As published in The Retailer - 4 January 2014
Strengthening the ‘code’ and refereeing the supply chain
After five long years, a Groceries Code Adjudicator (GCA) has been installed to enforce the Groceries Supply Code of Practice - introduced to regulate the relationship between supermarkets and their suppliers. However, many question whether the GCA can effectively adjudicate upon complaints when the code it is upholding suffers from a lack of clarity in its language.
While, for example, retailers are given the right to vary terms of supply agreements unilaterally on ‘reasonable notice’, a ‘reasonable’ timeframe has not been defined despite the fast pace of today’s consumer industry. Further, the code prevents retailers from ‘requiring’ a supplier to make payments for wastage, though the definition of ‘requiring’ permits ‘ordinary commercial pressure’. Given the alleged imbalance in power between the supermarkets and many suppliers, what amounts to ‘ordinary commercial pressure’ in day-to-day trading?
In many instances, supermarkets have tightened up their terms of purchase in order to comply with the code, ensuring otherwise prohibited actions - such as passing on the costs of buyer visits and market research to suppliers – are written into the permitted ‘relevant supply agreement’.
Likelihood of complaints
Understandably, retailers under investigation will demand full details of what is being alleged against them, in order to adequately defend themselves. For the GCA, this can lead to a careful balancing act between its duty to protect supplier confidentiality - for fear the supplier’s relationship with the retailer could be negatively affected - and the practicalities of carrying out a successful investigation.
Because of this, suppliers may feel the code does not protect them effectively and so won’t raise complaints against retailers, and in turn the low numbers of complaints could be used as evidence of retailer compliance.
The role of the GCA
Statutory guidance issued on 18 December 2013 explains two of the GCA's functions; investigation and enforcement.
Investigation allows the GCA to undertake enquiries if there are reasonable grounds to suspect that a retailer has broken the code or failed to follow a recommendation. Evidence of breach may be taken from information in the public domain, or be provided by suppliers, trade associations or whistle-blowers via the GCA’s revised template.
Once aware of any issues, the GCA will prioritise them based on the level of impact the alleged practice is having on suppliers and the strategic importance the investigation may have in relation to the code’s statutory purpose; for example, if the issues are of wider public importance.
Once a formal investigation has been opened, the GCA has statutory powers to require individuals to provide information, but must ensure this information remains confidential. The GCA will resolve investigations within 12 months, or sooner if reasonably practical.
Enforcing the code
If satisfied that the code has been breached, the GCA has a number of sanctions at its disposal including the requirement for the retailer to pay costs arising as a result of the investigation.
Where a less serious breach has occurred, the GCA may make recommendations to the retailer to change its practices. It may also require information about the breach and its remedies to be published by press release, newspaper advertisement, open letter to relevant trade associations or through the retailer’s annual report or website, in order to encourage best practice.
In more serious cases, or where the GCA considers the breach would constitute an effective deterrent, a fine may be imposed. Any financial penalty levied will be calculated following a stepped approach. This will consider: the seriousness of the infringement; aggravating factors, such as intentional and repeated breaches; failure to comply with recommendations; and any mitigating factors, such as cooperation with the investigation, remedying the breach promptly, specific deterrence and proportionality. The maximum financial penalty for breach of the code has yet to be confirmed by the Secretary of State.
The GCA can recommend minor changes to the code, found at Schedule 1 of The Groceries (Supply Chain Practices) Market Investigation Order, 2009, but only in relation to circumstances arising since the 2008 Competition Commission Report, for example, technological changes that result in retailers passing excessive risks to suppliers.
Choosing the sanctions
When deciding which sanctions to apply, the GCA will refer to the ‘Penalties Principles’. These dictate that any sanction imposed should be responsive and appropriate with the aim of changing the offender’s behaviour. It should also eliminate any financial benefit gained from the breach, and restore the harm caused by non-compliance as well as deterring future non-compliance.
In addition , the GCA will also consider the seriousness of the breach and the level of harm caused by the breach, as well as the number of suppliers affected and the importance of the product and/or category concerned.
The GCA must always be conscious of the proportionality of its enforcement power and how likely it is to reach a successful outcome, bringing about beneficial change in the supply chain. Ultimately, the aim of any investigation is to reduce the number of breaches and so the number of future complaints.
Reducing complaints and improving compliance
It is highly unlikely that the GCA will launch a full investigation based upon a single complaint, but retailers should be mindful that single breaches may still be acted upon by way of enforcement.
Though financial penalties may be imposed, these do not provide any form of compensation to suppliers and will be paid into the Government’s Consolidated Fund for general use.
It remains to be seen though whether these latest developments will in fact stimulate investigations, or have any effect upon the number of complaints and consequential enforcement action by the GCA.
If you have any questions or would like more information please contact Paul Attwood, Partner.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.