The ACCC regulates the Food and Grocery Code of Conduct which is a voluntary code prescribed under the Competition and Consumer Act 2010.
The Code governs certain conduct by grocery retailers and wholesalers in their dealings with suppliers. It has rules relating to grocery supply agreements, payments, termination of agreements, dispute resolution and a range of other matters.
It is a voluntary code. This means that it only applies to retailers or wholesalers that have elected to be bound by the Code by giving written notice to the ACCC.
The following companies have signed up to the Code:
- About Life Pty Ltd (retailer) (signed up on 19 May 2015)
- ALDI (retailer) (signed up on 15 June 2015)
- Coles Supermarkets Australia (retailer) (signed up on 1 July 2015)
- Woolworths Limited (retailer) (signed up on 1 July 2015).
The ACCC is responsible for enforcing the Code (see: Role of the ACCC).
The Code provides for an additional framework for dealings between retailers or wholesalers and suppliers. The Code does not override the existing provisions of the Competition and Consumer Act 2010 and the Australian Consumer Law. In particular, the provisions relating to unconscionable conduct, misleading or deceptive conduct and misuse of market power continue to apply.
For the purposes of the Code:
- a retailer is a corporation that carries on a supermarket business
- a wholesaler is a corporation that purchases groceries from suppliers to resupply to a supermarket
- a supplier is someone who is carrying on (or seeking to carry on) a business of supplying groceries for retail sale by another person (including another business).
Where the conduct of a party bound by the Code is also subject to the Horticulture Code of Conduct or the Franchising Code of Conduct, the terms of this Code won’t apply to the extent that they conflict with the other codes.
Retailers and wholesalers must make the contact details of their Code compliance manager available to suppliers.
The Code requires certain standards of conduct that cover the life cycle of the relationship between retailers or wholesalers and suppliers.
- sets out minimum obligations for retailers and wholesalers relating to the making of grocery supply agreements
- requires retailers and wholesalers to act lawfully and in good faith
- prohibits retailers from threatening suppliers with business disruption or termination without reasonable grounds
- establishes minimum standards of conduct by a retailer when dealing with suppliers, such as payment, de-listing, standards and specifications for fresh produce, and the allocation of shelf space
- requires retailers and wholesalers to provide annual training to employees whose role includes direct involvement in buying grocery products, and their managers, on the requirements of the Code.
The Code also sets out a dispute resolution mechanism.
A retailer or wholesaler can agree to be bound by the Code by giving written notice to the ACCC stating that it agrees to be bound by the Code, and specifying whether it is a retailer or wholesaler. The written notice should be signed by a competent officer, such as a director or company secretary.
Written notice may be given to the ACCC by delivering or sending the notice to any ACCC office (addressed to David Salisbury, A/g General Manager, Consumer & Small Business Strategies). The retailer or wholesaler will be bound when the ACCC receives the written notice.
If multiple companies from a group of companies wish to be bound by the Code, each company must provide written notice that it agrees to be bound by the Code.
A retailer or wholesaler can cease to be bound by the Code by giving written notice to the ACCC stating that it withdraws its agreement to be bound.
Suppliers are not required to sign up to the Code. They will be covered by the Code when dealing with a retailer or wholesaler that has agreed to be bound by the Code.
Under the Code, retailers and wholesalers must deal with suppliers in good faith.
This obligation applies to all dealings between a retailer or wholesaler and its suppliers, as well as people entering into negotiations with a retailer or wholesaler to become a supplier. This means the obligation applies during the bargaining stages of establishing grocery supply agreements, during the term of the agreement, and in dealing with any disputes.
Agreements with a supplier must not contain a provision that limits or excludes the obligation to act in good faith. Any such provisions will be of no effect.
What is ‘good faith’?
Although the Code does not define exactly what good faith means, it does state that the obligation reflects historical judge-made law (known as the ‘common law’).
Under the common law, good faith requires retailers or wholesalers to exercise their powers under an agreement reasonably and not arbitrarily or for some irrelevant purpose. Conduct may lack good faith if a retailer or wholesaler acts dishonestly or fails to have regard to the legitimate interests of the supplier.
Australian courts have found business dealings to not be in good faith when they involve one party acting for some ulterior motive, or in a way that undermines or denies the other party the benefits of a contract.
The Code also outlines certain matters that a court may consider when determining whether a retailer or wholesaler has acted in good faith, including whether:
- the relationship with the supplier has been conducted without duress
- the relationship has been conducted in recognition of the supplier’s need for certainty about the risks and costs of trading, particularly in relation to production, delivery and payment, and
- the supplier has acted in good faith in dealing with the retailer or wholesaler.
