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"[When] grocery retailers transfer excessive risks or unexpected costs to their suppliers, this is likely to lessen suppliers’ incentives to invest in new capacity, products and production processes. If unchecked, we conclude that these practices will ultimately have a detrimental effect on consumers.”
© The supply of groceries in the UK market investigation, Competition Commission, April 2008
This article, the first of 3, focuses on the origins of the GSCOP and the key rules which all suppliers of groceries (which covers more than simply food) should be aware of when dealing with the major high street supermarket retailers (only those turning over more than £1bn). It is intended to provide an insight into the Code and what rights and remedies are available to suppliers.
The writer, Tom Maple, a Partner in FSP’s Food and Drink team, takes an active interest in the food industry and GSCOP. Tom has recently concluded a multi-million pound claim arbitration before the GCA, between a fresh produce supplier and a retailer.
The Groceries Supply Code of Practice came into force in February 2010. It came about as a direct result of the 2008 Competition Commission (CC) Report quoted above. The CC’s report covered many issues relating to the effect that the major supermarkets had on competition. The conclusion reached was that a number of their practices were anti-competitive because their effect was to transfer excessive risks and costs on to suppliers which in turn stifled supplier innovation and growth.
The CC created the office of the Groceries Code Adjudicator in June 2013. The Adjudicator and Ombudsman (as well as Arbitrator), Christine Tacon CBE, has a number of key functions. For example, to gather information and proactively investigate retailers’ records; publish guidance on specific provisions of the GSCOP, and, arbitrate disputes between retailers and suppliers arising under the GSCOP. The overriding objective of the GCA is to monitor and enforce GSCOP.
The Code is broken into 17 different clauses and in this first guide to the Groceries Code, we shall focus on 6 of those, the remaining 11 clauses being addressed in our subsequent 2 updates (in August and September).
Clause 2 - Principle of Fair Dealing
The cornerstone of GSCOP is the principle of fair dealing. Specifically (per the CC Report):
"A Retailer must at all times deal with its Suppliers fairly and lawfully. Fair and lawful dealing will be understood as requiring the Retailer to conduct its trading relationships with Suppliers in good faith… and in recognition of the Suppliers’ need for certainty as regards the risks and costs of trading…”
The CC described this provision as the overarching principle of GSCOP. It gives the GCA a general standard by which to judge retailers’ conduct. It therefore acts as an important safeguard against the transfer of excessive risk and unexpected cost from grocery retailers to their suppliers.
Whilst further guidance from the GCA would be welcomed, our analysis of this provision is that, whilst it may give a supplier the right to make a complaint to the GCA that a Retailer has breached Clause 2 alone, it is more likely that clause 2 will be used to as a yardstick to determine whether a Retailer has complied with a particular section of the Code. For example, when determining whether a supplier has ‘genuinely volunteered’ to comply with the request or whether it was ‘required’.
Clause 3 - Variation of Supply Agreements and terms of supply
It is clear that the CC’s greatest concern was the practice of retailers passing excessive risks and costs from itself to those of its suppliers. One of the main methods by which this practice was achieved was to change the terms of supply agreements after the event. A simple example of this was to change the terms of sale (e.g. the price) after receipt of the goods. Accordingly, the CC decided that retrospective changes to agreed terms of supply should be prohibited outright.
Clause 3 states that a Retailer must not vary any Supply Agreement retrospectively, and must not “request” or “require” that a Supplier consent to retrospective variations of any Supply Agreement. However, a Retailer may be able to make an adjustment to the terms of supply which has retroactive effect provided the relevant Supply Agreement sets this out clearly and unambiguously.
Given that GSCOP is largely easy to follow and is intended to be understood by everyday suppliers, the use of “retrospective” and “retroactive” in the Code is unfortunate given that they are not easy words to understand. There are numerous websites which evaluate what the difference the two words mean and various answers are given.
