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About the obligation to act in good faith
Large grocery businesses must deal with suppliers in good faith. Failure to act in good faith will make the large grocery business liable to civil penalties. As with other Food and Grocery Code of Conduct obligations, evidence will be needed to support any good faith violations. This may require suppliers to provide copies of emails or file notes of phone calls with large grocery businesses. This page sets out what the good faith obligation does and does not require from large grocery businesses.
The good faith obligation is intended to build trust between parties and improve standards of conduct.
The good faith obligation always applies when dealing with suppliers, such as during:
- pre-contractual bargaining
- establishing a grocery supply agreement
- exercising rights under a grocery supply agreement
- negotiating price increases
- dealing with a dispute
- varying or terminating a grocery supply agreement.
If a large grocery business enters into a grocery supply agreement that contains a provision limiting or excluding the good faith obligation, they will be liable to civil penalties.
What good faith means
The meaning of good faith under the code is determined by reference to judge-made law, known as the ‘common law’. This concept can develop over time to reflect changing commercial practices and social attitudes.
It is the courts, and not the ÌÇÐÄÔ´´, that decides if behaviour is in good faith or not.
The code lists several factors that may be considered when deciding whether a large grocery business has acted in good faith when dealing with a supplier.
These factors include whether the large grocery business has:
- acted honestly
- cooperated to achieve the purposes of the grocery supply agreement
- not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives
- not acted in a way that is retribution against the supplier
- conducted their trading relationship with the supplier without duress
- conducted their trading relationship with the supplier in recognition of 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 large grocery business may also be considered.
A court may also take other things into account in determining whether someone acted in good faith.
What good faith does not require
Acting in good faith doesn’t require a large grocery business to:
- act in the interests of the supplier
- stop acting in their own commercial interests
- agree to make any changes to prices or a grocery supply agreement that are requested by a supplier
- buy products from a supplier forever.
Examples of dealing and not dealing in good faith
The following examples describe scenarios that a supplier may experience in dealing with a large grocery business.
Example 1 of negotiating a price increase
Scenario
A supplier of a breakfast cereal product finds that the cost of their inputs has increased, which they cannot absorb. They notify the large grocery business who they supply of a price rise and the reasons. The large grocery business doesn’t immediately agree to the full price increase. The parties start negotiations.
During negotiations, the large grocery business responds promptly to the supplier’s communications and engages with the key issues. The large grocery business considers 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.
Factors relevant to good faith
In this scenario, the large grocery business didn’t agree to the full price rise but is still likely to have acted in good faith. This is because the large grocery business acted honestly and reasonably during negotiations and paid attention to the legitimate commercial interests of the supplier. The large grocery business isn’t required to act in the interests of the supplier.
Example 2 of negotiating a price increase
Scenario
The supplier of the breakfast cereal product in scenario A notifies another large grocery business who they supply of the price rise and the reasons. This large grocery business also doesn’t agree to the full price increase that was notified and the parties start negotiations.
The large grocery business ultimately refuses to agree to a price increase. Their reason is that the supplier had previously initiated the dispute resolution process under the code about the large grocery business’s behaviour on other matters.
Factors relevant to good faith
The code states that courts determining good faith may consider whether the large grocery business has engaged in retribution against the supplier. In this case, it is unlikely that the large grocery business is acting in good faith.
Example of delisting a product
Scenario
A supplier of packaged confectionary agrees to pay a large grocery business $20,000 upfront to fund a marketing campaign for the product. This is covered in the grocery supply agreement and in line with code requirements. The campaign is to run over 8 weeks.
Two weeks into the campaign, the large grocery business notifies the supplier that it will be delisting the confectionary product. The product has not been meeting the large grocery business’s profit targets in the grocery supply agreement. The large grocery business had started considering this product for delisting during the time that they were seeking funding from the supplier for the marketing campaign.
Factors relevant to good faith
Asking the supplier to fund the marketing of a product that was being actively considered for delisting, and delisted not long afterwards, is behaviour that is unlikely to be acting in good faith. The large grocery business may have acted dishonestly or unreasonably in their dealings with the supplier.
Example of preventing a supplier from fulfilling obligations
Scenario
A supplier enters into a grocery supply agreement with a large grocery business. 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 large grocery business decides that it no longer wants to work with the supplier. The large grocery business places the supplier’s product behind other competitors’ products on shelves so that consumers can’t see them. As a result, the supplier does not meet its sales targets, and the large grocery business terminates the agreement.
Factors relevant to good faith
The large grocery business is unlikely to have acted in good faith, as it acted with an ulterior motive and did not act reasonably.
Example of not renewing an agreement
Scenario
A supplier supplies dairy products to a large grocery business under a 2-year grocery supply agreement. Sales of the supplier’s products are very low throughout the term of the agreement.
Before the end of the agreement, the large grocery business informs the supplier that due to the poor performance of the supplier’s products, the large grocery business will not enter into a new grocery supply agreement with the supplier.
Factors relevant to good faith
The large grocery business is likely to have acted in good faith as their actions were based on their legitimate business interests.
Exemption from the good faith obligation
The only exemption from the good faith obligation in the code is when a ‘large supplier’ has not acted in good faith towards the large grocery business. When this occurs, the large grocery business is not required to act towards that large supplier in good faith for that matter, or matters of that kind.
A supplier is a ‘large supplier’ for a financial year when the total revenue earned by the supplier, and each related body corporate, from carrying on a business of supplying groceries for retail sale in Australia by another person exceeded $1 billion for the previous financial year.
The exemption does not remove the large grocery business’s obligation to act in good faith:
- towards all other suppliers, and
- in all non-related matters when they are dealing with that large supplier.
Even when the large grocery business is exempt from acting in good faith, they are still required to otherwise act lawfully. This includes complying with the rest of the code.