The Grocery Supply Code (the Code), which applies to regulated grocery retailers and suppliers in New Zealand, will come into effect (with some exceptions) from 28 September 2023.
The purpose of the Code is to, among other things, promote fair conduct (and prohibit unfair conduct) between regulated grocery retailers and suppliers and promote transparency and certainty about terms of grocery supply agreements. A draft version of the Code was initially circulated for public submission in early June 2023. We set out below key changes made to the draft Code in the final version and how the Code will take effect.
Please see our previous alert on the Grocery Industry Competition Act 2023 for a summary of the draft Code.
Who will the Grocery Supply Code apply to?
The Code imposes obligations on the following regulated grocery retailers (designated under the Grocery Industry Competition Act 2023): Foodstuffs, Woolworths and their related bodies corporate (including franchisees) for the benefit of grocery suppliers. “Groceries” are defined in the principal Act as meaning goods in any of the following categories: fresh produce; meat, seafood, or meat substitutes; dairy products; bakery products; chilled or frozen food; pantry goods or dry goods; manufacturer-packaged food; non-alcoholic drinks; personal care products; household consumables and pet care products.
Is the final version of the Code the same as the Draft Code?
The majority of the draft Code has been carried through to the final version, with minor changes made for clarity between the two versions. However, there are a few important substantive changes. A list of the key provisions in the Code and a summary of substantive changes from the draft Code is below:
|
Clause |
Draft Code |
Final Code |
|
6 |
Regulated grocery retailers must deal with suppliers in good faith. |
No substantive change |
|
7, 8 |
Regulated grocery retailers must ensure all supply agreements are written in plain English and specify key terms. |
Regulated grocery retailers must ensure all supply agreements are written in plain language and specify key terms. |
|
9, 10 |
Regulated grocery retailers must not vary a supply agreement without the supplier’s consent or with retrospective effect |
No substantive change |
|
11 |
Regulated grocery retailers must not directly or indirectly require a supplier to use a particular transport or logistics service. |
New clause 11(1)(b) added – a retailer must not directly or indirectly impose unreasonable service standards in respect of transport or logistics. |
|
16 |
Regulated grocery retailers must not require a supplier to make any payment towards the cost of the retailer’s business activities unless specific circumstances apply. |
No substantive change. |
|
18, 19 |
Regulated grocery retailers must comply with certain requirements if delisting suppliers’ products. |
New examples included in clause 18 which clarify when the obligations on a regulated retailer regarding delisting apply to franchisee operators and when they apply to the parent company. Removal of the requirement in clause 19(1)(c) to give suppliers six months notice before delisting fruits and vegetables. |
|
22 |
Regulated grocery retailers must not place a supplier under duress that has the purpose, effect or likely effect of preventing that supplier from supplying groceries to any other party. |
Regulated grocery retailers must not engage in any conduct that has the purpose, effect, or likely effect of unduly hindering or obstructing a supplier from supplying groceries to any other party. |
|
23 |
Regulated grocery retailers must not threaten a supplier with business disruption or termination of a grocery supply agreement without reasonable grounds. |
No substantive change. |
|
24 |
Regulated grocery retailers must respect the IP held by the supplier and not infringe IP through development of private label products. |
No substantive change. |
|
New rule |
N/A |
New clause 27 “Transfer of Intellectual Property Rights” prevents a regulated retailer from directly or indirectly requiring a supplier to transfer or exclusively license any intellectual property rights held by the supplier in relation to a grocery product as a condition or term of supply of an equivalent private label product of the retailer. |
|
28 |
Regulated grocery retailers must not provide an inducement to prevent suppliers from forming an association of suppliers or associating with other suppliers for a lawful purpose, or discriminate or take action against suppliers that participate in an association. |
No substantive change – except this is now clause 29 as there is a new clause 27 discussed above. |
What are the consequences for not complying with the Code?
If a regulated grocery retailer fails to comply with the Code, suppliers will be able to access a range of remedies under the Act including the ability to seek compensatory orders, orders varying or cancelling a supply contract or injunctive relief. The supplier can also refer the dispute to the alternative dispute resolution scheme managed by the Ministry of Business, Innovation and Employment (MBIE) which is yet to be established.
The Commerce Commission can seek significant penalties against regulated grocery retailers and individuals for breach of the Code. The majority of penalties that apply to breaches of the Code are “Tier 2” penalties – a maximum of $200,000 for an individual, and the greater of $3m or the commercial gain from the contravention or 3% of the turnover in each accounting period in which the contravention occurred for others. However, there are also a small number of breaches of the Code that will only give rise to a “Tier 4” penalty (maximum of $30,000 for an individual, or $300,000 in any other case).
When will the Code come into effect?
The parts of the Code which do not require retailers to modify supply agreements (such as, for example, clause 29 – precluding a regulated retailer from inducing suppliers not to form an association of suppliers) and the overriding obligation of regulated retailers to deal with suppliers in good faith (clause 6) will come into effect on 28 September 2023.
For the parts of the Code which specify certain requirements for grocery supply agreements (such as clauses 8 and 9), these will only come into effect for existing grocery supply agreements from 28 March 2024. Existing agreements are defined as those entered into or arrived at before the commencement of the Regulations (in this case, 28 September 2023). Accordingly, regulated retailers have a six-month grace period in which to review existing supply agreements and make amendments to these agreements to address inconsistency with the Code. At the conclusion of this grace period (if not done beforehand) regulated retailers must offer to suppliers to vary existing supply agreements so that they are consistent with the Code (clause 5). However, if suppliers unreasonably reject an offer made by a regulated retailer under clause 5 of the Code, then even if the supply agreement is inconsistent with provisions of the Code after the grace period ends, the regulated retailer will not be liable for a pecuniary penalty in respect of that inconsistency.
Our view
We anticipate the Code will go some way to address the inequality in bargaining power between regulated retailers and suppliers. There is likely to be a large amount of work on the part of regulated retailers during the six-month grace period (in reality this period is much shorter given the Christmas/New Year break) to assess existing supply agreements for compliance with the Code. Suppliers should ensure they are familiar with the Code and its requirements so they can properly assess whether any proposed amendments to existing supply agreements will ensure compliance with the Code and what their remedies are if a regulated retailer is in breach of the parts of the Code that come into effect from 28 September 2023.
We also consider it likely that disputes regarding the application of the Code will be referred to the alternative dispute resolution scheme to be managed by MBIE and that these disputes will highlight any issues or inconsistencies with the operation of the Code. While yet to be established, we understand MBIE intends for the scheme to be set up before the end of 2023. We will be closely monitoring developments in this area.
For any specific inquiries or to discuss how the Code may impact your business or existing agreements, please contact our dedicated team of lawyers who specialise in competition and regulatory law.
This article was co-authored by Jovana Nedeljkov, a Senior Solicitor in our Corporate and Commercial team.
