The Code has the potential to change the dynamics of negotiations between suppliers and grocery retailers. It:

  • will assist in ensuring greater transparency in that rights to vary agreements will need to be incorporated (up-front) into agreements and reasonable notice will be required about the exercise of any such rights;
  • takes account of the issues that have led to disputes between suppliers and grocery retailers such as shelf position and delisting of products, shrinkage and wastage, in-store support, supply chain management and branded versus private label products and seeks to ensure that all such issues are provided for in Grocery Supply Agreements and that parties engage in good faith about such issues; and
  • seeks to put in place a streamlined dispute resolution process.

In doing so it seeks to take account both of the concerns raised by suppliers, while at the same time recognising the legitimate commercial interest of grocery retailers in seeking to reduce inefficiencies and input costs. Time will tell whether the transaction costs created by the Code will ultimately benefit industry participants and consumers (if and when the Code is approved by Government (and the ACCC)).

INTRODUCTION

On 18 November 2013, after more than 18 months of negotiation, the Australian Food and Grocery Council (AFGC) reached agreement with Coles and Woolworths on the terms of a proposed food and grocery code of conduct (Code).

The Code is aimed at regulating commercial transactions between suppliers and grocery retailers, building and sustaining trust throughout the food and grocery supply chain, ensuring transparency and certainty, and providing a streamlined process for complaints and dispute resolution.

It is proposed that the Code will be declared by the Minister for Small Business as a voluntary code under the Competition and Consumer Act 2010 (Cth) (CCA) – the first voluntary conduct under the CCA. Accordingly, industry participants will not be required to comply with the Code. However, once a participant (retailer) becomes a signatory to the Code, compliance is mandatory.

A breach of the Code will amount to a breach of the CCA. The ACCC can investigate alleged breaches of the Code and take enforcement action. The ACCC may seek orders from the court to redress loss or damage, which may include orders refunding money, varying an agreement and/or declarations that an arrangement void.

The Code is similar to the mandatory Groceries Supply Code of Practice (UK) (UK Code), enacted pursuant to the Groceries (Supply Chain Practices) Market Investigation Order 2009 (UK Order). The UK Code imposes legally binding obligations on grocery retailers with an annual turnover of more £1 billion. There are, however, some important differences between the Code and the UK Code, as referred to below. These differences are likely to be attributable to the fact the UK Code is a mandatory code, and was drafted by the UK Government following failed stakeholder negotiations.

TO WHO WILL THE CODE APPLY?

The Code applies to any signatories that are Retailers, meaning that they are:

  • Supermarket Businesses: persons carrying on the businesses of selling all or most of the following types of groceries: bread, breakfast cereals, butter, eggs, flour, fresh fruit and vegetables, fresh milk, meat, rice, sugar and other packaged food1; or
  • persons that purchase groceries from a supplier for the purpose of resale to a supermarket.

Once a Retailer has agreed to be bound by the Code, the Code will apply to its direct or indirect commercial dealings with Suppliers (defined as directly or indirectly supplying, or seeking to supply, groceries to any Retailer).

GROCERY SUPPLY AGREEMENTS

The Code requires that Retailers (that are signatories) may only trade in groceries with a Supplier where they have entered into a Code compliant Grocery Supply Agreement – which is any written agreement between a Supplier and Retailer for the supply of groceries.

The Code will not apply to Grocery Supply Agreements in existence prior to a Retailer becoming a signatory to the Code, other than the dispute resolution provisions (see comments below).

However, Retailers must negotiate with Suppliers to vary existing agreements so as to be compliant with the Code by the later of 12 months from the commencement of the Code or six months after the Retailer becoming a signatory to the Code.

For a Grocery Supply Agreement to be Code compliant, it must:

  1. be in writing; and
  2. specify:
    1. any delivery requirements;
    2. circumstances where the Retailer may reject delivered groceries;
    3. payment terms;
    4. the term, if it is limited;
    5. any quantity and quality requirements;
    6. termination rights; and
    7. that the "Retailer and Supplier must at all times deal with each other lawfully and in good faith" (which is also a requirement under the Code).

