15 December 2016

Normal commercial conduct not unconscionable, says Federal Court

The Court found that a general scheme to regularise negotiations with suppliers fell well short of being unconscionable.
Australia Antitrust/Competition Law
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In an important decision about the proper limits of "unconscionable conduct" under the Australian Competition Law, the Federal Court has found that a general scheme to regularise negotiations with suppliers fell well short of being unconscionable, and emphasised the need to consider all circumstances (ACCC v Woolworths Limited [2016] FCA 1472).

Supermarkets' arrangements with suppliers

The supermarket sector is not one marked by great consumer loyalty. Customers will go to multiple supermarkets in search of particular brands, or for discounted items. Additionally, there is competition from non-supermarkets, such as petrol stations or convenience stores. It's perhaps no surprise, given the level of competition, that around 40% of Woolworths' sales are on promotion.

Supermarkets and their suppliers will both usually bear the burden of promotions, which could mean marketing support or trade investment from the supplier. Supermarkets and their suppliers have frequent conversations about the standard measures of a product's performance, which include the supermarket's gross margin. Alterations in the measures can and do lead to adjustments in the account between the two parties.

Mind The Gap: formalising current practices

Woolworths decided to formalise and co-ordinate these discussions, under a short-term program called Mind The Gap. Four "lenses", or basic considerations, were set out and applied to the relationship with each of over 800 suppliers, who were identified as Tier B (roughly, they were neither Woolworths' biggest nor smallest suppliers). Although they were mid-sized suppliers, they were not necessarily mid-sized businesses; they included large companies such as the Australian subsidiaries of global manufacturers.

The buying staff were instructed to use their discretion when selecting which suppliers to approach concerning supplier underperformance against the measures, as they knew the supplier best and usually had long-term relationships with them. They were also given explicit instructions on how to approach suppliers and negotiate with them, including:

  • All discussions must be based on commercial facts that are well supported by data
  • You must consider the supplier's point of view in developing your perspective on what is a fair outcome
  • You must consider any personal conflicts that may affect your ability to conduct negotiations – if in doubt, check with your manager
  • You must assume all documents (internal working papers, e-mails, etc.) will be discussed publicly – store any materials ... used to prepare for negotiations, and ensure they are consistent with what you would be prepared to say to a supplier in person
  • You may not disclose data regarding any other supplier
  • You must be polite and courteous at all times, and maintain a professional and composed posture – assume anything you say or do could be discussed publicly
  • You must never threaten anyone
  • You may not make any unreasonable claims.

The ACCC's case

The ACCC had previously had a win over Coles on its dealings with suppliers, but that decision was based on the particular facts of that case and, more importantly, on particular dealings with individual suppliers.

The case against Woolworths was different; the ACCC alleged Mind The Gap itself was a system of conduct or pattern of behaviour that was unconscionable, so it did not need to inquire into any actual dealings between Woolworths and any individual supplier.

This argument rested on many factors, but very broadly the ACCC alleged Woolworths' had significantly superior bargaining power, and that this was an illegitimate behaviour because it was unusual and sprung upon the suppliers. When considered all together, this was allegedly unconscionable.

The Federal Court rejects the ACCC's case

Unconscionability is a high bar. Justice Yates said that it's more than just being unfair or unjust (not that he considered Woolworths' behaviour was either of those things); it must be highly unethical behaviour, attracting a high level of moral fault/obloquy. After considering all the circumstances, he said the ACCC's allegations about Woolworths' behaviour simply did not amount to highly unethical behaviour.

He declined to find that Woolworths had significant bargaining power. He noted that the ACCC's argument was that Woolworths' behaviour was unconscionable because of (amongst other things) an inequality of bargaining power, and that the Court should infer there was an inequality of bargaining power because it engaged in the conduct - an argument he considered circular.

There is nothing prima facie improper about asking for an adjustment; this was accepted commercial practice in the supermarket sector, and both supermarkets and suppliers do it. Each request rested upon four conventional commercial measures, and those numbers were shared with the individual supplier. It was not a speculative "grab for cash", as the ACCC described it.

The requests were "forthright, generally civil and polite, in many cases cordial on both sides". Some exchanges might be considered robust on each side, but no more robust than would be expected of commercial parties putting their positions plainly, in the context of a trading relationship.

There was no evidence from any supplier who considered it had been threatened. In fact, there was evidence of suppliers plainly and clearly refusing to make the requested adjustments, and some even negotiating benefits to themselves as a result. There was no evidence of retribution against those suppliers.

Sensible measures and compliance the keys to Woolworths' success

This is a sensible decision which recognises the complexity of sophisticated business arrangements, and the fluidity of the balance of power between parties.

More broadly, it emphasises that unconscionability requires behaviour that goes beyond relevant, accepted norms in an industry. Merely attempting to renegotiate a commercial arrangement to improve profitability cannot be considered, by itself, to be unconscionable. The focus must be on the means of achieving that goal, and on all of the particular circumstances.

It also helps that Woolworths had internal guidelines for conducting these approaches to suppliers, and clearly could take "no" for an answer.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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