The Australian Food and Grocery Council, the principal peak body representing Australia’s packaged food, drink and grocery product manufacturers, and major supermarkets Coles and Woolworths have agreed a new voluntary Code of Conduct to apply in relation to the supply of groceries (Code). The Code will only come into effect when regulations have been made under the Competition and Consumer Act 2010 (CCA) to declare the Code as a voluntary industry code under the CCA.
The Code seeks to regulate supply terms and practices between major retailers and grocery suppliers. The Code is intended to lead to greater transparency and certainty for grocery suppliers in relation to supply terms and to provide an improved dispute resolution process to resolve disputes.
The Code has been negotiated in the context of an ongoing investigation by the Australian Competition and Consumer Commission (ACCC) into the practices of the major supermarket chains. The ACCC has stated publicly that it is investigating:
- whether the major supermarket chains have engaged in unconscionable conduct in dealing with their suppliers, and
- whether the major supermarket chains misused their market power by discriminating in favour or their own house brand products.
The ACCC has said that it expects to form a view, one way or the other, on any action it will take following its investigation around the end of the first quarter of 2014. ACCC Chairman Rod Sims has been reported as saying that the ACCC welcomed the development of the Code but is continuing its investigations.
It is worth noting that the development of a code governing the relationship between grocery retailers and suppliers is not unique to Australia. In the UK major retailers are subject to the Grocery Supply Code of Practice. Earlier this year UK legislation came into force establishing the office of the Grocery Code Adjudicator whose role is to oversee the implementation and enforcement of the Grocery Supply Code of Practice. Unlike the situation in Australia , the application of the Grocery Supply Code of Practice is not voluntary.
The CCA allows for regulations to be made prescribing an industry code either as a mandatory or voluntary industry code (section 51AE). The Code is expressed to commence from when any such regulations have been made to declare the Code as a voluntary industry code. This has not yet occurred and there is no indication when this might happen. The ACCC and the Government are considering the Code. It is possible that they will recommend that changes are made prior to making any regulation.
Assuming a regulation is made, the Code will become law and enforceable by the ACCC and may be taken into account in assessing claims of unconscionable conduct under the Australian Consumer Law.
Application of Code
The Code will apply to retailers who agree to become bound by it. At present, the only retailers who are expected to agree to be bound are Coles and Woolworths. A retailer can withdraw from the Code at any time by giving notice to the ACCC. However, a retailer withdrawing from the Code will not affect any dispute arising in relation to a period where a retailer was bound by the Code. On becoming bound by the Code, the retailer is required to deal with all suppliers in accordance with the Code and any new supply agreements will need to comply with the Code (see below). A transitional period will apply (of up to 12 months from the commencement date of the Code) for retailers and suppliers to update existing grocery supply agreements to meet the Code requirements.
Impact on supply terms
The primary objective of the Code is to improve supply practices for suppliers in their dealings with major supermarket retailers and to build trust. The Code seeks to address a number of issues which have been of concern to some suppliers. The extent to which the Code will be effective achieving this objective remains to be seen, as there remains scope for some practices to remain if they are addressed in relevant supply agreements. At a minimum, the Code should however improve transparency for suppliers and provide an industry baseline for determining acceptable practices. The prospect of ACCC intervention for breaches of the Code may also influence the way in which the industry addresses the issues in the Code.
The Code imposes the following key restrictions on grocery supply terms and practices:
- retailers cannot vary grocery supply agreements unilaterally or retrospectively (except where it has an express right to do so under the agreement),
retailers cannot ask suppliers to make payments:
- for ‘shrinkage’ (being loss of groceries in the retailers possession),
- for ‘wastage’ (being groceries unfit for sale), unless caused by the supplier’s negligence or default or as provided for in the agreement,
- to stock or list products (except for promotions or to stock new products),
- to secure additional or superior shelf space and positioning (except for promotions or in accordance with the supply agreement),
- retailers may only ‘delist’ products in accordance with the grocery supply agreement and for ‘genuine commercial reasons’,
- retailers cannot require suppliers predominantly to fund the retailer’s costs of a promotion, and the retailer must give reasonable notice of promotions which the supplier has agreed to fund and must not “over order” products at the promotional price (for later sale at the non-promotional price), and
- any labelling, packaging and preparation requirements and fresh products standards must be provided by a retailer in clear, unambiguous and concise written terms.
Private label products
The Code also includes recognition of some concerns raised by suppliers in relation to the use of supplier intellectual property rights in the development of the retailer’s own private label products. In particular:
- retailers and suppliers must ‘respect’ each other’s intellectual property rights in relation to their grocery products, including intellectual property rights in branding, packaging and advertising. The legal significance of this is questionable (as the law already requires intellectual property rights to be recognised), but recording this fact in the Code may allow the ACCC to intervene if there is an alleged breach of these intellectual property rights,
- the retailer must only use confidential information provided by a supplier relating to product development, promotions and pricing for the purpose for which it was disclosed, and the retailers must have appropriate systems in place to ensure compliance with this obligation,
- retailers must publish or provide to suppliers the principles they apply for the ranging of private label products and allocation of shelf space, and affected suppliers must be given a reasonable notice of any range review and the key criteria governing ranging decisions.
The Code includes mediation and arbitration dispute resolution mechanisms to resolve disputes. These do not preclude a supplier from bringing other claims that it might have, such as lodging a complaint with the ACCC or commencing court proceedings for breach of contract.
Once an industry code is prescribed under the CCA, it has the force of law. Relevantly the CCA:
- prohibits contraventions by corporations of a prescribed industry code, and
- allows the courts, when determining whether conduct is unconscionable, to consider the requirements of any prescribed industry code.
As well as the role outlined in the draft Code with respect to monitoring compliance, the making of a regulation prescribing the Code would empower the ACCC to investigate and prosecute contraventions of the Code.
The Minister for Small Business Mr Bruce Billson, whose portfolio includes competition issues, has referred to the Code as a ‘very significant and substantial step forward in an area of market concern’. However, the Government has not committed to any timetable for making the required regulation to give effect to the Code. The Government and the ACCC are currently considering the Code. Notwithstanding Mr Billson’s initial comments, the review is expected to include a detailed assessment of the benefits of Code which may result in some suggested changes.