Negotiating Grocery Supply Agreements: Five Practical Tips for Suppliers

Here are five practical tips to help suppliers navigate their GSA negotiations with retailers:

1. Limit set-offs

The rules around set-offs are designed to reduce excessive deductions from a supplier’s invoice and unfair cost-shifting. Retailers can only set-off amounts against a supplier’s invoice if:

• the supplier has consented in writing; or
• the GSA expressly includes an “allowable contrary provision” providing for the set-off and the set-off is “reasonable” in the circumstances.[2]

What’s new under the mandatory Code is that retailers are now required to explain in the GSA why the set-off is reasonable having regard to the benefits, costs and risks for the supplier and the retailer and whether the set-off is for a purpose that benefits both the supplier and the retailer.

Why it matters: The new regime is designed to ensure better transparency as suppliers will now know when and why amounts are being withheld from their payments. This increased transparency will allow suppliers to consider the potential grounds for set-offs upfront, rather than to having to argue the matter at a later stage.

Tip: Suppliers should carefully consider any set-off provisions and object if they find the circumstances to be unreasonable.

2. Understand Shrinkage and Wastage

As with the former voluntary Food and Grocery Code (Former Code)[3], retailers are prohibited from requiring suppliers to make payments for shrinkage [4]. Shrinkage is defined as product losses that occur after a retailer has taken possession of grocery products that arise from theft, other loss or accounting errors.

Deductions for wastage remain permissible, but only in tightly defined circumstances. Rather than having a broad “wastage” definition (as provided for under the Former Code which defined wastage as groceries that are unfit for sale), the new Code restricts “wastage” to grocery products that become unfit for sale at the retailer’s premises[5]. Whilst the old definition of “wastage” could potentially apply to groceries that became unfit for sale at any point, the new Code is clearly seeking to draw a line in the sand and link “wastage” to events that occur after delivery.

Why it matters: Traditionally, suppliers and retailers have used a variety of terms interchangeably and without properly defining them, including shrinkage, ullage, wastage, spoilage and product or stock losses. This has often given rise to uncertainty and inconsistencies in commercial terms.

Tip: When negotiating your GSA, make sure you give careful consideration to the use of these terms, ensure they are clearly defined and that there is no potential for overlap or double-charging.

3. Watch Out for Unilateral Variation Clauses

The Code prohibits the ability of retailers to unilaterally vary GSAs, except in limited circumstances[6].

Why it matters: Unilateral variations erode contractual certainty and can impose significant operational or financial burdens, especially when changes extend to ancillary documents incorporated by reference (such as policies or manuals). Whilst the Code requires unilateral variations to be “reasonable” and that the circumstances must be explained, the exact nature and potential impacts of such changes will be unknown.

Remember that, under the Australian Consumer Law (ACL)’s unfair contract term regime, clauses that allow one party to unilaterally vary terms are often considered unlawful. Even if a variation clause is permitted under the Code, it can still be void or expose the retailer to penalties under the ACL if it is unfair.

Tip: Suppliers should scrutinise any clause that allows unilateral variations and push back or limit broad rights to make unilateral variations.

4. Confirm Scope

For many suppliers, GSAs have often not been a single document, but a combination of commercial terms, trading terms, purchase order terms, freight and promotional agreements and other side documents issued by retailers or agreed by the parties over time.

Why it matters: The broad and fragmented approach to documenting GSAs has left suppliers vulnerable to “scope creep” where GSAs incorporate obligations from a variety of sources and give rise to the potential for confusion and inconsistencies.

Tip: Now is the time to confirm the exact scope of your GSA. Make sure any ancillary documents are clearly listed and consider their precedence.

5. Beware of amendments unrelated to the Code

Whilst the Code may be the impetus for negotiating new GSAs, suppliers should also be on the lookout for other changes to a retailer’s terms and conditions that are unrelated to the Code.

Why it matters: Whilst the Code seeks to improve the transparency and fairness in dealings between suppliers and retailers, there are many commercial issues that are not regulated by the Code. Updating GSAs to comply with the Code provides an opportunity for retailers to re-visit those issues and make changes that could have significant implications for your commercial arrangements and risk allocation between the parties.

Tip: We strongly recommend that suppliers conduct a comprehensive review of any new GSAs to consider all the changes that have been made, particularly those that are unrelated to the Code.

Need help? Contact Renee Shipp for tailored advice on negotiating compliant and commercially sound grocery supply agreements.