Compliance with the various codes of conduct, such as the Dairy Code, is a must to avoid attracting attention from the regulator and potential penalties being imposed.
The ACCC has wasted no time in following through with its enforcement priority of investigating supply chain issues in the agricultural sector by commencing proceedings against Lactalis Australia Pty Ltd for alleged breaches of the Dairy Code.
The proceedings come less than two months after ACCC Deputy Chair Mick Keogh addressed the National Farmer's federation on competition in the Agricultural sector following the recent report on the Perishable Agriculture Goods Inquiry, and only 18 months after the commencement of the Dairy Code. The Dairy Code came into effect from 1 January 2020.
The move also seeks to reinforce the policy directives behind the Dairy Code.
Allegations against Lactalis
The proceedings, filed in the Federal Court of Australia allege that, in relation to certain standard form milk supply agreements (MSAs) with farmers, Lactalis allegedly contravened the Dairy Code (and consequently the Competition and Consumer Act) in the following ways:
- failed to publish any of its standard form MSAs on its website as required under the Code by the required deadline, but instead required farmers to request that they be sent to them by email;
- included terms in the MSAs that allowed Lactalis to suspend or terminate supply if the farmer had engaged in public denigration of "processors, key customers or other stakeholders", which the ACCC allege does not satisfy the requirement to terminate only where there is a "material breach";
- failed to comply with the Code's "single document" requirement by failing to provide farmers with all three documents that made up Lactalis' MSA;
- failed to publish genuine "non-exclusive MSAs", but instead required farmers to supply a minimum of 90% of their monthly production volume, which allegedly would prohibit most farmers from supplying milk to another processor.
Policy behind the Dairy Code
The ACCC alleged that the above conduct taken collectively, demonstrated a resistance by Lactalis to the policy efforts pursued by the Dairy Code to rectify market failures and conditions.
The Dairy Code sets a mandatory set of minimum standards of conduct between processors and farmers in order to address market failures that have arisen from:
- the structure of the dairy industry and the terms of contracts offered by processors to farmers;
- some common industry practices which are unfair and / or hinder farmers from responding to market signals (eg. such as the ability to switch processors); and
- a resulting imbalance in bargaining power between farmers and processors and unreasonable transfer of risk to farmers.
ACCC claims that Lactalis:
- caused harm to farmers by denying them the full benefits and protections of the Dairy Code, including:
- increased transparency about the terms and conditions in its MSAs during a critical and limited timeframe in which farmers had to weigh their supply options; and
- access to alternative supply options (and, in some cases, greater bargaining power) which may have been available by having the option of entering into a non-exclusive MSA;
- reduced transparency in relation to their MSA terms and conditions and denied farmers proper access to information about their contractual relationship with Lactalis;
- caused harm to farmers by including terms allowing them to unilaterally terminate for non-material breaches of the MSA, signalling to farmers that they may not speak out against "processors, customers or other stake holders" lest Lactalis terminates their MSA; and
- is perpetuating an imbalance in bargaining power and reduces competition in the market, demonstrating a resistance to the policy efforts pursued by the Dairy Code.
Addressing power imbalance in supply agreements: agricultural sector and beyond
Generally, the ACCC's actions demonstrate its renewed focus on increasing transparency of supply agreements with small businesses across an array of industries as a way to correct perceived imbalances of bargaining power. The ACCC's enforcement of the Dairy Code aligns with its enforcement priorities for 2021 (published in February) that identified supply chain relationships in the agriculture sector as a priority.
The enforcement of other codes made under the Competition and Consumer Act has similarly been seen as a useful tool in regulating the behaviour of market participants. For example, the ACCC has also recently commenced proceedings for alleged breaches of the Franchising Code of Conduct concerning the disclosure of information to small businesses (franchisees) and ensuring that the parties act in good faith.
The speed with which the ACCC investigated these issues and commenced action should be seen (as intended) as a warning to large market participants in these regulated industries that the ACCC is focused on compliance with the various codes to ensure fair competition and reducing bargaining power imbalances in supply arrangements.
Large market participants, or those that may be seen to have bargaining power, should expect that the ACCC will be paying close attention to whether they are complying with the requirements of the Code and are willing to bring proceedings for breaches of the Code if not complied with.