Acting in good faith under the Food and Grocery Code

The good faith obligation is intended to build trust between parties and improve standards of conduct. It's important for suppliers, retailers and wholesalers to understand how good faith might apply under the Food and Grocery Code (the Code).

Retailers and wholesalers must act in good faith

Retailers and wholesalers who are bound by the Code must at all times deal with suppliers in good faith. This obligation applies at all stages of the relationship.

Retailers and wholesalers cannot enter into a grocery supply agreement (GSA) that contains a provision limiting or excluding this obligation. If this happens, that provision will have no effect.

If you raise a dispute with a Code Arbiter, their investigation of the complaint must include consideration of the retailer’s or wholesaler’s obligation to act in good faith. They may also consider whether the retailer or wholesaler has acted fairly in dealing with the supplier.

The meaning of good faith – what the law says

What ‘good faith’ means is not defined in the Code. However, the Code does say that the obligation reflects historical judge-made law (known as the ‘common law’).

Under the common law, good faith requires retailers or wholesalers to exercise their powers under an agreement reasonably and not arbitrarily or for some irrelevant purpose. Conduct may lack good faith if a retailer or wholesaler acts dishonestly or fails to have regard to the legitimate interests of the supplier.

Australian courts have found business dealings to not be in good faith when they involve one party acting for some ulterior motive, or in a way that undermines or denies the other party the benefits of a contract.

While good faith requires a retailer or wholesaler to have regard to the rights and interests of a supplier, it does not require a retailer or wholesaler to act in the interests of the supplier. It also does not prevent a retailer or wholesaler from acting in its own legitimate commercial interests.

Factors indicating good faith

The Code lists a number of factors that may be taken into account when deciding whether or not a retailer or wholesaler has acted in good faith when dealing with a supplier. For example, whether the retailer or wholesaler has:

  • acted honestly
  • cooperated to achieve the purposes of the GSA
  • not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives
  • not acted in a way that is retribution for past complaints and disputes
  • conducted their trading relationship with the supplier without duress
  • conducted their trading relationship with the supplier in a way that recognises the need for certainty about the risks and costs of trading — particularly in relation to production, delivery and payment
  • observed any confidentiality requirements relating to information disclosed or obtained in dealing with or resolving a complaint or dispute with the supplier.

Whether the supplier has acted in good faith in dealing with the retailer or wholesaler may also be taken into account.

The listed considerations are not exhaustive — a court may also take other things into account in determining whether or not someone acted in good faith.

How the good faith obligation might be relevant to you - examples

The good faith obligation applies at all times — from bargaining to establish a GSA, to negotiating about price increases and dealing with a dispute. The following examples describe scenarios that a supplier might experience in dealing with a retailer or wholesaler.

While it is ultimately the courts, and not the ACCC, that can decide when conduct was not in good faith, these scenarios contain examples of considerations on whether or not a retailer or wholesaler has acted in good faith.

Example: negotiating a price increase – scenario A

A supplier of a breakfast cereal product finds that the cost of their inputs has increased significantly and the supplier is not able to absorb these costs. They notify a retailer to whom they supply this cereal of a price rise and the reasons why the price increase is necessary. The retailer does not immediately agree to the full price increase. The parties enter into negotiations.

During negotiations, the retailer responds promptly to the supplier’s communications and engages meaningfully with the key issues. The retailer takes into consideration the supplier’s reasons for requesting the price rise and makes reasonable counter-offers. This allows parties to make timely progress on the negotiations. The parties ultimately agree to a price rise that is less than the full price rise that the supplier initially requested.

Did they act in good faith?

In this scenario, the retailer did not agree to the full price rise but is still likely to have acted in good faith in doing so. This is because the retailer acted honestly and reasonably during negotiations and had regard to the legitimate commercial interests of the supplier. The retailer is not required to act in the interests of the supplier.

Example: negotiating a price increase – scenario B

The supplier of the breakfast cereal product in scenario A notifies another retailer to whom they supply this cereal of the price rise and the reasons why the price increase is necessary. Like the retailer in the first example, this retailer also does not agree to the full price increase that was notified and the parties enter into negotiations.

The retailer ultimately refuses to agree to a price increase. Their reason is that the supplier had previously initiated the dispute resolution processes under the Code in relation to the retailer’s conduct on other matters.

Did they act in good faith?

The good faith provision in the Code specifies that, in determining whether the retailer or wholesaler has acted in good faith, a relevant factor to consider is whether the retailer or wholesaler has not acted in a way that constitutes retribution against the supplier for past complaints and disputes. Not agreeing to a price rise is not necessarily, in itself, determinative. However, in this case it is unlikely that the retailer is acting in good faith because it is known to be acting in retribution against the supplier for previously raising a dispute under the Code.

Example: delisting a product

A supplier of packaged confectionary agrees to pay a retailer of the product $20,000 upfront to fund a marketing campaign for the product (as provided for in the GSA and in accordance with Code requirements). The campaign is to run over 8 weeks.

Two weeks into the campaign period, the retailer notifies the supplier that it will be delisting the confectionary product because it has not been meeting the retailer’s profitability targets as specified in the GSA. The retailer had started considering this product for delisting during the time that they were seeking funding from the supplier for the marketing campaign.

Did they act in good faith?

It is unlikely that asking the supplier to fund the marketing of a product that they were actively considering for delisting, and which they decided to delist not long afterwards, is conduct which shows good faith by the retailer. The retailer may have acted dishonestly or with recklessness, capriciousness and unreasonableness in their dealings with the supplier.

Example: preventing a supplier from fulfilling obligations

A supplier enters into a GSA with a retailer. The agreement sets out sales targets for the supplier, and specifies that the agreement can be terminated if the supplier does not meet these targets.

During the term of the agreement, the retailer decides that it no longer wants to work with the supplier. The retailer places the supplier’s product behind other competitors’ products on shelves so that consumers cannot see them. As a result of this, the supplier does not meet its sales targets, and the retailer terminates the agreement.

Did they act in good faith?

The retailer is unlikely to have acted in good faith, as it has acted for an ulterior motive and has not acted reasonably.

Example: not renewing an agreement

A small business supplies dairy products to a retailer under a two-year grocery supply agreement. Sales of the supplier’s products are very low throughout the term of the agreement.

Prior to the conclusion of the agreement, the retailer informs the supplier that due to the poor performance of the supplier’s products, the retailer will not enter into a new grocery supply agreement with the supplier.

Did they act in good faith?

The retailer is likely to have acted in good faith as its actions were based on its legitimate business interests.

If you think a retailer or wholesaler is not acting in good faith

If you think that a retailer or wholesaler has not acted in good faith you can make a complaint or raise a dispute. It is important to keep evidence of what has led to your complaint. Ensure that you keep written records of the conversations that you have with retailers and wholesalers during negotiations or when trying to resolve a dispute. If you come to an agreement about an issue, get confirmation in writing of what was agreed.

More information

Food and Grocery Code of Conduct

Protections for suppliers under the Food and Grocery Code

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