Groceries Code Adjudicator Bill [HL]

Viscount Eccles Excerpts

Tuesday 26th June 2012 Grand Committee

Moved by

[Viscount Eccles]

2: Clause 1, leave out Clause 1 and insert the following new Clause—
“The Groceries (Supply Chain Practices) Market Investigation Order 2009
The Office of Fair Trading is to continue to monitor compliance with The Groceries (Supply Chain Practices) Market Investigation Order 2009.”

[Viscount Eccles]

My Lords, I start by thanking my noble friend for letters that have been deposited in the Library and for the dialogue that we have had. I start with two regrets. The House of Commons Business, Innovation and Skills Committee, which put a lot of work into the Bill, considered whether there should be a review of how the present regime was working. On balance—and it was only on balance—it decided not to ask for that review. That was a pity because a good deal of time has gone by since the Competition Commission started its inquiry in 2006, and the order that is to a large extent the subject of the Bill became effective on 4 February 2010.

My second regret is that we have not had a briefing from the Office of Fair Trading, although I asked for one. To be precise, I asked if it thought that the monitoring of the order was going okay and whether it had any concerns. It said that it had done—I think—nine out of 10 compliance reports but that it would take some time to analyse them. Those reports are on the second full year of operation of the order. There has now been more than 24 months of experience of how the GSCOP is working. Perhaps I might suggest to my noble friend that we should have a report from the OFT before Report. The OFT has had this responsibility for more than 24 months and we should know how it thinks the scheme is going.

That led me to believe that the case had not fully been made for the changes proposed in this unusual Bill. As I will explain, I am not against a lot of its intentions, but they are not being sensibly carried through. There is a case for leaving the present regime in place because, as far as I can tell, it is working. All that I will do from now on is probe to find out whether there is a case for what is proposed in the Bill. In so doing, I will explain that in this enormous group of amendments the only thing that really matters is the new clause. If that were to be accepted, Schedule 1 would fall away almost automatically. The rest of the amendments, on which the Public Bill Office kindly advised me, are technical in the sense that one has to replace “adjudicator” with “Office of Fair Trading” if the regime is to stay as it is. Of course, I shall have to be pretty prompt in saying, “Not moved” all the way through the proceedings. I hope that that will at least make sure that I am awake.

After the consequential point, I have to enter a caveat. I have not studied the OFT’s existing powers. Someone, probably my noble friend on advice from the Bill team, needs to say that, if we go down that road, we will not need this or that clause because the OFT already has those powers. An example is the collection of information. I am aware that if my scheme is accepted, there would be other consequential amendments.

At Second Reading I referred to the minority opinion in the commission’s report put forward by Professor Bruce Lyons. This is set out in detail in paragraph 11.347. He supported the finding of the adverse effect on competition and went on to support very strongly a strengthened code of practice. I am sure that the contents of the present code of practice will be entirely acceptable to Professor Lyons, who went on to say that the OFT was “well placed” to monitor adherence to it because competition was at the heart of its role and its history. I agree with that. If the passing on of excessive risk and unexpected costs is not stopped, it is perfectly sensible to come to the conclusion that there may be an adverse effect on competition. The strengthened code of practice in front of us is a sensible document and the OFT is well placed to monitor adherence to it.

Good progress has been made. Now that we are coming to the completion of the second round of compliance reports, it is clear that disputes are regularly being settled. I would like to be guided by someone if I am wrong, but I am not aware that any dispute has yet been referred to arbitration under the code. As we all know, there is a full description in paragraph 11 of Part 5 of the code of practice of how the dispute resolution procedure should lead to arbitration.

[Lord Knight of Weymouth]

I am most grateful to the noble Viscount for giving way. Has he seen the briefing that has been provided by the National Farmers’ Union, particularly the second point in the section on myths and misconceptions? It states:

“Suppliers do already have the right to independent arbitration under the code. However, this requires suppliers to make the details of their grievance known to the retailer they believe has breached the code. The Competition Commission explicitly referred to the climate of fear in this sector preventing small suppliers from complaining about unfair treatment. The current system of arbitration clearly makes no provision for this serious problem”.

[Viscount Eccles]

My Lords, I am grateful for that intervention, and no doubt we shall come on to discuss the climate of fear. The concern of the National Farmers’ Union is a pretty difficult issue because very few farmers are direct suppliers to supermarkets and so they are not covered by the code. Indeed, the detriments identified by Professor Lyons, to which I shall come in a moment, include the extended chain of supply to the supermarkets. Perhaps I should say at this point that I owned some cows for a while, but maybe it is not an interest I need to declare on this occasion. It is a difficult issue and we shall come on to it. I do not accept that the problem of indirect suppliers and the question of arbitration so torpedoes the present regime that it is necessary to change it. It may be necessary to do so and I am here to be persuaded, but at the moment I would not change it.

