the Competition Commission's investigation into this market.

The Code has five main sections to redress the imbalanced retailer-supplier relationship: principle of fair dealing, variation, prices and payments, promotions and other duties.

The following are the main obligations contained in the Order:

a.Obligation to have a written supply agreement in compliance with the Code

  • The Designated Retailer is under a duty to incorporate the Code into its supply agreement. It is prohibited from entering into or performing any supply agreement which is inconsistent with the Code, or which contains any provisions which are inconsistent with the Code.
  • Designated Retailers are required to ensure that the terms of any Agreement entered into with a supplier for the supply of groceries must be recorded in writing. Any subsequent agreements or arrangements agreed to orally between the Designated Retailer and supplier must be confirmed in writing by the Designated Retailer within three working days of the agreement.

b. Obligations to be contained/prohibited in the written supply agreement,such as:

  • a prohibition on retrospective variations without the provision of reasonable notice or without clear rules;
  • an obligation to deal fairly and lawfully with suppliers;
  • a prohibition on delaying payments for products which meet the specification;
  • a prohibition of making suppliers pay for things such as retailer visits, artwork or packaging design, market research, shrinkage (losses arising in the product after delivery), wastage (where products become unfit for sale after delivery unless caused by the supplier's negligence or default), shelf placement charges (unless promotional);
  • compensation must be paid to suppliers due to forecasting errors by Designated Retailers in certain situations;
  • Designated Retailers may not require suppliers to predominantly fund promotions; and
  • in relation to customer complaints Designated Retailers can only reclaim money from suppliers if certain conditions are met, including that payment is reasonably related to the Designated Retailer's costs.

Please note that there is much more detail contained in the Code than is set out in the general list above and further obligations. There are also some exemptions and allowances given to soften the strict application of some of the obligations.

c.Notice obligations

In addition to the supply agreement itself, the Designated Retailer must also provide the supplier with a notice which sets out details of the Designated Retailer's compliance regime and certain prescribed information.For example, de-listing procedures and feedback mechanism for suppliers on retailer's compliance with code. This notice should be distinct from the supply agreement.

d.Obligation to train employees on the Code.

e.Obligation to have a Code compliance officer to monitor internal retailer compliance with the Code.

f.Obligation to submit annual compliance report to the OFT and make other information available to OFT.

4. Effect of non compliance

At the moment the possible consequences of non compliance are:

  • any person who suffers loss or damage due to a Designated Retailer failing to comply with the Order can take direct legal action under Section 167 of the Enterprise Act 2002 ; and/or
  • an enforcement by the OFT or Competition Commission (through Section 167 of the Enterprise Act 2002) by civil proceedings, injunction or other appropriate relief or remedy.

The Order currently provides for suppliers to raise disputes with Designated Retailers to resolve any breach of the Code. Where a resolution cannot be reached, arbitration is available and will be administered by the Ombudsman, but at the expense of the Designated Retailer.

The announcement by the Department of Business, Innovation and Skills in January 2010 that the Government has accepted the recommendation of the Competition Commission to establish an Ombudsman for this retail sector means that the range of penalties available for non-compliance may soon expand.

While the consultation to outline the powers of the Ombudsman will commence in February 2010, it is expected that the ability to impose fines on Designated Retailers for non-compliant behaviour will be introduced.

5. Practical Actions for Suppliers of Groceries

  • Check your own standard terms and conditions of sale - then make sure you take advantage of the Code.
  • Train sales teams in the new legislation so that they know your new rights.
  • Develop a strategy - your approach will depend on your company's individual circumstances and bargaining power.
  • Review contracts with retailers to identify any material non-conformities with the legislation with your in-house team/lawyers.
  • Consider asking Designated Retailers for compliant contracts or submit your own compliant contracts. Obviously, a step to be taken with care.
  • Consider whether opportunities may arise to sell parts of your business to retailers.

6. Practical Actions for All Retailers

  • Determine whether you are or could be a Designated Retailer.
  • Actively develop a strategy for responding to the Code.

And for Designated Retailers

  • Consider whether you will be ensuring that all Grocery suppliers have agreed contracts in place which contain all aspects of the supplier:retailer relationship and are fully compliant with the Code;
  • Consider whether a notice pursuant to the Code needs to be sent to all Grocery suppliers;
  • Comply with obligations around the compliance officer and submissions to the OFT;
  • Review standard purchase conditions to ensure compliance with the new Code,
  • Train purchasing teams so that they know any limitations; and
  • Consider alternative strategies - for example integration of the supply chain, in particular purchase of own label manufacturers.