Australia: Food and Grocery Code of Conduct - a win for suppliers?

Focus Paper
Last Updated: 22 November 2013
Article by Laura Hartley and Sarah Best

The Australian Food and Grocery Council (AFGC) and Australia's two largest supermarket retailers have announced that they have finally reached agreement on the terms of the voluntary Food and Grocery Code of Conduct (Code) which will govern supply chain relationships. Agreement was reached at the inaugural meeting of the Retailer and Supplier Roundtable, a food and grocery industry initiative designed to facilitate collaborative approaches on relevant issues. This comes following discussions by the parties over the last 14 months, which at times looked close to collapse.

The AFGC has called this an "historic agreement" and is satisfied that the Code is meaningful, enforceable and tough enough to deliver more contractual certainty to suppliers, encourage a better sharing of risk and reduce inappropriate use of market power by retailers.

Suppliers appear to be welcoming the Code. The Code appears to cover most elements of the equivalent UK Groceries Supply Code of Practice (GSCOP) and whilst there is no requirement for an independent adjudicator as in the UK, the Australian Code goes further in part by covering retailer's private label products or own brands.

So whilst a step forward for suppliers, is the Code in its current form adequate and does it deliver a real win for suppliers?

What does the Code seek to accomplish?

The Code aims to establish a clear set of principles relating to key aspects of trading relationships between retailers and suppliers and to provide greater certainty and clarity about dealings in the industry without adding complexity or cost in the sector.

Key aspects of the Code include:

  • restrictions on retrospective and unilateral variations to "Grocery Supply Agreements";
  • greater transparency on the basis of shelf allocation for branded and private label products;
  • no obligation on suppliers to make payments to retailers to compensate for "shrinkage";
  • recognition of the importance of intellectual property (IP) rights and confidentiality in driving innovation and investment in new products;
  • a low cost and fast track dispute resolution mechanism, with a number of options available to suppliers (retailer's complaints process (published), mediation/arbitration, legal avenues or the Australian Competition and Consumer Commission (ACCC)).

The vast majority of provisions in the Code impose obligations on retailers, with only three provisions applying to suppliers. These are the obligations on suppliers not to make vexatious complaints against retailers, to agree to the mutual respect of IP rights and the general obligation of fair dealing. Suppliers are not obliged to sign up to the Code on an individual basis.

The Code will commence when it is prescribed as a voluntary industry code by regulation made under the Competition and Consumer Act 2010 (Cth) (CCA). It will apply to all new "Grocery Supply Agreements" and to all existing agreements once the Code is in place and following a 12 month transition period. This means that suppliers should not have to re-negotiate existing contracts and therefore risk contracts being changed in an adverse way.

What the Code doesn't accomplish

Whilst the Code requires the terms of a "Grocery Supply Agreement" between a retailer and supplier to be documented in writing and agreed to up-front, this does not preclude these contracts from being very much one-sided in favour of the retailer. The idea behind the Code is to improve transparency in contractual terms so that suppliers are protected from unilateral or retrospective variations to contract if this isn't provided for in the Grocery Supply Agreement. It does not seek to impose overly restricted rules on commercial negotiations and does not set rules for every possible circumstance within a supply relationship. The Code envisages that the particular terms and conditions of each Grocery Supply Agreement will be determined by negotiation between the parties and may differ from case to case. At the heart of the Code is transparency, certainty and adherence to written agreements rather than mandating minimum requirements as to fairness. This means that if a supplier negotiates a "bad" deal, the Code will not provide a remedy so it is the responsibility of suppliers to ensure they negotiate the most appropriate supply terms.

Furthermore, whilst there is an over-arching obligation on retailers and suppliers to deal with each other lawfully and in "good faith", the legal effect of this general obligation is uncertain and grey at best. To date, courts have been reluctant to enforce a simple agreement to act in good faith unless there is some sufficient process upon which obligations can fasten or some form of readily ascertainable standard against which the obligations can be assessed. Time will tell what the practical effect is of this good faith obligation.

Suppliers have long been angered by the massive growth in private label or own brands groceries in supermarkets. However, the retailers have successfully pushed against being required to separate their branded buying operations from their private label buying so suppliers have not had a win on that count. Retailers argued that any such split was unworkable, as category buyers have to take a holistic approach to categories. Various protections have however been put in place for private label products with obligations encompassing "respect" of IP rights, confidentiality, exclusivity and transparency on range and shelf allocation rules. Retailers are required to respect the IP rights of suppliers and not infringe these rights when developing their own private label brands and products. Retailers are also obliged to only use confidential information supplied by a supplier for the purposes for which the information was provided and not to develop their own private label products or for their own marketing campaigns. Just how readily these protections in the Code can be policed and enforced remains to be seen, particularly in relation to the all-important and critical IP rights of suppliers.

Will the Code have "teeth"?

It is proposed that the Code will have legal force by being prescribed by the Federal Government under the CCA by way of regulation. Once prescribed, the ACCC is provided with an audit, compliance and enforcement role to oversee the operation of and compliance with the Code. A breach of the Code will amount to a breach of the CCA which may lead to remedial orders being made under section 87, injunctions being awarded under section 80. Any person who has suffered loss or damage as a consequence of a contravention of the Code may also recover damages under section 82. There are no pecuniary penalties or criminal sanctions for a breach of the Code under the CCA.

Each retailer must appoint an internal Code Compliance Manager (separate to buying teams) who is required to:

  • provide the ACCC or allow the ACCC to inspect manuals, records and reports required to be kept by the Code; and
  • report six monthly to the Code Committee of the Retailer and Supplier Roundtable on compliance practice. The Code Committee is then required to report to the ACCC by 31 March of each year setting out details of the number of complaints received for investigation, the nature of complaints received and so forth.

A significant benefit of the Code having the force of law will be that the ACCC can investigate supplier complaints about Code contraventions such as IP infringement. This is a major breakthrough for suppliers who have been reluctant to date to take legal action against major customers.

It is also hoped that other retailers and industry groups agree to be bound by the Code. Once a retailer decides to "opt-in", the Code automatically applies to all of the retailer's suppliers and supply agreements.

Watch this space!

Before the Code has the force of law, the Government and the ACCC will analyse the draft to ensure there are no unintended consequences. It then needs to go through a formal government approval process involving ministerial sign-off and broader consultation by way of a Regulatory Impact Statement allowing other retailers and suppliers not involved in the drafting process to provide their input.

Against the backdrop of the Code negotiations, the ACCC has been investigating complaints of misuse of market power and unconscionable conduct by the retailers and recently announced that it will make a final decision as to whether it will take legal action against any of the retailers by March 2014. Interestingly, whilst welcoming the agreement on the Code, ACCC Chairman Rod Sims has vowed to push ahead with the ACCC's investigation into the power of the retailers. We await the decision of the ACCC in six months' time.

Time will tell if the Code will deliver an effective win to food and grocery suppliers.

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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Laura Hartley
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