On 1 September 2023 the New Zealand Government announced that the Grocery Supply Code (Code) will commence on 28 September 2023.
We’ve created a summary of supplier rights and retailer obligations in the Code, which you can download.
Click here to download our Grocery Supply Code summary
Structure of the Code
The Code is mandatory, meaning designated regulated grocery retailers (Retailers) must comply with the Code. Retailers are essentially the two main supermarket chains (Foodstuffs North Island, Foodstuffs South Island, Woolworths New Zealand) and their stores. Most Code provisions have a maximum pecuniary penalty per breach for companies of the greater of $3M, the value of any commercial gain (if readily ascertainable), and 3% of turnover (if commercial gain is not readily ascertainable).
While the Code commences on 28 September, there is a “grace period” of 6 months which provides some leeway for the Retailers to update existing grocery supply agreements if they are inconsistent with the Code.
The Code creates an overarching obligation to deal with grocery suppliers in good faith. Good faith is a broad concept which is dependent on the context. It encompasses honesty and sticking to the spirit of agreements. In colloquial terms it can be described as “playing fair” or “putting one’s cards on the table”. The Code lists many factors which can be considered in determining if a Retailer has acted in good faith including honesty, retaliation, duress, recognition of risks and costs of trading and provision of information to suppliers in a timely way, observation of confidentiality requirements, avoidance of unreasonable discrimination, and if the supplier has acted in good faith. It does not prevent usual commercial “hard bargaining”.
In determining whether the retailer has acted in good faith in dealing with a supplier, the following may be taken into account:
(a) whether the retailer has acted honestly:
(b) whether the retailer has co-operated to achieve the purposes of the relevant grocery supply agreement (including being responsive and communicative with the supplier):
(c) whether the retailer has not acted arbitrarily, capriciously, unreasonably, recklessly, or with ulterior motives:
(d) whether the retailer has not acted in a way that constitutes retaliation against the supplier for past complaints and disputes:
(e) whether the retailer’s trading relationship with the supplier has been conducted without duress:
(f) whether the retailer’s trading relationship with the supplier has been conducted in recognition of the need for— (i) certainty regarding the risks and costs of trading, particularly in relation to production, delivery, and payment; and (ii) provision of information to the supplier in a timely manner:
(g) whether the retailer has observed any confidentiality requirements relating to information disclosed or obtained in dealing with or resolving a complaint or dispute with the supplier:
(h) whether the retailer has avoided unreasonable discrimination or distinction between suppliers:
(i) whether, in dealing with the retailer, the supplier has acted in good faith.
The Code also provides more specific obligations on grocery supply agreements, payments, and other conduct. These specific obligations cover:
- The form and content of grocery supply agreements
- Unilateral and retrospective variations
- Transport or logistics services
- Payments to suppliers
- Payments for shrinkage, wastage, as a condition of being supplier, for retailer business activities, and promotions
- Funded promotions
- Delisting
- Product ranging, shelf space allocation, and range reviews
- Price increases
- Intellectual property rights and confidential information
- Fresh produce standards and quality specifications
- Unduly hindering or obstructing supply to competitors, business disruption, and freedom of association
The Code (or at least our summary) is worth a read for grocery suppliers dealing with the Retailers. For those familiar with the Australian Food and Grocery Code of Conduct, the New Zealand Code is largely based on the Australian equivalent. Both codes also draw from UK experience on the UK Groceries Supply Code of Practice.
The Code is directly enforceable by a new Grocery Commissioner who sits within the Commerce Commission (Commission) and will have a dedicated team with around 25 staff.
Escalation options for suppliers
A dispute resolution scheme is expected to be in place by the end of 2023 that grocery suppliers will be able to refer disputes of $5M or less to. The dispute resolution scheme will be able to lead to binding decisions that can only be appealed on questions of law.
Broadly, escalation options for suppliers will likely be:
- Negotiate with the Retailer. Remember Retailers have an overarching obligation to deal with suppliers in good faith.
- Refer the dispute to the dispute resolution scheme (the timeline and process criteria for this is still to be determined). The dispute resolution scheme may potentially facilitate resolution by mediation (binding settlement agreement between the parties) and adjudication (binding decision by an independent adjudicator).