In addition, Grocery Supply Agreements must not Require a Supplier to take certain actions (see below). Under the Code, a Retailer will be considered to have Required a Supplier to take a particular action if the Supplier does not agree to undertake a particular action in response to ordinary commercial pressures (essentially attributable to the Retailer). Ordinary commercial pressures exist where they do not constitute or involve duress (including economic duress), and are objectively justifiable and transparent. The Retailer is responsible for proving that an action was not Required by them.

The Code imposes restrictions on the terms that can be included in a Grocery Supply Agreement. A Retailer is prohibited from:

  1. de-listing a Supplier's products, except in accordance with terms agreed in the Grocery Supply Agreement and for "genuine commercial reasons" once reasonable notice is given;
  2. Requiring a Supplier to predominantly fund the Retailer's costs of a Promotion (offer for sale at an introductory or reduce price, or involving non standard sales activities). However, a Supplier may agree to make a payment in support of a Promotion;
  3. Requiring a Supplier to materially change its supply chain procedures during the period of a Grocery Supply Agreement. However, the Retailer may do so following the giving of reasonable notice to the Supplier in writing (or compensating the Supplier for failing to give reasonable notice);
  4. threatening business disruption or termination of a Grocery Supply Agreement without reasonable grounds;
  5. compelling a Supplier to make payments for Shrinkage (losses that occur after the Retailer has taken possession of the Supplier's groceries). However, the Retailer may discuss or agree with a Supplier proposals and procedures to mitigate the risk and occurrence of Shrinkage;
  6. Requiring a Supplier to pay to cover WASTAGE (groceries that are unfit for sale) incurred at the Retailer's premises, unless the basis of such payment is set out in the Grocery Supply Agreement;
  7. Requiring a Supplier to pay in order to secure better positioning or an increase in the allocation of shelf space. This prohibition does not apply to payments made in relation to a Promotion or that are required in accordance with the provisions of a Grocery Supply Agreement, where the payment required is reasonable having regard to the additional benefit to the Supplier and/or the costs and risks of the Retailer in allocating additional or different shelf space;
  8. Requiring Suppliers to consent to variations, or allow retrospective variations except where the variations are in accordance with the provisions of a Grocery Supply Agreement.

Finally, the Code provides guidance where a Supplier provides fresh produce to a Retailer, including guidelines for fresh produce standards and/or quality specifications, and the processes for accepting or rejecting fresh produce.

RETAILER OWN BRAND PRODUCTS

Notable inclusions in the Code are provisions protecting Suppliers' intellectual property rights in branding, packaging and advertising. Similar provisions are not included in the UK Code.

Under the Code, a Retailer must not infringe any intellectual property rights held by a Supplier when developing Retailer Own Brand Products, and the brand names, packaging designs and advertising in relation to such products. Retailer Own Brand Products are defined to include all grocery products which carry Retailer owned, or licensed names or trademarks, or products which it produces, processes or manufactures (on its own or on its behalf).

Importantly, confidential information disclosed to a Retailer in connection with the supply of grocery products must only be:

  • used for the purpose for which it is disclosed; and
  • disclosed or made available to people within the Retailer who need to have that information.

This is to protect Supplier confidential information being used by a Retailer in the development of Retailer Own Brand Products.

Ranging and allocation of Retailers Own Brand Products must be principled and transparent. Retailers must provide Suppliers with product ranging and shelf allocation principles, and act in accordance with those principles. These principles must be applied "without discrimination in favour of Retailer Own Brand Products".

Where Retailers conduct a range review, they must provide affected Suppliers with notice of the purpose of the range review and criteria governing ranging decisions. On conclusion of the review, Retailers must engage with Suppliers to allow them to discuss the outcome of the range review.

DISPUTE RESOLUTION

The Code is intended to provide an effective, fair and equitable process for addressing complaints and disputes arising between Suppliers and Retailers.

Retailers are required to appoint a Code Compliance Manager to whom Suppliers may refer complaints and prepare reports.

