Australia: Unconscionable conduct - A comparison of Coles and Woolworths decisions

IN BRIEF - FEDERAL COURT DECISIONS PROVIDE LESSONS FOR BUSINESSES

While the Federal Court cases of ACCC v Coles [2014] FCA 1405 and, more recently, ACCC v Woolworths [2016] FCA 1472 delivered different outcomes, they nevertheless provide important lessons for larger entities to be aware of what is considered normal business practice in their industries and to avoid requests of suppliers or distributers that could reasonably be perceived as threats.

UNCONSCIONABLE CONDUCT IS A BROAD AREA OF LAW AND COURTS MAY CONSIDER A RANGE OF FACTORS

These two cases concerned Australia's supermarket giants Coles and Woolworths seeking retrospective payments from suppliers, which the Australian Competition and Consumer Commission alleged amounted to unconscionable conduct under section 21(1) of the Australian Consumer Law (ACL).

Under the ACL, a party must not engage in conduct so harmful so as to be considered unconscionable.

The ACL does not define "unconscionable conduct" but does give a list of factors the courts may regard in determining whether conduct is unconscionable. This makes unconscionable conduct a broad area of law which is largely considered based on the circumstances on a case-by-case basis.

Despite the broad parallels between the two cases, they diverge significantly in fact and structure, and ultimately had very different outcomes, leaving potential uncertainty for businesses.

ACCC V COLES - SUPERMARKET FOUND TO HAVE ENGAGED IN UNCONSCIONABLE CONDUCT UNDER THE AUSTRALIAN CONSUMER LAW

In ACCC v Coles, the ACCC was successful in its application to find Coles had engaged in unconscionable conduct under the ACL. The conduct in question related to an "Active Retail Collaboration" (ARC) program through which Coles sought more than $12 million in payments from around 200 suppliers as a "rebate" back to Coles for "profit gaps", waste, and fines or penalties for alleged short or late deliveries by suppliers.

Coles admitted its conduct was unconscionable and consented to judgement. The Court, in its consent judgement, was highly critical of Coles, describing the practice, demands and threats as "deliberate, orchestrated and relentless" (at [24]). Justice Gordon found that in the implementation of the ARC program, Coles had engaged in "serious, deliberate and repeated" unconscionable conduct (at [104]), as it had:

  • misused its bargaining power
  • treated its suppliers in a manner not consistent with acceptable business and social standards which apply to commercial dealings
  • demanded payments from suppliers to which it was not entitled by threatening harm to suppliers that did not comply with the demands, and
  • withheld money from suppliers it had no right to withhold

Coles was ordered to pay pecuniary penalties of $10 million and costs, and refund more than $12 million it had collected through the ARC program. Following the judgement, Coles also agreed to become a signatory to the Food and Grocery Code of Conduct from 1 July 2015.

ACCC V WOOLWORTHS - FEDERAL COURT DISMISSES UNCONSCIONABLE CONDUCT PROCEEDINGS

On 8 December 2016, the Federal Court delivered its judgement in ACCC v Woolworths, this time dismissing the ACCC's application in which it alleged that Woolworths had engaged in unconscionable conduct.

Similarly to Coles, Woolworths' "Mind The Gap" scheme sought retrospective payments from certain suppliers to make up the shortfall in Woolworths' expected and actual profit for the December 2014 half year. As a result of the scheme, Woolworths obtained $18.1 million in payments from a group of 821 suppliers.

Taking into account the factors for establishing unconscionable conduct under the ACL, the ACCC argued that Woolworths' conduct was unconscionable as:

  • the conduct was not of a standard of accepted behaviour of businesses generally operating in any industry
  • the conduct was an abuse of Woolworths' substantially stronger bargaining position relative to its suppliers, and
  • engaging in those types of negotiations was not a right in the contract between the parties

MIND THE GAP SCHEME NO DIFFERENT TO ORDINARY BUSINESS NEGOTIATIONS, COURT ACCEPTS

Woolworths successfully defended the application, arguing that the ACCC's case proceeded on a significant misunderstanding of the supermarket industry.

The Court concluded that the conduct was within the ordinary course of business in the supermarket industry and was not unconscionable as it met the "norms of society". In determining this, the Court accepted Woolworths' submission that from the perspective of any individual suppliers, the Mind The Gap scheme was no different to any ordinary negotiation that the supplier might have had with Woolworths. This standard of "ordinary business" was narrower than that employed in the Coles case which looked to the standards of business as a whole rather than specifically at the norms of the supermarket industry.

WOOLWORTHS' STRONGER BARGAINING POSITION AND CONTRACTUAL RIGHTS IN REGARD TO NEGOTIATIONS CONSIDERED BY COURT

The Court also found that Woolworths was not in a substantially stronger bargaining position than all relevant suppliers, particularly large multinational companies whose products customers expect to be available in supermarkets. In those instances the suppliers had a stronger bargaining position as Woolworths was reliant upon their products to meet the demands of its customers. The Court also noted that superior bargaining position alone does not amount to unconscionable conduct.

Finally, the Court held that Woolworths was not acting outside of its contractual rights to enter into those negotiations as it did not need a contractual or other legal right to approach its suppliers to enter into a negotiation with them; nor did it assert any such right.

LESSONS FOR LARGER ENTITIES FROM THE COLES AND WOOLWORTHS DECISIONS

There are three main takeaways from these cases for larger entities, particularly those who frequently enter negotiations with smaller businesses:

  1. Unconscionable conduct is assessed more narrowly on the standards and norms of a particular industry, rather than on society as a whole. So consider what the normal business practice is in your industry.
  2. If your requests of a supplier or distributer could reasonably be perceived as "threats", then you will likely be found to be engaging in unconscionable conduct.
  3. Superior bargaining power alone will not amount to unconscionable conduct.
Jon Meadmore
Commercial litigation
Colin Biggers & Paisley

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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