Mind the Gap

Published On 16/12/2016 | By Aarthi Sridharan | Consumer protection, Enforcement, Litigation

On 10 December 2015, the ACCC instituted proceedings against Woolworths, alleging that it had engaged in unconscionable conduct towards its suppliers in 2014. The ACCC alleged that Woolworths, through its “Mind the Gap” initiative, held discussions with suppliers regarding their performance and, in a number of cases, requested support to account for poor performance.

Last week, the Federal Court of Australia found that Woolworths had not engaged in unconscionable conduct towards its suppliers.

This case confirms that “unconscionability” has a legal meaning that is different to “unjustified”, “unfair” or “unjust” (noting that the Court did not find that Mind the Gap was any of these things).

It also confirms that an assessment of unconscionability can only be undertaken by considering all of the relevant circumstances, and highlights the pitfalls for the ACCC in running a case solely based on documentary evidence obtained in response to mandatory investigation notices (particularly when that evidence does not disclose all the relevant circumstances).

The law

Section 21 of the ACL prohibits unconscionable conduct in the supply or acquisition of goods or services.

Section 22 of the ACL lists matters that the court may have regard to in determining whether conduct is unconscionable. These matters include, for example, the relative strengths of the bargaining positions of the parties and the terms of any contract between the parties.

Mind the Gap

In around September 2014, Woolworths knew that its Supermarkets business was unlikely to meet its half yearly sales and profit targets and sought to implement a number of measures to address this. One of those initiatives was Mind the Gap.

Mind the Gap involved a review of suppliers’ trading performance and holding discussions with suppliers regarding the cause, and how to address, any perceived underperformance. These conversations were with “Tier B” suppliers, who were those not already involved in separate negotiations. Mind the Gap was intended to improve Woolworths Supermarkets’ gross profit position by approximately $15 million.

Evidence

The ACCC ran its case on a documentary basis and did not call evidence from any supplier affected by Mind the Gap. However, the documents relied upon were in many cases incomplete records of communications between Woolworths and its suppliers. In some cases, it was not clear on the face of the documents whether a supplier actually agreed to make a payment (and, if so, in what amount and why).

The absence of evidence from a supplier is perhaps most telling in relation to the ACCC’s case that Mind the Gap involved “demands” rather than mere “asks” for support. The Court found that Woolworths’ scripts prepared for Mind the Gap were “but examples of plain-speaking where, in the context of a trading relationship, one party, acting in its own interests, seeks to make clear its commercial expectations. Certainly the ACCC called no evidence from any supplier who considered that it had been “threatened” by such statements”.

Woolworths led both written and oral evidence on the relationship between supermarkets and its suppliers, arguing that the ACCC’s focus on the contractual relationship between Woolworths and its suppliers did not reflect the commercial dynamics of supermarket business (in particular the myriad negotiations which take place between a supermarket business and its suppliers).

Woolworths submitted that the ACCC had proceeded on a “significant misunderstanding of the relationship between suppliers and supermarket retailers, including the role of financial support which retailers such as Woolworths seek from suppliers in relation to the promotion and sale of the products concerned.

The Court accepted that Woolworths had conducted very similar dealings in the past, that those dealings were somewhat commonplace and not argued by the ACCC to be unconscionable, and that they were in line with the general practices of other like supermarket retailers in relation to their suppliers.

ACCC’s allegations and the Court’s conclusions

The ACCC alleged that Woolworths’ systematic conduct in seeking Mind the Gap payments from Tier B suppliers was unconscionable for various reasons, including that Woolworths was in a substantially stronger bargaining position relative to its suppliers, that it had no contractual entitlement to the payments and that it knew it did not have a legitimate basis for requesting a Mind the Gap payment from every targeted Tier B supplier. In support of these reasons the ACCC contended that there were 13 key elements that the Court should consider. They included the following:

incompetition-table-mind-the-gap-unconscionable-conduct

Inequality in bargaining power?

Another key contention of the ACCC was that Woolworths took advantage of a substantially stronger bargaining position relative to its suppliers. In what was found to be a circular argument, the ACCC had reasoned that Woolworths’ conduct was unconscionable because of the inequality of bargaining power and simultaneously, that there was an inequality of bargaining power because Woolworths engaged in the conduct.

The fact that Woolworths engaged in Mind the Gap was not enough to prove a disparity in bargaining power. Further, while Woolworths might have a significant share in Australian grocery sales, this was not indicative of the significance of Woolworths’ business to any particular supplier.

For example, a supplier’s business with Woolworths may only be minor in comparison to its sales to other customers (including Woolworths’ competitors). Also, given the ability for the supplier to negotiate, and evidence suggesting that suppliers themselves might similarly approach Woolworths for assistance, it was found that making requests for financial support was not always a one-sided affair. The argument about disparity in bargaining power required more intricate consideration of the particular circumstances that affect a particular trading relationship. Therefore the Court could not be satisfied that the alleged disparity existed.

Comparison with the Coles case

The Court also did not give much weight to the ACCC’s reliance on its success in its proceedings against Coles, where specific conduct directed to certain suppliers was found to be unconscionable. The Coles case was found to be “very different” from the Mind the Gap case.

The Court noted that it was the “particular facts and circumstances germane to each supplier” that was integral to the Court’s finding of unconscionability in the Coles case. In this case, it was only the facts and circumstances surrounding the design and implementation of Mind the Gap that could be taken into account.

On that approach, “standing back and looking at the whole episode”, and having regard to “all the circumstances” (as required by s 21(1) of the ACL), the Court concluded that Woolworths’ design or implementation of Mind the Gap was not unconscionable.

Even if Woolworths’ conduct was unjustified, unfair or unjust (which the Court did not find), that is not the standard set by s 21(1) of the ACL.

Implications

This case provides important guidance about when conduct may be unconscionable under the ACL. Part of the Court’s reasoning related to its finding that Woolworths’ “asks” for support as part of Mind the Gap were not unusual, being typical of Woolworths’ normal commercial dealings with its suppliers and the ACCC had not alleged that Woolworths’ “asks” outside of Mind the Gap were unconscionable. Accordingly, this case highlights that when considering whether conduct is unconscionable, the Court will assess the parties’ own prior dealings and the normal commercial dynamics between parties.

The case also emphasises the importance of leading sufficient evidence in proving to the Court that “in all circumstances” the conduct is unconscionable. Here it was clear that the ACCC’s failure to lead evidence from suppliers meant that it was unable to prove to the Court that “in all circumstances”, Woolworths’ conduct was unconscionable.

While unsuccessful in this case, the decision will hold important implications going forward as ACCC Chairman Rod Sims has confirmed in a media release that pursuing unconscionable conduct and taking enforcement action where appropriate remains a priority for the ACCC, particularly in relation to supply chain issues. The ACCC announced today that it will not appeal the decision.

It also remains to be seen how the Grocery Code, particularly its provisions surrounding prohibitions on retailers requiring unreasonable payments as a condition of being a supplier and payments for retailer’s activities, might interact with unconscionability decisions going forward.

Photo credit: Flickr / clogsilk / CC2.0

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About The Author

is a solicitor in the Sydney office of King & Wood Mallesons where she works in the competition dispute resolution team.

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