Code clarification: requests for lump sum payments
The GCA determination of the Wm Morrison Supermarkets plc requests for lump sum payments from suppliers.
Theme of case study
The GCA determination of Wm Morrison Supermarkets plc requests for retrospective and prospective lump sum payments from suppliers in June 2015.
Paragraph 3 of the Code – Variation of Supply Agreements and terms of supply; together with Paragraph 2 of the Code – Principle of fair dealing.
Wm Morrison Supermarkets plc.
Summary of the issue
The GCA received evidence of Wm Morrison Supermarkets plc requesting a lump sum payment from a supplier in July 2014. The lump sum did not form part of the Supply Agreement, but the supplier felt it had no option but to make the payment to keep the business. Wm Morrison Supermarkets plc was informed, conducted an internal investigation into the issue and did not find any evidence of the payment having been requested or made. It was believed the payment requested was prospective, not retrospective. The GCA did not progress the issue due to the limited evidence available and the risk of compromising supplier confidentiality.
In June and early July 2015 the GCA received evidence from a number of sources which indicated that Wm Morrison Supermarkets plc had requested lump sums to be paid for the first half year (which ended 1st August) within 4 weeks, in most cases, sometimes less. It was not clear whether these were prospective or retrospective, given the short time remaining to the half year end. No negotiation was offered, there were no references made to Supply Agreements nor to any variation being made to the relevant Supply Agreement, with due notice being given.
The GCA wrote to Wm Morrison Supermarkets plc Chief Executive Officer alerting him to the issue. As a result, Wm Morrison Supermarkets plc immediately launched an extensive internal investigation, including reviewing 66,000 emails, interviewing employees and taking disciplinary action where appropriate. Further training for staff on negotiation techniques permitted by the Code was immediately put in place, with particular focus on variation to existing Supply Agreements.
The request for lump sum payments was reported in the press including a national newspaper. Over the following few weeks, the GCA received anecdotal evidence from a number of suppliers, and from a trade association, that there had been requests made for lump sum payments for the first half year from Wm Morrison Supermarkets plc, including clear indications that suppliers would suffer detriment, perhaps de-listing, if payments were not made. Still it was not clear whether these were prospective or retrospective. These had reportedly “gone away when it hit the press”.
The GCA then received evidence over the summer at supplier interviews conducted during the investigation into Tesco plc, that Wm Morrison Supermarkets plc had called a meeting of its largest suppliers in June 2015, with senior personnel present, and requested lump sum payments, not only for the first half year but also for the second half. Figures of around £2m for each half year were mentioned by a number of suppliers as having been requested following the conference. These suppliers said that requests for money in the first half year had not been pursued by Wm Morrison Supermarkets plc but in some cases suppliers had turned the request for money in the second half into a “more for more” negotiation and were satisfied with the outcome.
In September 2015 the GCA visited Wm Morrison Supermarkets plc and the internal investigation was discussed. The GCA requested and received a written report of the internal investigation which found that there had been requests for lump sum payments from suppliers, only some of which were related to the terms recorded in the relevant Supply Agreements. Wm Morrison Supermarkets plc accepted that 19 of the requests made had not been related to the relevant Supply Agreements and were therefore in breach of the Code. These may also have been retrospective requests, i.e. relating to an activity that had passed. A further 25 requests were clearly prospective and had resulted in a “more for more” agreement.
In March 2016, following the end of the investigation into Tesco plc, the GCA requested a full report from Wm Morrison Supermarkets plc. This presented the retailer with a table of questions to be answered and set a date to discuss the report. The report was received and the meeting held in May.
Outcome and/or GCA decision
Lump sum requests have been one of the GCA’s Top 5 issues for some time, and there had been engagement between the GCA and Wm Morrison Supermarkets plc specifically on this issue since July 2014.
The GCA concluded that Wm Morrison Supermarkets plc had breached paragraph 3 of the Code, Variation of Supply Agreements and terms of supply, by indirectly requiring suppliers to pay lump sums that were not provided for in the relevant Supply Agreement, at least some of which requirements were retrospective.
The GCA concluded further that if Wm Morrison Supermarkets plc was making unilateral variations to the relevant Supply Agreement, that it had not given reasonable notice of the variation in each case.
It was clear to the GCA that the requests for payments from suppliers were made with an implication of detriment if any supplier declined to contribute. The requests were accordingly to be understood to be indirect requirements contrary to paragraph 3 of the Code, read with paragraph 2 of the Code, which establishes the overarching principle of fair dealing in interpreting the specific practices covered by the Code.
The GCA acknowledged that Wm Morrison Supermarkets plc had responded immediately when alerted to the issue, had conducted an extensive internal investigation, and this had led to the requests not being followed up. Requests for money for the second half year then became genuine negotiations between retailer and supplier. Wm Morrison Supermarkets plc told the GCA that it had contacted suppliers who had paid money for no clear benefit and offered it back, which in some cases was accepted. Those suppliers suffered no detriment and said they were happy with the outcome.
The GCA has been assured that additional training, more robust internal processes and increased audits are now in place and that Wm Morrison Supermarkets plc checked to see that no similar activity occurred at its year end in February 2016. This was a relatively small-scale incident confined to a short trading period, which was rapidly investigated and corrected. No supplier complained to Wm Morrison Supermarkets plc about the incident and all suppliers have continuing trading arrangements with the retailer.
The GCA advised Wm Morrison Supermarkets plc that its swift action and subsequent processes put in place, such that either (i) there was no supplier detriment; or (ii) where there was, that it had been put right, meant that the issue would be treated as a case study rather than meriting investigation. There was no need for the GCA to conduct an investigation to establish the facts of the incident or its effect on suppliers; nor to better understand the situation in order to require suitable remedial measures to be put in place. All of that could be done, and indeed had already been achieved, on the facts as now understood and accepted by Wm Morrison Supermarkets plc.
Key points of clarification are accordingly:
Requests for retrospective lump sum payments not explicitly agreed in the Supply Agreement are in breach of the Code. Requests for lump sum payments relating to future business not explicitly agreed in the Supply Agreement are potentially an attempt by the retailer to vary the Supply Agreement. While retailers retain the right to vary a Supply Agreement unilaterally, there must be provision for this in the Supply Agreement and reasonable notice must be given to the supplier.
Initiatives which are in breach of the Code can be halted quickly and rectified promptly if referred to the GCA by suppliers and others.
Swift action by the retailer in response to regulatory interest from the GCA can in some circumstances avert an investigation, because to investigate may become disproportionate in the circumstances.
On 7th July 2015 the GCA emailed Wm Morrison Supermarkets plc Chief Executive Officer advising that lump sum payments appeared to be being requested in breach of the Code.
On 10th September 2015 the GCA visited Wm Morrison Supermarkets plc and was given an overview of the internal investigation and requested it be put in writing.
On 14th September the GCA received the report.
On 27th October the GCA wrote a letter to make clear to Wm Morrison Supermarkets plc that the issue was still open. The GCA continued to advise the retailer’s Code Compliance Officer that the issue was not closed.
On 16th March, following the conclusion of the investigation into Tesco plc, the GCA wrote to Wm Morrison Supermarkets plc requesting further information, with a deadline of 29th April. An extension was requested by Wm Morrison Supermarkets plc and the report was submitted on 12th May. It addressed all of the GCA’s questions.
On 18th May the GCA met with Wm Morrison Supermarkets plc to discuss the report and advised it of her decision to issue a case study.
On 13th June the GCA met with David Potts to conclude the review.