In simple terms, we understand clause 3 to mean that you cannot alter the terms that were originally agreed, that is, re-write some or all of the agreement. However, if the agreement allows for it, a retailer may make changes after the event which may affect a prior period.
Clause 5 - No delay in Payments:
This clause is straightforward:
“A Retailer must pay a Supplier for Groceries delivered to that Retailer’s specification in accordance with the relevant Supply Agreement, and, in any case, within a reasonable time after the date of the Supplier’s invoice.”
This clause has received recent attention in light of Mrs Tacon’s report into certain of Tesco’s business practices (the SFO’s report is still to be finalised/ published) read more.
In that report, Mrs Tacon confirmed that she had found extensive evidence that where payments were otherwise than for goods supplied, or, there was any disagreement over amounts due, Tesco deducted or deferred payment. She noted, somewhat remarkably, that even where a debt had been acknowledged by Tesco, on occasions the money was not repaid until up to 24 months later.
Mrs Tacon’s concluded that “…that delay in payments was a widespread issue that affected a broad range of Tesco suppliers on a significant scale. The delay in payments had a financial impact on suppliers….”
As a result, she made 5 recommendations, such as that Tesco should pay suppliers in line with the terms of the supply agreement and Tesco should not make unilateral deductions. Mrs Tacon recommended that suppliers must be given at least 30 days to challenge any proposed deduction and Tesco (and therefore all of the retailers) must provide the supplier with an explanation of the proposed deduction with reference to the terms of the supply agreement. Where a supplier challenges a proposed deduction, Tesco must not deduct the disputed sum from the supplier’s trading account or otherwise from money owed to the supplier for goods supplied.
Clause 7 - No Payments for shrinkage
A Retailer must not include provisions in a supply agreement which makes a supplier liable for compensation for shrinkage – That is, losses that occur after groceries are delivered to a retailer’s premises through theft, the groceries being lost or accounting error.
The CC Report confirmed that the party best placed to control losses through shrinkage is the retailer (e.g. by improving security at depots or improving stock accounting procedures). Therefore, the risk and cost must be borne by them.
Clause 8 - Payments for Wastage
A retailer must not directly or indirectly require a Supplier to make any payment to cover any Wastage of that supplier’s groceries incurred at that Retailer’s stores unless:
Wastage is defined as groceries which become unfit for sale subsequent to them being delivered to Retailers. Unlike Shrinkage, there is no absolute prohibition on a retailer demanding payments for Wastage. However, a retailer must neither require nor request such a payment save in specific circumstances.
Plainly, all retailers will now ensure their supply agreements set out the basis upon which payments can be deducted. However, if that clause is not clear and/ or is unambiguous and/ or was not sufficiently specific as to the circumstances a payment could be demanded/ deducted (and the allocation of risks and costs that would apply), it may fall foul of clause 8.
Clause 17 - Senior Buyer
A retailer’s senior buyer must, on receipt of a written request from a supplier, review any decisions made by the retailer in relation to the Code or this Order.
As detailed above, this update covers 6 of the 17 clauses in GSCOP. We will cover off the remainder in subsequent updates. However, if you want to discuss any issue arising out of a breach or possible breach of GSCOP please do contact us without delay.
 The CC stated that “in our view, where a retailer and a supplier have concluded an agreement for the supply of goods, any subsequent unexpected unilateral change of the contractual terms governing the provision of those particular goods is generally not appropriate when the supplier has itself already sunk significant costs in order to meet the objectives set out in the agreement. Even when the renegotiation occurs prior to delivery of the goods and acceptance of them by the retailer, it is likely that a supplier will have taken irrevocable steps as a result of the contract. However, where a contract sets out expressly and unambiguously in advance the basis on which retroactive adjustments to the terms of supply can occur, a resulting adjustment ought not to be considered retrospective.”
This represents a mere snapshot of the law. It is for information only and is not intended to be, nor does it amount to, legal advice and therefore should not be relied upon as such. If you require advice on GSCOP or any other legal issue, please contact us without delay.