Of course, with regard to farmers, I think that we are going to talk primarily about milk and cheese production. Some 53% of milk finds its way into fresh milk, 27% into cheese and the remaining 20% into manufactured products. While I think we will be talking about that, I do not believe it quite lies within the remit of where Professor Lyons was finding detriments, except on the point of indirect supply.

The first detriment that Professor Lyons worried about was that he thought that the third-party intervention—however that was structured, but at the time the description was “ombudsman”—would be counterproductive. I suppose that was based on “two’s company and three’s a crowd”, or some such version of it. He thought that independent arbitration with the addition of monitoring by the Office of Fair Trading was a better option than the intervention of a third party for the interests of the industry.

Secondly, Professor Lyons worried very much about anonymity. He did not believe that it could be maintained and he cited the German experience. I have no doubt that we will discuss anonymity in more depth as we go along. Thirdly, he thought that justifiable investigations had a very limited potential because he did not see the third party intervening in disputes or discussions between supermarkets and suppliers about a particular contract. Her Majesty’s Government do not think that that is the way that the adjudicator should work. Professor Lyons thought that finding justifiable investigations would be quite difficult because of the length of the supply chain and the lack of ability to look into actual disputes. I am sure that we will want to discuss that more.

Next, Professor Lyons thought that any third party—an ombudsman or now an adjudicator—could be seen to be in support of suppliers, and of them throughout the supply chain. He thought that that itself could become anti-competitive. He saw difficultly in dealing with complaints from suppliers about buyers and at the same time achieving benefits for the public, particularly long-term ones. The successful outcome of intervening in a contract between suppliers and supermarkets would presumably be that the suppliers got better terms. It was difficult to link that to a benefit to the public—that link was pretty weak.

Professor Lyons also saw any third party intervening in this market as being subject to external pressures and to the almost inevitable regulatory creep. Regulatory creep has been a feature of our lives in recent years, as noble Lords have seen in the amendments to secondary legislation which have tended to make legislation more complicated and severe, not lighter or less severe. Finally, Professor Lyons said that this would be a much more expensive system than leaving things as they are.

Quite a lot of these points have been discussed but I submit that they have not really been properly dealt with and therefore, as I am probing and as we go through, I am sure that these subjects will recur. It will be interesting to see where the argument leads us. I very much agree with Professor Lyons. Sometimes, minorities can turn out to be right. His minority report was very good and absolutely on the ball. I am still left with the question: why have we got this Bill? I beg to move.

[Lord Borrie]

My Lords, perhaps I may intervene at this point. Most Members of the Committee know that I had a connection with the OFT—the Office of Fair Trading—but retired from it 20 years ago, after many years as its director. I no longer have any position of that kind and therefore do not have anything formally to declare.

However, references to the Office of Fair Trading by the noble Viscount led me to consider whether there was a great deal of point in establishing—for a fairly narrow field of anti-competitive complaints from farmers and others who complain about the power of supermarkets—a specially appointed new body created as a corporate sole, with all the debates, complications and so on that are involved in doing so. The subject of the Bill covers a fairly narrow sphere. It does not deal with all complaints against supermarkets, but only those connected with groceries. It does not even apply to all supermarkets, but only the 10 that are especially designated.

There are surely many reasons for thinking that there may not be an adequacy of work for the groceries adjudicator to justify the appointment of an adjudicator and, as one of the schedules states, a deputy adjudicator and all the paraphernalia of an office—although I admit that it is stated that back-office facilities may be provided by the Office of Fair Trading. If back-office facilities can be provided by the Office of Fair Trading, why are these powers not simply given to the OFT to monitor, to check, to listen to complaints and if necessary push those complaints further to the Competition Commission, and so on?

The points made by the noble Viscount are quite convincing but, as the phrase goes, we are where we are. We have given the Bill a Second Reading. We are now at the Committee stage. We can go backwards, of course, but there would then be an emptiness and nothing immediately to take its place because the Office of Fair Trading does not have all the different powers intended for the adjudicator under the Bill. I therefore return to the point that the Bill in front of us will set up a particular body—the groceries code adjudicator—and we have details in front of us to elaborate, consider and change, as a normal Committee does. In summary, it is not worth while continuing with the fundamental points made by the noble Viscount, although there is a lot of value and a lot of point in what he said. However, that would represent a backward step and we would, in effect, be replacing entirely the contents of the Bill with something else.

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[Lord Knight of Weymouth]

My Lords, I am sure that we are all extremely grateful to the noble Viscount, Lord Eccles, for giving us the opportunity to test at this early stage some of the principles behind establishing an adjudicator. He used the phrase, “As far as I can tell, it is working.”. The core of this debate is whether having just the rules of the game in place is enough or whether we need a referee alongside the rules at this stage.

My strong view is that we need a referee now in order to enforce the rules and to make sure that everyone who is a part of this market and supply chain understands that if they break the rules, there will be consequences. In preparing for Committee stage I have spoken to a number of suppliers to supermarkets and to people in the supermarket supply chain. The anecdotal evidence I have received is that there are still some considerable problems. If there is a belief that it is working, that may be correct technically in terms of the OFT’s analysis, as we have just heard from the noble Lord, Lord Curry, but the reality for people who are trying to operate within this market is that it is not.

