09 February 2017

The Australian Competition and Consumer Commission (ACCC) alleged that Woolworths engaged in unconscionable conduct within the meaning of the Australian Consumer Law when it designed and implemented its Mind the Gap scheme in 2014.

In 2014 Woolworths was facing a half-year profit shortfall. As part of its strategy to ‘close the gap’ between targeted sales and profit and expected sales and profit, Woolworths implemented the scheme. One element of the scheme saw Woolworths seeking payments from Tier B suppliers, based on the performance of those suppliers in the period from July to October 2014, relative to the corresponding period in 2013, according to metrics or ‘lenses’ adopted by Woolworths.

The scheme required Opportunity Reports to be prepared, which set out the underperformance, if any, of each supplier according to each ‘lens’. Category managers and buyers would then approach suppliers with ‘asks’, being the financial contribution or support that each supplier was to be asked to make.

ACCC took the issue to the Federal Court for an order that the purpose, design and implementation of the scheme was unconscionable under section 21 of the Australian Consumer Law (ACL).

In considering questions of unconscionability the Court must consider “all the circumstances”. Justice Yates noted, while there was evidence of email correspondence between Woolworths’ employees and Tier B suppliers about the scheme the ACCC had called no evidence from any supplier claiming to be affected by the scheme. It was highlighted that the absence of evidence from the suppliers made it impossible to assess some of the factors to which the Court had to have regard. This was a significant weakness in the ACCC’s case.

His Honour discussed each of the 13 propositions which the ACCC argued in its oral closing submissions the Court should have in mind when deciding whether the conduct had been unconscionable.

ACCC’s propositionCourt’s consideration
Not business as usual - the scheme was not part of the normal trading relationships or dealings between Woolworths and its suppliers.While the scheme was unusual in that it was a formalised and coordinated campaign across the whole of the business, the dealings with its suppliers in implementing the scheme were not unusual and were typical.
Last minute grab for cash - the scheme’s sole purpose was to make up part of Woolworths’ perceived profit gap.The mere fact that conduct is engaged in for profit cannot be a hallmark of unconscionability, particularly in the context of trade or commerce. The commercial relationships between Woolworths and its suppliers were such that each party was seeking to maximise its profit out of the relationship.
Suppliers not at fault - Woolworths’ profit gap was not the fault of the suppliers who were being called upon to fill it.Notions of fault or innocence did not assist in the analysis.

For supermarket businesses, cost to the retailer is not just a function of the price-per-unit paid for the goods and includes all other financial support provided by the supplier in respect of the goods.

Suggestion that the suppliers had not contributed to Woolworth’s profit shortfall had not been established as a fact by the ACCC.
Retrospective - the scheme was retrospective in the sense that the payments were not forward-looking payments in the context of anticipated commercial dealing.Approaching a supplier to re-open a concluded transaction to seek a greater benefit than that already gained from it does not, without more, amount to conduct that is unconscionable.
No warning - the scheme was not foreshadowed with the suppliers or agreed to by them (when the trading relationship was set up) as a reasonable commercial thing for Woolworths to be doing.The significance of a failure to foreshadow that an ‘ask’ would be made was reduced because the Court accepted that the approaches made to suppliers under the scheme were not unusual and were typical of Woolworths’ dealings with suppliers.

The possible suggestion in the ACCC’s submission that there is an element of unconscionability when a party to a trading relationship approaches the other party to make a request or to engage in a negotiation, without first obtaining the second party’s prior agreement to that approach being made, is untenable.
No contractual or legal basis - there was no contractual or any other legal basis or right that existed for the ‘asks’ under the scheme.Woolworths did not need a contractual or other legal right to approach its suppliers to enter into a negotiation with them; nor did it assert any such right.
Arbitrary quantumThis element was not pleaded by the ACCC.

If the allegation had been properly raised Woolworths would have had the opportunity to address the allegation in evidence. In these circumstances his Honour was not prepared to permit the ACCC to rely on the allegation.
Demands - the ‘asks’ were demands because they were urgent, insistent, accompanied by threats of an absence of cooperation in the future and threats of escalation.The proposition that the ‘asks’ were ‘demands’ or that they could be characterised as ‘urgent’ or ‘insistent’ was not accepted because:

(a) while suppliers were asked to come forward with proposals within a relatively short timeframe, this did not transform the ‘asks’ into ‘demands’ or mean that the ‘asks’ were made in circumstances necessarily importing urgency;

(b) the setting of timeframes for action was not unusual commercial behaviour; and

(c) the timeframes in the ‘asks’ could not be enforced by Woolworths.