Legitimate business conduct
While good faith requires a retailer or wholesaler to have regard to the rights and interests of a supplier, it does not require a retailer or wholesaler to act in the interests of the supplier. It also does not prevent a retailer or wholesaler from acting in its own legitimate commercial interests.
For example, while good faith will require retailers or wholesalers to act honestly and cooperatively during the negotiation of a grocery supply agreement, it is unlikely to require a retailer or wholesaler to drastically alter their agreement to accommodate a supplier. Similarly, the decision by a retailer or wholesaler not to renew or extend a grocery supply agreement does not in itself mean the retailer or wholesaler has not acted in good faith.
Example 1: preventing a supplier from fulfilling obligations
A supplier enters into a grocery supply agreement with a retailer. The agreement sets out sales targets for the supplier, and specifies that the agreement can be terminated if the supplier does not meet these targets.
During the term of the agreement, the retailer decides that it no longer wants to work with the supplier. The retailer places the supplier’s product behind other competitors’ products on shelves such that consumers cannot see them. As a result of this, the supplier does not meet its sales targets, and the retailer terminates the agreement.
The retailer has not acted in good faith, as it has acted for an ulterior purpose and has not acted reasonably.
Example 2: not renewing an agreement
A small business supplies dairy products to a retailer under a 2-year grocery supply agreement. Sales of the supplier’s products are very low throughout the term of the agreement.
Prior to the conclusion of the agreement, the retailer informs the supplier that due to the poor performance of the supplier’s products, the retailer will not enter into a new grocery supply agreement with the supplier.
The retailer has acted in good faith as its actions were based on its legitimate business interests.
A grocery supply agreement is an agreement between a supplier and a retailer or wholesaler for the supply of groceries to (or for the purposes of) a supermarket business.
A grocery supply agreement must be in writing and must set out:
- any delivery requirements
- the circumstances in which the retailer or wholesaler can reject the groceries
- the payment period, and circumstances in which payment may be withheld or delayed
- the term of the agreement (if the agreement is intended to operate for a limited time)
- any quantity and quality requirements, and
- the circumstances (if any) in which the agreement may be terminated.
Any new grocery supply agreements entered into after a retailer or wholesaler agrees to be bound by the Code must comply with the requirements of the Code.
The Code allows existing agreements to be transitioned to comply with the Code. After agreeing to be bound by the Code, retailers have 6 months, and wholesalers have 18 months, to offer to vary existing agreements to comply with the Code.
The agreement must be varied within 6 months of the supplier accepting the variation. If an agreement is not varied, the entire Code applies to a retailer 12 months and to a wholesaler 24 months after they agree to be bound. However, the good faith (and freedom of association) obligations apply immediately upon the retailer or wholesaler agreeing to be bound.
Varying an agreement
The Code limits when retailers or wholesalers can unilaterally or retrospectively vary an agreement. These variations can only occur where (among other things) the agreement expressly provides for the variation and sets out the circumstances where the variation can be made, and the variation is reasonable in the circumstances.
Payments to suppliers
A retailer must pay a supplier for products delivered and accepted in accordance with a grocery supply agreement within the time agreed (or within a reasonable time).
Payments to retailers
A retailer must not require a supplier to make payments for shrinkage (a loss of grocery products that occurs after a retailer has taken possession of them).
If the retailer requires a supplier to pay for any of the following, the payment must be set out in the grocery supply agreement and must be reasonable:
- payments for wastage
- payments as a condition of being a supplier
- payments for better positioning of groceries or an increase in allocation of shelf space
- payments for retailer’s activities (e.g. a buyer’s visit to the supplier, artwork or packaging design, consumer or market research or opening or refurbishing a store)
- funding for promotions
For each of these payments, the Code sets out additional criteria that must be met before a retailer can request the payment.
Example: payment for wastage
A supplier enters into a grocery supply agreement that sets out the circumstances in which the supplier will be required to pay for wastage, and the basis of the payment.
Wastage occurs at the retailer’s premises, and the retailer incurs costs of $500 as a result. It seeks compensation of $1,500 from the supplier under the agreement.
The retailer has breached the Code, as the payment is not reasonable having regard to the retailer’s costs incurred as a result of the wastage.
When requesting payments for wastage the retailer must also consider its obligation to act in good faith.
The Code also provides suppliers with additional protections, covering:
- supplier funded promotions
- fresh produce standards
- labelling requirements
- supply chain changes
- product ranging and shelf space allocation
- intellectual property and confidential information
- threatening business disruption or termination.
The Code provides processes for suppliers to lodge complaints and seek to have their disputes with retailers and wholesalers resolved.
The ACCC is responsible for regulating compliance with the Code and can take enforcement action to enforce the Code, where appropriate.