On 8 December 2016, the Federal Court found that Woolworths did not engage in “unconscionable conduct” in contravention of the Australian Consumer Law by implementing its “Mind the Gap” scheme (Scheme). Under the Scheme, Woolworths sought payments from certain suppliers based upon whether they had achieved certain performance parameters adopted by Woolworths.

The facts of the case

By late 2014, it had become apparent to Woolworths that their supermarket business was unlikely to meet its sales and profit targets for the half year ending in December 2014. In order to rectify this position, Woolworths’ trading departments were tasked with developing and implementing measures to “close the gap” between their targeted and expected sales and profit. Of the several initiatives that were undertaken to mitigate this risk, Woolworths sought to implement the Scheme to improve its 2014 profits by approximately $15 million, which was the “gap” between the anticipated profits and the actual sales profits.

The performance of Woolworths’ suppliers was analysed for the period from July to October 2014 against the corresponding period in 2013 using four metrics, described as “lenses”, which included whether:

  • Woolworths’ gross profit margin had declined from the previous year;
  • the supplier was behind on their Joint Business Plan targets;
  • the supplier’s co-op and promotional spend had declined from the previous year; and
  • Woolworths had achieved its targeted growth in gross profit margin on selling the supplier’s products.

Using these metrics, the Scheme was implemented in December 2014 with a view to asking for, negotiating and obtaining, financial support from those suppliers who had underperformed relative to the previous year. In doing so, Woolworths’ financial position benefited with the Scheme raising approximately $18 million by the end of 2014.

ACCC case

The ACCC alleged that the Scheme as a whole was unconscionable and inconsistent with normal business practice of the industry. The ACCC claimed that:

  • Woolworths had no legitimate basis for seeking payments from their suppliers;
  • Woolworths took advantage of a stronger bargaining position to put undue pressure on its suppliers;
  • the Scheme was a “grab for cash”, rather than “business as usual”, and not agreed to by the suppliers as part of their commercial relationship or pursuant to any contract;
  • the profit gap was not the fault of the suppliers and the quantum of the asks were arbitrary; and
  • the asks, due to their commercial nature and threats of escalation, were demands in reality.

Why was Woolworths’ conduct lawful?

No different to prior conduct by Woolworths

The ACCC’s case was largely based on the written trading terms agreement between Woolworths and supplier but failed to take into account the dynamic day to day side-deals and agreements struck between Woolworths and supplier on many aspects of the trading relationship (i.e. promotions). Pursuant to these deals and agreements, Woolworths often asked for supplier support for promotions or other trading issues which was seen as normal business behaviour and was consistent with the conduct under the “Mind the Gap” scheme.

In addition, prior to the “Mind the Gap” scheme, Woolworths engaged in almost the same conduct with suppliers which was considered normal business practice and was not challenged by the ACCC as “unconscionable”.

Evidentiary problems

The ACCC did not call any supplier to provide oral evidence about the circumstances and effects of Woolworths’s conduct (that is, the ACCC ran a purely documentary case). This meant the court had difficulty in assessing whether the relevant conduct was unconscionable “in all the circumstances”.

Further, there was no evidence about the consequences for suppliers if they refused to pay the amounts requested by Woolworths. Rather, the ACCC relied upon the implicit assumption that if suppliers did not pay, there would be some form of retaliation.

Different to the Coles case

While it is important to note that Coles admitted to have engaged in unconscionable conduct by demanding payments from suppliers as part of a settlement with the ACCC, there were some significant difference between the two cases which explain why Woolworths’ conduct was lawful:

  • in Coles, the ACCC relied upon evidence against actual suppliers, rather than seeking to impugn the conduct at a general level (as in Woolworths);
  • Coles deducted monies owed to the supplier for products already supplied and admitted to using threats to obtain payments (unlike in Woolworths); and
  • Coles misled suppliers as to basis of the payments requested – this was not a feature of the Woolworths case.

What is unconscionable conduct?

Unconscionable conduct is not conduct that is simply unfair or unjust – it is conduct characterised by a high level of unethical behaviour by reference to the norms of society relevant to the relationship between the parties in question (not by reference to what any individual judge may think). Therefore, determining whether conduct amounts to unconscionable requires an evaluation of the relevant and accepted norms upon which commercial relationships operate.

What amounts to unconscionable will ultimately depend on all the facts and evidence available. Conduct is not to be characterised as unconscionable based simply on idiosyncratic notions of commercial morality. Rather, it is to be ascertained through an analysis of commercial behaviours, values and principles.