Ari Duchen and Brian Wu explore the proposed changes to the Food and Grocery Code of Conduct which are intended to strengthen effectiveness and compliance.
In April 2024, the Interim Report (Report) (available here) on the 2023-24 Review of the Food and Grocery Code of Conduct (Review) was released, prior to the Final Report being delivered by 30 June 2024. In this blog post we explain the Food and Grocery Code of Conduct (Code), how it currently operates, what the Review involves and the changes the Report has recommended.
What is the Code and how does it currently operate?
The Code was introduced in 2015 to improve standards of business behaviour by retailers and wholesalers (supermarkets) towards suppliers in the food and grocery sector. Currently, the Code operates on a voluntary basis. The Code binds supermarkets that voluntarily sign up to the Code but they can withdraw at any time.
The provisions of the Code include:
- an overarching obligation for supermarkets to act lawfully and in good faith in dealings with suppliers;
- specific standards for grocery supply agreements (e.g. rules relating to variations to agreements) and general conduct (e.g. payment arrangements, delisting products and shelf space allocation);
- compliance and dispute resolution procedures which provide for supermarkets to appoint Code Arbiters who try to resolve complaints raised by suppliers and an Independent Reviewer who can review Code Arbiters’ complaints-handling.
What does the Review involve?
A review of Part 5 of the Code (concerning dispute resolution) was concluded in September 2023. This review made recommendations (which the Government accepted) to strengthen options available to Code Arbiters when engaging in mediation and strengthen the oversight role of the Independent Reviewer.
The current Review (focusing on the rest of the Code, apart from Part 5) commenced in October 2023. The Review needed to consider:
- the effectiveness of the Code in improving the relationships between supermarkets and suppliers in the grocery sector (including whether the Code should become mandatory and whether civil penalties should be introduced); and
- the need for the Code (whether it should be remade, amended or appealed), noting that the Code is set to be automatically repealed on 1 April 2025.
What changes have been recommended in the Interim Report?
The Report finds that the Code is ‘not effective in meeting its stated purpose’ due to (as the Report finds) persistent power imbalances between supermarkets and small suppliers. The Report makes ‘firm recommendations’ which will not change in the final report, as well as ‘draft recommendations’ which are subject to feedback but will not be removed. Some key recommendations are explained below.
(a) How the code applies
A mandatory code
While many stakeholders suggested that the Code has improved business conduct in the grocery industry since its introduction, they also raised ongoing issues such as bargaining power imbalances. The Report states that making the Code mandatory and introducing effective penalties (discussed below) are necessary for effectiveness. The Report makes a ‘firm recommendation’ that the Code should be mandatory for all supermarkets with $5 billion or more in annual revenue, and that all suppliers be automatically covered.
Removal of broad exceptions
The current Code’s prohibitions on certain types of conduct can be ‘contracted out’ depending on circumstances such as whether there is an exception in a grocery supply agreement and where it is reasonable in the circumstances. The Report contains a draft recommendation that the Code should set minimum standards in relation to certain obligations that cannot be contracted out of or avoided.
Addressing suppliers’ fear of retribution
Stakeholders suggested that a reason for the low number of disputes lodged with Code Arbiters (only six since January 2021) was the fear of retribution by supermarkets against suppliers. While retributory conduct (e.g. offering poorer shelf locations for products, reducing the volume of stock ordered and cancelling supply agreements) falls under the obligation to act in good faith in the current Code, there are no penalties associated with this obligation.
The Report makes a ‘firm recommendation’ that the Code should place greater emphasis on addressing the fear of retribution. The specifics are subject to consultation, with proposed options including the introduction of a standalone prohibition against retribution, penalties for retributory conduct and a confidential complaints mechanism for suppliers to raise issues directly with the ACCC.
(b) Dispute resolution mechanisms
The primary change to dispute resolution under the recommended mandatory Code is that arbitration could no longer be made mandatory. While mediation can be required in a mandatory code, due to constitutional limitations, final and binding arbitration requires agreement of the parties, such that mandatory arbitration does not fit within the framework of a mandatory code.
The table below summarises the key features of the proposed dispute resolution framework in comparison with the existing framework.
(c) Enhanced enforcement
Penalties
The Report finds that the absence of financial penalties undermines the Code’s effectiveness in terms of providing incentives to encourage compliance, the ACCC’s ability to undertake meaningful enforcement action and supplier confidence in the Code. The introduction of penalties is expected to ensure supermarkets are incentivised to invest in systems and processes to ensure compliance, staff training and reporting processes.
The Report makes a ‘firm recommendation’ for the introduction of penalties for breaches of key provisions of the Code, including obligations relating to grocery supply agreements and supermarkets’ conduct in relation to suppliers. The Report recommends significant penalties for breaching the Code due to the size and turnover of supermarkets. The proposed maximum penalty for serious breaches is the greater of: $10 million, three times the value of the benefit obtained from the breach or 10% of annual turnover. For less serious breaches, the proposed maximum penalty is 600 penalty units (currently $187,800).
Infringement Notices
The ACCC would also be able to issue infringement notices (requiring payment of a smaller penalty) where it has reasonable grounds to believe there has been a contravention of the Code. Introducing infringement notices will provide the ACCC with an efficient, low-cost enforcement outcome for relatively minor contraventions without requiring court proceedings.
Compliance Monitoring
Subject to consultation, the Report recommends that the ACCC should have powers to conduct compliance checks and compel businesses to produce information. These compliance monitoring powers would allow the ACCC to efficiently identify and address issues without the need for reasonable suspicion of a contravention and without formal enforcement action.
Next steps
To summarise, the Report recommends significant changes to the Code, including:
- the Code becoming mandatory for supermarkets with annual revenue exceeding $5 billion;
- the Code being strengthened to better protect suppliers from retribution; and
- introducing penalties of up to $10 million, 10% of annual turnover, or three times the benefit gained from the breach (whichever is greatest) for breaches of key provisions of the Code.
The Review is still finalising a range of issues including the proposed dispute resolution mechanisms, the minimum standards of conduct (which cannot be contracted out of) and the level of penalties that should apply. The Final Report will be released by 30 June 2024.
Image credit: Many Red Trolleys by Polycart / Flickr and Wikimedia Commons / Licence – CC BY 2.0 / Remixed to B&W and resized