- Any other dispute resolution processes provided for in their grocery supply agreement with the Retailer.
- Complain to the Grocery Commissioner. The Grocery Commissioner has stated “Anyone can make a complaint to the Commission about a party in the grocery sector at any time.” by making a complaint through https://comcom.govt.nz/make-a-complaint or calling 0800 943 600 or emailing contact@comcom.govt.nz.
- Issue court proceedings. The Grocery Commissioner can also seek a declaration of contravention from the court, which suppliers can piggy-back off to seek remedies from the court without needing to prove breach (though loss may still need to be proved). Remedies that can be sought include compensatory orders, cancellation and variation orders, and injunctions. Only the Commission can seek pecuniary penalties.
Learnings from Australia
While codes of conduct might seem novel in New Zealand, they are much-used regulatory tools in Australia. At the recent Law Council of Australia Competition & Consumer Workshop, “Codes as regulatory instruments” was a dedicated session, with speakers including a Grocery Code Arbiter, ACCC representative and a Treasury Competition Taskforce speaker (on secondment from the ACCC). (Treasury in Australia performs a similar role on these issues to New Zealand’s Ministry of Business, Innovation and Employment.)
Australia has prescribed mandatory codes (which industry must follow) for Dairy, Franchising, Horticulture, Electricity Retail, Gas Market, Oil Code, Sugar Code, Unit Pricing, & Wheat Port. The Food and Grocery Code in Australia is a “prescribed voluntary code” (ie opt-in, then legally binding). The codes provide a set of rules or minimum standards within an industry covering the relationship between industry participants and other stakeholders.
These Australian codes fall under their Competition & Consumer Act (equivalent to our Commerce Act and Fair Trading Act). New Zealand’s grocery Code is instead issued directly under the new Grocery Industry Competition Act. New Zealand also introduced Unit Pricing Regulations applying to certain grocery retailers from 31 August 2023.
Observations relevant to New Zealand are:
- the need for strong sanctions for breach of the Code, which New Zealand has (most Code provisions have “tier 2” pecuniary penalties) – “incentives matter” was the observation made here
- the benefit of being able to confidentially work through concerns.
Under the Australian Food and Grocery Code, retailers each have their own Code Arbiter, which among other things can work through potential disputes on a confidential basis. The ACCC describes its role as being to enforce the code, including undertaking compliance checks, but “We don’t resolve disputes under the code between suppliers and retailers or wholesalers”. This is to be contrasted with the New Zealand system where the Commission will play a vital role.
The approach taken by the Commission to confidentiality will be key as it is subject to the Official Information Act. The Commission is keen to ensure procedural fairness and has strongly signalled it remains alive to confidentiality concerns. We expect the Commission will issue guidance on how it plans to approach confidentiality in the near future. There should be real comfort for suppliers from the approach taken by the Commission in the grocery market study. Other mechanisms for maintaining confidentiality will include working through industry groups (such as the New Zealand Food and Grocery Council) and through external advisors (including consultants & lawyers).
Recent improvements to the Australian regime, including around the role of the Code Arbiters, is seen as assisting with resolution of disputes, visibility through reporting to the public, improved education of parties’ responsibilities, compulsory training for retailers, and an overall increase in confidence. We understand that there has been improvement on areas of concern (such as delays in payment, IP (including in relation to private label, delisting), and price increases). It is important to remember that “hard bargaining” will remain, especially on price. However the enactment of the Grocery Industry Competition Act and the issuing of the Code should lead to an increase in efficiency and clarity of commercial dealings. (The Australian Treasury is also currently consulting on policy options for reform to law regulating unfair trading practices – so watch this space as New Zealand has a track record of following Australia’s lead.) The new dedicated Grocery Commissioner (supported by a large team, as well as the Commission’s other resources), coupled with New Zealand’s ability to draw on Australian and UK experience, gives cause for optimism.
More information
The Commission published an open letter to the grocery sector on 13 July 2023, marking the coming into force of the Grocery Industry Competition Act. It plans to publish more information about rights and responsibilities under the Code soon.
More information can be found on the Commission’s website and the Code can be found here.