Suppliers may refer a complaint to the relevant Retailer's Code Compliance Manager, senior buyer or complaints manager. The recipient of the complaint must take reasonable steps to investigate the complaint and identify the action required to resolve the complaint.

A Supplier may also notify a Retailer in writing of a dispute relating to dealings in connection with a matter covered by the Code, and the parties must then seek to resolve the dispute.

If a complaint or dispute cannot be resolved internally, a matter can be referred to either mediation or arbitration.

The Code makes it clear that these dispute resolution procedures operate concurrently with the power of the ACCC to conduct investigations into alleged breaches of the Code.

This procedure largely replicates the processes provided for in the UK Order. However, on 25 June 2013, the UK Groceries Code Adjudicator Act 2013 established the Groceries Code Adjudicator. This resulted in a significant expansion of the scope of sanctions that can be imposed on retailers. The Adjudicator has no powers over price setting, but can intervene in direct dealings between retailers and suppliers, and investigate confidential complaints from suppliers and third parties. The power of the Adjudicator to impose financial penalties on retailers who are found to have acted in breach of the code is viewed as a more effective deterrent than negative publicity arising from investigations and recommendations.

CODE COMMITTEE

The Code calls for a Code Committee to be established by Retailers and Suppliers. The Code Committee is to:

  • publicise and promote the Code;
  • monitor the Code's operation;
  • consult with industry participants on the operation and effectiveness of the Code, and any proposed amendments;
  • produce an annual report on the Code and its administration;
  • report to the industry on the operation and effectiveness of the Code; and
  • report to the ACCC on any matters in connection with the Code.

WHAT IS THE PROCESS FROM HERE?

The following process must now be followed before the Code comes into effect as a prescribed industry code under the Competition and Consumer Act 2010 (Act):

  1. Notification of industry participants and the Australian Competition and Consumer Commission (ACCC)
    The Minister and the ACCC will consider the scope and the likely effect of the Code. Key stakeholders, including retailers, suppliers, consumers and relevant industry association will be notified that the Minister for Small Business is considering prescribing an industry code.
  2. Development of a draft Regulation Impact Statement
    The Department of Small Business will prepare a draft Regulation Impact Statement that will outline an analysis of the relevant issues and objectives, which will be released for public comment.
  3. Final Regulation Impact Statement
    Following consultation with stakeholders and relevant government agencies the draft Regulation Impact Statement will be finalised and forwarded to the Office of Best Practice Regulation for review.
  4. Making Regulations
    Following approval by the Executive Council, the Governor-General will make regulations, which will be gazetted with the Code as a schedule to the regulations. The regulations will be tabled before Parliament and, if approved, they will come into effect.

Once in effect, the Code will be reviewed at least every five years in consultation with the industry, consumers and businesses.

CONCLUSION

The AFGC is hailing the Code as:

  • including "tough restrictions";
  • leading to "greater transparency";
  • recognising "the importance of intellectual property rights and confidentiality in driving innovation and investment in new products"; and
  • including "a low cost and fast track dispute resolution mechanism."2

These potential benefits will only be known with the passing of time – it is at least six months before the Code is likely to come into effect and, given the transitional provisions in the Code for existing Grocery Supply Agreements, it is likely to be much longer before the Code has broad application across the industry.

In addition, the terms and conditions of Grocery Supply Agreements will likely require material changes to become Code compliant. Time will tell whether these additional transaction costs will ultimately benefit industry participants and consumers (if and when the Code is approved by Government (and the ACCC)).

Of more immediate interest, perhaps, is whether the Code will assist to alleviate any of the ACCC's expressed concerns in recent times about the conduct of major supermarket chains. Rod Sims, the ACCC chairman, has expressed the ACCC's support for the release of the Code, but has indicated that the ACCC intends to proceed with its current investigations into alleged unconscionable conduct and misuse of market power by Coles and Woolworths.3

Footnotes

1Importantly, the Code does not apply to alcohol

2Click here for AFGC media release: Food and Grocery Code agreed by supermarkets and food industry

3Click here for Sydney Morning Herald article: Coles, Woolworths still in sights of ACCC despite new code of conduct

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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