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About the obligation to act in good faith
Retailers and wholesalers who are bound by the Food and Grocery Code of Conduct must always deal with suppliers in good faith.
The good faith obligation is intended to build trust between parties and improve standards of conduct.
The good faith obligation applies during:
- bargaining
- establishing a grocery supply agreement
- negotiating about price increases
- dealing with a dispute.
Retailers and wholesalers cannot enter into a grocery supply agreement that contains a rule limiting or excluding this obligation. If this happens, that rule has no effect.
A supplier may raise a dispute with a Code Arbiter, the Code Arbiter must then consider the retailer’s or wholesaler’s obligation to act in good faith when they investigate. The Code Arbiter may consider whether the retailer or wholesaler has acted fairly in dealing with the supplier.
What good faith means
The code doesn’t define what good faith means.
However, the code does:
- state that good faith is to reflect the unwritten law. This is judge-made law, known as the ‘common law’. Under common law, good faith requires parties to an agreement to act reasonably.
- outline certain principles of dealing in good faith. A court may use these principles to decide whether a retailer or wholesaler has acted in good faith. A court can also consider other relevant matters.
It is the courts, and not the ACCC, that decides if behaviour is not acting in good faith.
Factors that are considered when deciding good faith
The code lists several factors that may be considered when deciding whether a retailer or wholesaler has acted in good faith when dealing with a supplier.
For example, whether the retailer or wholesaler has:
- acted honestly
- cooperated to achieve the purposes of the grocery supply agreement
- not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives
- not acted in a way that is retribution for past complaints and disputes
- conducted their trading relationship with the supplier without duress
- conducted their trading relationship with the supplier in a way that recognises the need for certainty about the risks and costs of trading — particularly in relation to production, delivery and payment
- observed any confidentiality requirements relating to information disclosed or obtained in dealing with or resolving a complaint or dispute with the supplier.
Whether the supplier has acted in good faith in dealing with the retailer or wholesaler may also be considered.
A court may also take other things into account in determining whether someone acted in good faith.
Dealing in good faith doesn’t:
- require a retailer or wholesaler to act in the interests of the supplier
- stop a retailer or wholesaler from acting in their own commercial interests.
Not acting in good faith
Certain behaviour may be not acting in good faith.
This behaviour can be a retailer or wholesaler:
- acting dishonestly
- failing to consider the genuine interests of the other party.
The courts have also found that not dealing in good faith can be behaving:
- for some ulterior or underhanded motive
- in a way that undermines or denies the other party the benefits of a contract.
Examples of dealing and not dealing in good faith
The following examples describe scenarios that a supplier may experience in dealing with a retailer or wholesaler.
Example 1 of negotiating a price increase
Scenario
A supplier of a breakfast cereal product finds that the cost of their inputs has increased, which they are not able to absorb. They notify a retailer who they supply of a price rise and the reasons. The retailer doesn’t immediately agree to the full price increase. The parties enter into negotiations.
During negotiations, the retailer responds promptly to the supplier’s communications and engages with the key issues. The retailer considers the supplier’s reasons for requesting the price rise and makes reasonable counter-offers. This allows parties to make timely progress on the negotiations. The parties ultimately agree to a price rise that is less than the full price rise that the supplier initially requested.
Factors relevant to good faith
In this scenario, the retailer didn’t agree to the full price rise but is still likely to have acted in good faith. This is because the retailer acted honestly and reasonably during negotiations and paid attention to the legitimate commercial interests of the supplier. The retailer isn’t required to act in the interests of the supplier.
Example 2 of negotiating a price increase
Scenario
The supplier of the breakfast cereal product in scenario A notifies another retailer who they supply of the price rise and the reasons. This retailer also doesn’t agree to the full price increase that was notified and the parties enter into negotiations.
The retailer ultimately refuses to agree to a price increase. Their reason is that the supplier had previously initiated the dispute resolution process under the code about the retailer’s behaviour on other matters.
Factors relevant to good faith
The good faith rule in the code states that the retailer or wholesaler must not act in a way that punishes the supplier for past complaints and disputes. In this case, it is unlikely that the retailer is acting in good faith.
Example of delisting a product
Scenario
A supplier of packaged confectionary agrees to pay a retailer of the product $20,000 upfront to fund a marketing campaign for the product. This is covered in the grocery supply agreement and in line with code requirements. The campaign is to run over 8 weeks.
Two weeks into the campaign, the retailer notifies the supplier that it will be delisting the confectionary product. The product has not been meeting the retailer’s profit targets in the grocery supply agreement. The retailer had started considering this product for delisting during the time that they were seeking funding from the supplier for the marketing campaign.
Factors relevant to good faith
Asking the supplier to fund the marketing of a product that was being actively considered for delisting, and delisted not long afterwards, is behaviour that is unlikely to be acting in good faith. The retailer may have acted dishonestly or unreasonably in their dealings with the supplier.
Example of preventing a supplier from fulfilling obligations
Scenario
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 so that consumers can’t see them. As a result, the supplier does not meet its sales targets, and the retailer terminates the agreement.
Factors relevant to good faith
The retailer is unlikely to have acted in good faith, as it has acted for an ulterior motive and has not acted reasonably.
Example of not renewing an agreement
Scenario
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.
Before the end 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.
Factors relevant to good faith
The retailer is likely to have acted in good faith as their actions were based on their legitimate business interests.