GSCOP, ‘reasonable notice’ and the 12-week myth
Tuesday 22nd November 2016
As the UK’s designated retailers continue to scale back the number of products they sell and look to achieve better deals from suppliers, we see more and more queries relating to reasonable notice in relation to de-listing. Asda, Morrisons, Sainsbury’s, Tesco, Aldi, Lidl, Marks & Spencer, Co-Op, Iceland, Waitrose and their subsidiaries are all making moves in this area.
Project Renewal and Project Reset were both precursors to a huge number of products being taken off the shelves at the big four of Tesco, Asda, Sainsbury’s and Morrisons. Of course, the big four – and the other six designated retailers – are all looking at what they sell and how much they sell it for. As a consequence, a number of suppliers have been delisted and many more are still fighting what some may perceive as an inevitable cull.
What I have often been surprised by in the food and drink sector is that so many buyers and suppliers seem to hold misplaced belief that 12 weeks’ notice amounts to reasonable notice under the Groceries Supply Code of Practice (GSCOP). It does not and it is not that simple.
I think the reason this perceived period exists is that most designated retailers require their own label suppliers to keep at least 12 weeks’ dry stock. That means that if their product is delisted then, at the very least, the own label supplier will not be stuck with a substantial amount of packaging that cannot be re-used.
This may be where the 12-week period originates, but larger suppliers and savvier suppliers sometimes buy double that amount of dry stock because economies of scale apply just as much to packaging as they do with anything else. Linking notice to dry stock, if that is what has been done, is not the correct approach.
What is the correct approach?
Before GSCOP, reasonable notice was already a legal concept and one which contract lawyers and dispute lawyers grappled with frequently. Reasonable notice would be required to terminate an agreement where there was no written evidence as to what notice was appropriate.
In law, there are some key factors which the Court would take into account to determine what notice period was reasonable. Of course, if there is a written contract and there is a specific agreed notice period, reasonable notice is not usually relevant because the parties have already agreed what notice should be provided.
If there isn’t an agreed notice period then, in those circumstances, a Court would consider other extrinsic information to determine what reasonable notice is. It is worth pointing out a couple of the leading cases on reasonable notice and the Court’s subsequent ruling in the food and drink sector.
In one of those cases, the Court said the notice period should equate to the time needed to find an alternative supplier. In another case, the Court ruled the time required should reflect the time needed for the orderly winding up of the agreement.
In terms of extrinsic factors, the Court would look at the degree of formality in the relationship. The less formal, the less likely the law would apply a lengthy notice period. A Court would also look at the length of the relationship, the initial capital investment and any unordinary business expenses incurred by the parties. The longer the relationship and the greater the unordinary expenses incurred by the parties to meet their contractual obligations, the more likely it is a notice period will be significant.
Finally, the Court would look at the general custom and practice in the trade. This is where 12 weeks’ notice may be both helpful and harmful for retailers and suppliers alike. 12 weeks’ notice might be standard fair for the most part but GSCOP complicates that question.
For example, if Thai Union – the world’s largest canned tuna producer and the owner of John West -has a small contract of around £500,000 with Sainsbury’s and it is entitled to 12 weeks’ notice, what happens when a fresh produce supplier has a £60 million contract with Tesco with no agreed notice period, and that contract represents 100 per cent of that supplier’s business? Is 12 weeks suitable notice in both cases? Clearly, the answer is no.
We know the Court will take into account the factors specified above, but the beauty of GSCOP is that it affirms such factors and adds to them when somebody assesses what reasonable notice is. Under GSCOP, reasonable notice will depend on the circumstances of the individual case, including:
- the duration of the supply agreement and frequency with which orders were placed
- the characteristics of the groceries
- the value of any order relative to the turnover of the supplier
- the overall impact, of the information given in the notice, on the business of the supplier and the extent that this was foreseeable to the retailer
Taking these factors in turn, the duration of the supply agreement is undoubtedly a factor the Courts would take into account. There is nothing new here and it follows, therefore, that the longer the supply agreement, the longer the notice may be.
The second point to consider under GSCOP is the characteristics of the groceries. This is intended to include durability, seasonality and external factors affecting their production. In short, if you are supplying strawberries, a very short delisting period is unlikely to be appropriate because they are a seasonal produce and any supplier may have had to make commitments for subsequent seasons.
Any stock that supplier may have or has committed to will perish if not sold very quickly. On the other hand, if you have a product which has an extremely long shelf life – such as tuna or canned hotdogs – and it is a private labelled product, it is more likely that if notice is served the supplier will be able to sell those products to another customer before they perish or their value is impaired.
The third item in GSCOP – the value of any relevant order relative to turnover – is, in my view, one of the most critical questions and one which has, as far as I know, yet to be considered by the Court.
This factor essentially dictates that the more important the business is to the supplier, the longer the notice period is likely to be. So if 12 weeks is standard and applies to canned hotdogs when that supply agreement has run for one year and represents two per cent of the supplier’s business, then a much longer period should be appropriate for a supplier who is selling strawberries and the supply agreement represents 40 per cent of their turnover and has lasted for ten years.
The next item – overall impact of the information given in the notice and the extent that this is reasonably foreseeable to the retailer – is partly linked to the previous item. I say this because if the supply agreement represents a huge proportion of the business’ turnover, losing that contract is going to have a huge impact on the business in the form of redundancies, administration, liquidation, profitability, innovation, depreciation, prospects of investment and share value.
The retailer – anybody, in fact – should know that the larger the contract value relative to turnover, the greater impact it will have.
So where does this all take us? We know retailers differ in how they treat notice periods, even if a lot of buyers and suppliers think 12 weeks is what notice is meant to be.
Some retailers have risk categories for ‘delisting’ and those categories, probably appropriately so, split the suppliers into low risk, medium risk and high risk.
The high risk category will be for those suppliers who are about to lose a very valuable contract to their business and will not readily be able to replace business with other customers. In those circumstances you might expect to see a notice period of anywhere between nine months and three years.
For your average supply agreement you would expect to see a notice period of perhaps three months. This will, of course, depend on the product and the particular circumstances. For instance, if you are supplying a product which is seasonal, it may be inappropriate to delist you during the middle of a season.
This is because the characteristics of the groceries have to be taken into account. It might be said it is not reasonable to delist somebody during the middle of the season because in order to supply during the first part of the season they need to make commitments for the whole season. But, removing unordinary factors such as those, an average supplier may expect at least three months’ notice.
Conversely, a company like Coca-Cola may not expect, in the absence of express written agreement, such notice period to be given. There are good arguments to say Coca-Cola is unlikely to be significantly affected by the loss of an agreement as the business has lots of customers all over the world and the impact may be low, so it could be said that minimal notice is needed.
The important thing to know is there is not a set notice period. Every case is different and what a supplier is entitled to depends on the factors outlined.