On 8 December 2016, the Federal Court (per Yates J) dismissed unconscionable conduct proceedings brought under section 21 of the Australian Consumer Law (ACL) by the Australian Competition and Consumer Commission (ACCC) against Woolworths Ltd (Woolworths) in relation to the design and implementation of its “Mind the Gap” scheme, through which Woolworths sought to obtain payments from its suppliers (see Australian Competition and Consumer Commission v Woolworths Limited [2016] FCA 1472) (ACCC v Woolworths).

What is unconscionable conduct?

Unconscionable conduct is prohibited under section 21 of the ACL (which appears in Schedule 2 of the Competition and Consumer Law 2010 (Cth)).  Specifically, a person is prohibited, in connection with the supply to or acquisition from a person of goods and services, from engaging in conduct that is, in all the circumstances, unconscionable.

Although what is “unconscionable” is not defined in the statute, a series of factors that the Court may have regard to is listed in section 22.  These include, among other things, the bargaining power of the supplier and the customer; whether the conditions were reasonably necessary to protect the legitimate interests of the supplier; whether the customer was able to understand the documents; whether any undue influence or pressure was exerted on the customer; and the extent to which the supplier and the customer acted in good faith.

The leading authority on the meaning of unconscionability is the recent High Court decision, Paciocco v Australia & New Zealand Banking Group Ltd (2016) 90 ALJR 835; [2016] HCA 28 (ANZ Bank Fees Case), which considered the parallel unconscionability provisions relevant to financial services within the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).  In that case, Allsop CJ noted that unconscionability is a ‘value-laden concept’ which must be reasoned by reference to ‘values and norms’ – always considered in light of ‘all the circumstances’.  In the ANZ Bank Fees Case, the High Court held that ANZ’s conduct in relation to the imposition of exception fees was not unconscionable under the ASIC Act, finding that the requirement that the Court consider the “totality of the circumstances” meant that, while a disparity in bargaining power was a necessary condition, it was not sufficient, as “a disparity in bargaining power is an all-pervading feature of a capitalist economy,” but “does not establish that the party which enjoyed the superior power acts unconscionably by exercising it”.  The High Court also noted that while there is no mandatory list of factors, the Court should have regard to the totality of circumstances, including whether undue influence or unfair tactics are applied; the extent to which the alleged person’s conduct was consistent with its conduct in similar transactions with other recipients; the requirements of any industry code; the extent to which a supplier unreasonably failed to disclose the service recipient and extent to which the supplier and recipient acted in good faith.

Summary of allegations in ACCC v Woolworths

The unconscionable conduct proceedings in ACCC v Woolworths arose in relation to a scheme implemented by Woolworths designed to “close the gap” between targeted sales and profit, and expected sales and profit (the “Mind the Gap” scheme).  The “Mind the Gap” scheme focused on various “levers” to improve that margin, including a focused supplier performance management initiative.  As part of this initiative, suppliers who were not already in costs negotiations with Woolworths were identified, and were the subject of a performance review which would inform whether it was appropriate and feasible to contact the particular supplier as presenting an opportunity to ask for support.  It was then left to manager discretion to work out which suppliers should reasonably be contacted, and various forms of guidance were provided to managers to help with the form and substance of this contact.  

Importantly, the allegations made by the ACCC were broadly based, focussing on the design and implementation of the “Mind the Gap” scheme, rather than the specific conduct directed to individual suppliers in the course of requesting payments, which the Court considered distinguished the cases against Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 (ACCC v Coles), which involved admissions (in the context of a negotiated resolution of proceedings) of specific conduct in the course of seeking payments.

Notably, the ACCC’s case was documentary only, comprising materials produced under compulsory notices.  The ACC called no evidence from any supplier allegedly affected.  The Court highlighted that this resulted in an incomplete record of the dealings between Woolworths and each supplier and observed that in this context, it was impossible to adequately assess whether the conduct was unconscionable.

Woolworths put on detailed evidence of the “asks” that were made to suppliers, as well as providing examples of individual approaches to suppliers outside of the scheme as part of Woolworths’ regular dealings.  Yates J found that these individual approaches were no different in character to the approaches typically made to individual suppliers at other times in the normal course of Woolworths’ trading relationship with those suppliers, indicating that ‘in all the circumstances’, the scheme was not qualitatively different to Woolworths’ typical commercial dealings with its suppliers. 

The ACCC advanced the contrary proposition, and did not suggest that individual approaches to suppliers to make “asks” which were outside the Mind the Gap scheme constituted conduct that was unconscionable.

The essence of the ACCC’s pleaded case was that, in implementing the scheme, Woolworths:

• had no contractual entitlement to the payments sought and knew that it did not have a legitimate basis for these requests;
• applied, and intended to apply, pressure on the suppliers to make payments by threatening (even if only implicitly) adverse commercial consequences if they were not made; and
• was in, and took advantage of, a substantially stronger bargaining position.

