By Rod Sims, ACCC Chairman
Following the Coles case, other major companies should realise that no matter how much market power they hold, they must still deal with their suppliers fairly.
Late last year, in the days leading up to Christmas, the Federal Court handed down a decision which should have profound implications for relations between big and small business in Australia.
The case was the ACCC's action against Coles alleging unconscionable conduct in its dealings with smaller suppliers. The conduct the ACCC was concerned about involved Coles seeking payments and withholding money outside of the terms that had been negotiated with its suppliers, for reasons that included participating in a supplier program and for so-called profit gaps, waste and markdowns, and short or late deliveries.
When the ACCC instituted proceedings last year, I said that we consider the conduct contrary to the prevailing business and social values which underpin business standards, and that the proceedings provided the court with an opportunity to consider whether conduct of this nature is unlawful.
I also said that if the conduct alleged is established in court, the ACCC expects that the community will share our view that business should not be conducted in this way in Australia. To Coles' credit, the legal proceedings were resolved by consent after it acknowledged aspects of its conduct were inappropriate and broke the law. This saved considerable resources for Coles, the ACCC and the court. However, it did not prevent the court from making clear its grave concern with the conduct at the heart of the ACCCs case, which the court described as serious, deliberate and repeated misconduct which included orchestrated and relentless practices and demands.
The judge found that Coles' conduct was serious because it was difficult for the ACCC to detect, due to the reluctance of smaller suppliers to report complaints when they rely on these retailers for the viability of their businesses.
The court made some additional observations. The first was to dismiss a submission by Coles that the contraventions in this case were somehow distinguishable or of a less serious nature because they did not involve 'Vulnerable consumers' (the usual victims of unconscionable conduct in legal action). The judge said that while Coles' conduct did not involve vulnerable consumers, it did involve vulnerable suppliers who were up against the second largest retailer of grocery products in Australia. Indeed, the court said it was difficult to envisage circumstances involving a larger disparity in bargaining power. The court did not find any distinction between consumers and small businesses as victims of the conduct alleged, and confirmed that the Competition and Consumer Act has a critical role to play in protecting small business from unconscionable conduct.
The second observation concerned the size of the penalties. The court observed that the current maximum penalties ($1.1 million for each contravention) are arguably inadequate for a corporation the size of Coles. This is an issue for the Parliament In this case, we also have Coles' agreement to a process, being run by Jeff Kennett, that will see recompense and some adjustment to future arrangements for some of the over 200 affected suppliers. So the $10 million in penalties is only part of the financial exposure of Coles.
Commercial arrangements between big businesses and their suppliers are of course not confined to the supermarket sector. The court's assessment and disapproval of the conduct in this case is a timely reminder to large businesses in all sectors that dealing unconscionably with small suppliers in commercial transactions will be viewed by the court as seriously as dealing unconscionably with consumers.
The ACCC recognises that commercial transactions between businesses big and small will often be robust, and that increasing profit is at the heart of legitimate commercial endeavour.
Indeed, we agree that competition does and should involve aggressive and combative behaviour. Like all things in life, however, this case says there are some limits on such behaviour.
These limits ensure our market economy works as it should. All businesses should negotiate in a principled manner and smaller businesses in particular need to be able to plan and invest with some level of contract certainty. Certainty in business arrangements is a cornerstone of our society, and the case demonstrates that the provisions of the act apply to protect suppliers as well as consumers in their dealings with large corporations.
This article was first published in the Australian Financial Review on 23 February 2015.