Further, statements in scripts provided to category managers and buyers such as that Woolworth’s ‘ability to continue to support your business is predicated on [gross profit margin or trade spend] moving in the right direction’, were held not be ‘threats’ but examples of plain-speaking where a party in a trading relation is making clear its commercial expectations. It was relevant to this conclusion that ‘the ACCC called no evidence from any supplier who considered that it had been “threatened” by such statements’.
Opportunity Reports unjustified and arbitrary - the Opportunity Reports were unjustified, arbitrary and irrational for a number of reasons, including the fact that the reports assessed performance by reference to a small window of time and that the ‘lenses’ used by Woolworths were ‘bizarre’.This element was not pleaded by the ACCC and the allegations could not be raised in the ACCC’s closing submissions. In any event, the Court would not have been prepared to find that the period July to October was a small window of time to carry out the assessment or that the ‘lenses’ were ‘bizarre’, particularly as that characterisation was based purely on the ACCC’s assessment.
No checks for rationality - no one in Woolworths questioned, checked or verified the Opportunity Reports for rationality.This element was also not pleaded by the ACCC. Therefore the allegations could not be relied on by the ACCC. In any event, it was noted that there was no reason to question the accuracy of the data in the Opportunity Reports and that such data was based on Woolworths’ business and accounting records.

Further, the category managers and buyers were instructed to use their discretion and knowledge of the suppliers concerned in deciding whether to make, and the quantum of, an ‘ask’.
No allowance for Woolworths’ role and assumption that suppliers at fault - Woolworths made no allowance for its role in creating its poor profit performance. The working assumption behind the scheme was that the suppliers were at fault for Woolworths’ poor profit performance and that the suppliers should pay for that perceived poor profitability.Views about the relevance of notions of ‘fault’ or ‘innocence’ were repeated.

The ACCC’s submissions proceeded as if Woolworths’ perceived profit shortfall was attributable to actions that it alone took or failed to take. However, it was noted that the scheme was conducted in circumstances where Woolworths had analysed the trade performance of the Tier B suppliers and, where it was considered appropriate to do so, approached particular suppliers to make good what it regarded to be the shortfall in their performance.
Scale back of expectations - Woolworths’ expectations were scaled back to about 10% of the total value of the ‘opportunities’ shown in the Opportunities Report. It was alleged that this showed that Woolworth’s knew that ‘this was a try-on’.It was not thought to be fair to characterise Woolworths’ conduct as ‘a try-on’. The discretion was conferred on category managers and buyers due to the recognition that, because of circumstances that might be special to particular suppliers, it might not have been appropriate to make an ‘ask’ for the amount of the ‘opportunity’.

Further, without proper evidence, the Court would not attribute any particular significance to the fact that Woolworths’ targets were set at approximately 10% of the total value of the ‘opportunities’.
Other considerationsThe ACCC’s allegation that Woolworths took advantage of a substantially stronger bargaining position relative to the supplier was rejected for the following reasons:

(a) It was not accepted that it was self-evident that there was an immense disparity in bargaining power simply because Woolworths felt that it was able to embark on the scheme.

(b) While the ACCC highlighted that Woolworths had a large market share by overall sales value, there was no attempt by ACCC to move from generalities to specifics. For example, there was no attempt by the ACCC to relate the percentage share to the sale of products supplied by the Tier B suppliers.

(c) The ACCC’s case concerned conduct directed to Tier B suppliers as a class. However there was no evidence supporting the suggestion that the Tier B suppliers were homogenous and that they shared any common characteristic concerning bargaining power.

Finally, while Woolworth’s conduct may be seen by some as unjustified, unfair or unjust according to their own standards of commercial propriety, this was not relevant to the standard imposed by section 21(1) of the ACL.

This case highlights the high threshold that must be met for a court to consider that an entity has engaged in unconscionable conduct under section 21(1) of the ACL. Notably, the existence of unequal bargaining power between parties to a transaction and use of its superior bargaining power by one party, will not necessarily be sufficient to give rise to a claim of unconscionability.

 

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