The ACCC relied on various general written trading terms entered into between Woolworths and its suppliers, to argue that these did not confer any legal entitlement on Woolworths to seek any payment such as that sought under the “Mind the Gap” scheme.  Although Woolworths did not dispute this proposition, it gave evidence that all aspects of the cost of goods to Woolworths were typically the subject of regular discussions and negotiations which normally would not be recorded in any formal written agreement – arguing that a sole focus on the written terms was misplaced and distracted attention from the commercial dynamics of the supermarket business. 

Yates J found that Woolworths did not need a contractual or other legal right to approach its suppliers to enter into a negotiation with them, nor did it assert any such right on the evidence.

In respect of whether there was a ‘legitimate’ basis for making the requests, Yates J found that while the focus of the scheme was to improve Woolworths’ profitability, the attempt to realise this ‘opportunity’ by making “asks” of suppliers did not itself amount to conduct that was unconscionable, noting that the commercial relationships between Woolworths and its suppliers were such that each party can be taken as seeking to maximise its profit out of the relationship.

In many instances, the incomplete records of communications that the ACCC adduced as evidence (given they adduced no supplier evidence) showed that particular suppliers had no hesitation in communicating their refusal to Woolworths’ requests.  Where that occurred, there was no evidence that, because of that refusal, the supplier was met with any form of retribution by Woolworths, such as by de-listing a product or by treating the supplier less favourably than would have been the case had Woolworths’ request been met.  Furthermore, although the “asks” were requested in a relatively short timeframe, Yates J did not accept that this transformed “asks” into ‘demands’, nor could they be enforced by Woolworths.

Yates J also considered the bargaining power between Woolworths and the suppliers.  Whilst the ACCC gave evidence of Woolworths’ significant share of overall Australian grocery sales, it made no attempt to relate this percentage share to the sales of products supplied by the particular suppliers.  As argued by Woolworths, its market share said little about the significance of Woolworths to a given supplier.  As such, Yates J held that there was no basis to assume that, as between Woolworths and these suppliers, there was a substantial difference in bargaining power in favour of Woolworths.

Key lessons from ACCC v Woolworths

ACCC v Woolworths is only the second case that has been brought under section 21 of the ACL.  The first occurred two years ago, and was in relation to proceedings brought by the ACCC against Coles regarding its dealings with a number of suppliers (in ACCC v Coles).  In that case, Coles made admissions and acknowledged the gravity of its contravening conduct, and reached agreement with the ACCC as to the relief that they submitted was appropriate to be sought from the Court.  As noted above, however, the Court considered ACCC v Coles to be quite different.

Our key “take home” messages from the decision in ACCC v Woolworths are as follows.

• Unequal bargaining power does not mean conduct is unconscionable. Mere use of superior bargaining power is not sufficient to give rise to a claim based on unconscionability .  However, in the circumstances of the case, the ACCC did not establish that Woolworths had superior bargaining power compared with its suppliers.
• Gentility in commercial dealings is not required. It is important to consider “all the circumstances” in determining whether statutory unconscionability has been established – that is, the totality of the evidence in order to arrive at a “broad evaluative judgment”, rather than an analysis which is selective in its consideration of the relevant factors.  As the Court stated, characterisation of conduct as unconscionable is “not a process of personal intuitive assertions or idiosyncratic notions of commercial reality.”
• Bringing a claim for unconscionability without leading evidence from one party to the arrangement is a significant impediment to establishing unconscionability.  Yates J observed that because the ACCC’s case did not involve calling evidence from any supplier affected by the “Mind the Gap” scheme, it was not possible to discern from the correspondence “whether a supplier was prepared to make a payment and, if so, why, and for what amount or, indeed, on what terms”.  He noted that “the absence of evidence from the suppliers concerned makes it impossible to assess a number of the factors to which the Court must have regard in considering ‘all the circumstances’”.
• The case was materially different from the case against Coles. The nature of the claims alleged by the ACCC was the key difference between ACCC v Woolworths and ACCC v Coles, and this contributed in large part to the difference in the outcome.  While Yates J noted that there were some “broad parallels” between ACCC v Woolworths and ACCC v Coles in that “each involved the making of “asks” and the seeking of “payments” in relation to goods supplied in an earlier period”, the cases diverged in structure and in fact from that point.  He noted that whereas ACCC v Coles related to Coles’ “particular dealings with particular suppliers” which brought into play “particular facts and circumstances germane to each supplier”, ACCC v Woolworths was “more broadly based in that it is directed to the design and implementation of the Mind the Gap scheme as a whole”.
• Potential implications in other legislative contexts – It is relevant to note that the consumer protection provisions in the ACL are mirrored in the ASIC Act – specifically, section 21 of the ACL in relation to goods and services has its equivalent in section 12CB of the ASIC Act in relation to financial services.  In the context of observing that the Court may not “pick and choose” from the list of matters to which the Court “may have regard”, and must take into account each matter that exists in respect of the impugned conduct, Yates J refers to the recent High Court decision in the ANZ Bank Fees Case which considered this provision.  We consider it likely that future judicial consideration of unconscionable conduct under both the ASIC Act and the ACL will closely follow a similar approach in taking into account the matters listed.