All You Need to Know About the Tesco Investigation

1. Background Summary

1.1 In September 2014 Tesco said it had overstated expected profit.

1.2 Tesco instructed Deloitte to review and determine what caused the overstatement.

1.3 The Groceries Code Adjudicator (‘GCA’) asked Tesco and Deloitte to consider whether the Groceries Supply Code of Practice (the ‘Code’) had been breached.

1.4 In November 2014 the GCA asked Tesco to supplement the information provided by Deloitte and, in January 2015, Tesco stated that there were “very clear indications” that it had breached the Code.

1.6 Following this, the GCA launched an investigation focusing on three issues:

• Paragraph 5 of the Code: No delay in payments.
• Paragraph 12 of the Code: No payments for better positioning of goods unless in relation to a promotion.
• Paragraph 2 of the Code: The principle of fair dealing.

1.8 The period to be assessed by the GCA was 25 June 2013 to 5 February 2015.

2. The GCA’s Findings

2.1 The GCA established that Tesco had delayed payments by inputting data incorrectly.  Such data errors related to price changes, invoices and discount mechanisms being incorrectly entered.

2.2 Duplicate invoicing was also, apparently, common.

2.3 Forensic audit claims/historic claims resulted in unilateral deductions being made from suppliers’ trading accounts.

2.4 Unilateral deductions for short deliveries and failure to meet service levels were also made from suppliers’ trading accounts as well as deductions for unknown items.

2.5 One of the criticisms made of Tesco regarding delaying payments was the culture within the business.  The culture was said, by the GCA, to focus on profit margin, which promoted delay of payments in particular trading periods and an apparent apathy of the buyers and decision makers towards resolving supplier queries and disputed sums.

2.6 The GCA did not find Tesco to be in breach of Paragraph 12 of the Code (payments for better positioning of goods) . The GCA did, however, say that this is an issue which needs further consideration.

2.7 In that regard, the GCA has said that Tesco receives payments from suppliers to become ‘category captains’ and to preserve shelf-space. The GCA raised a concern that this may be circumventing the Code and affecting competition, all of which, the GCA suggests, may need addressing.

3. Key Points for Suppliers and Retailers

3.1 The GCA said, in summary, that unilateral deductions from a supplier’s trading account constitute a delay in paying a supplier.  Suppliers should be given 30 days’ notice of any proposed deduction and, effectively, a retailer is not entitled to deduct money from a supplier’s trading account if such deductions are opposed/disputed. Deductions made as a result of internal audit processes may also constitute a delay in payment and therefore a breach of the Code.

3.2 Any disputes in relation to payments should be resolved promptly and, in any event, within 30 days of notification. Only where constructive discussions are ongoing should that period be extended.

3.3 Pricing errors should be fast tracked and resolved within seven days.

3.4 Margin targets with supply agreements must be aspirational only, i.e. a supplier cannot be charged a lump sum following the end of a trading period in order to preserve a pre-agreed level of margin.

4. The GCA’s recommendations

4.1 Recommendation 1 – money owed to suppliers for goods must be paid in accordance with the terms for payment agreed between Tesco and the supplier.

4.2 Recommendation 2 – Tesco must not make unilateral deductions:

• Suppliers must be given at least 30 days to challenge any proposed deduction. Tesco should provide the supplier with an explanation of the proposed deduction, referring to the methodology in the Supply Agreement.
• Where a supplier challenges a proposed deduction Tesco is not entitled to deduct disputed sums from the supplier’s trading account or otherwise from money owed to the supplier.

4.3 Recommendation 3 – Data input errors identified by suppliers must be resolved promptly:

• Tesco should ensure that systems and internal processes are designed to facilitate prompt resolution of disputed invoices and should provide a single point of contact for suppliers to resolve queries which are not resolved promptly.
• Pricing errors should be fast tracked for review and resolved within seven days of notification.

4.4 Recommendation 4 – Tesco must provide transparency and clarity in its dealings with suppliers:

• The methodology for calculating any money due from suppliers……should be clearly explained in the Supply Agreement.
• Consistent language in invoices and other documents should be adopted.
• The status of agreements should be clear and should put beyond doubt that margin targets are only aspirational.

4.5 Recommendation 5 – The Tesco finance teams and buyers must be trained in the findings of the report.

4.6 Tesco must provide a detailed implementation plan by 23 February setting out how it will meet these requirements.

5. Discussion

5.1 The GCA’s investigation provides a helpful insight into what it perceives as a delay in payment.

5.2 Why the GCA says that unilateral deductions necessarily constitute a delay in payment is unclear.  This issue may not be black and white.  Commercial agreements often include an entitlement for one party to offset money due to the other party against money owed by that other party.  This is standard business practice, provided it is done in good faith. The suggestion that this contractual entitlement cannot be exercised without first giving notice, or if there is an objection, is not specified in the Code.

5.3 Although the recommendations apply only to Tesco, retailers must be aware that the GCA is likely to say the timescales set out in Tesco’s recommendation should be applied by all ten designated retailers and, essentially, unilateral deductions are simply not allowed.

5.4 If unilateral deductions are not allowed (even where there is a contractual right to offset) and money is owed by a supplier, then the only way a retailer may be able obtain that money where there is a dispute may be to issue proceedings or build some form of contractual mechanism into their trading terms which deals with such situations in a Code-compliant way.

If you need any legal advice on any retail matters please contact Retail Partner Andy Brian (0113 227 0354 or andy.brian@gordonsllp.com) or Retail Expert, Mark Jones (0113 227 0297 or mark.jones@gordonsllp)

For more information please visit www.gordonsllp.com/sector/retail-lawyers/