As regards notice periods, in some aspects of this business there are no contracts. Thus, the supermarkets often give very short notice—for example, one week for the complete stopping of ordering goods. A minimum of three months’ notice should be given for changes. There are short-term changes to forecasts. The current system is that suppliers get the forecast from the retailer, which is not binding, and then receive the order generally on the day of dispatch. The supermarkets then charge a penalty for not supplying the volumes on the order—shorting—even if they are massively different from the forecast. For example, the sale of salads on a hot weekend can go up fourfold or the supermarket can choose to do a promotion and not tell the supplier. If the supplier fails to supply the larger volume, it could get a penalty charge.

On the flip side, if a supermarket decides to cut back its orders massively, the supplier can be left with big stocks to write off because, often, these goods are on the supermarket’s own label and cannot be sold elsewhere. Consequently, the supplier loses out. I see the noble Viscount, Lord Eccles, wants to intervene, which will be a pleasure.

[Viscount Eccles]

Perhaps I may ask the noble Lord a short question. What part does he think that the public plays in the salad sales on a hot weekend?

[Lord Knight of Weymouth]

I am grateful to the noble Viscount for his intervention. Clearly, the public are the consumers. I am certainly aware that not every supermarket is guilty of abusing its power. The competition between supermarkets generally has been very good for consumers but that does not mean that they should continue to be able to use that power to exploit their relationship with suppliers.

To give another example, I heard about a company which was developing an innovative low-sugar jam. It took the product to a very large supermarket because, having invested in developing this new product, it needed to get the volume of sales that could be achieved only by using one of the large supermarkets. The supermarket was very interested and said, “Leave it with us. We will give you a call.”. It gave the company a call and said, “Do come in. We want to talk to you about the low-sugar jam that you showed us.”. The supermarket called the company in just to put on the table its own product which it had developed in response to that company’s innovation. Therefore, that investment was a loss for that innovator. Similar stories of abuses of market power by some supermarkets—not all of them—are legion. I referred to the helpful briefing from the National Farmers’ Union. We have had similarly helpful briefings from the Country Land and Business Association and the Federation of Small Businesses. All were extremely supportive of the establishment of this adjudicator because they agree that we need a referee.

I know that we will go on to talk about some of these things throughout the proceedings of the Committee. In response to my intervention, the noble Viscount, Lord Eccles, said that not many farmers supply retailers directly. The NFU tells us that some do and, what is more, the Competition Commission has identified an adverse affect on competition whereby grocery retailers pass unexpected costs and excessive risks down the supply chain. Ultimately, those risks, in the form of extra costs, are passed on to producers, even when they do not deal directly with retailers.

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[Viscount Eccles]

My Lords, I am grateful to my noble friend and to all noble Lords who have taken part in this short debate. My father wrote a book called Half-Way to Faith. The noble Lord, Lord Borrie, is halfway there, so we have plenty of time to persuade him to come the rest of the distance.

The climate of fear was mentioned just once by the Competition Commission in its report. If people can find it referred to more often, I would be grateful to know about it. It was not mentioned in the summary or in the findings. I am quite sceptical about it, but that is not really the point. The point is that if it is true, the adjudicator will make it worse. If the supermarkets have the power to create all this fear and they find out that a supplier has approached the adjudicator or that a trade association is doing so on behalf of a group of suppliers, I am afraid that the messages will be a lot sterner than they are supposed to be under a climate of fear. I am sceptical about it because I do not see any justification for a climate of fear for Waitrose, for goodness’ sake. Indeed, I do not see any justification for any of the leading quoted British supermarkets. Their shares are at the bottom of their 12-month spread and they are all in trouble with their shareholders. There is absolutely no reason why they would want to make their lives even more difficult. They will want to do the best they possibly can with their suppliers.

[Lord Curry of Kirkharle]

Perhaps I may intervene to say something I should have said earlier. I chair the Leckford Estate for Waitrose, so I have an interest in Waitrose which, uniquely, supports the code and is very much in favour of it. I have certainly never used the phrase, “a climate of fear”, and I would not do so. However, I am deeply concerned about trust and confidence within the food supply chain, and I believe that this is an important factor in creating more confidence.

[Viscount Eccles]

I am grateful to the noble Lord for his intervention, but I doubt whether a state-appointed sole corporation will generate more confidence.

There are all sorts of problems. I used to supply power steering pump casings to Delphi in Strasbourg on a schedule. One week it would be three container loads and the next week it would be one, then suddenly in the middle of the week it would be four, but the following week it would be none. That is the way that just-in-time supply works. There is no escape from it, and it does not matter whether it is the supply of lettuces or steering pump housings, where we were the only people who made them for Delphi.

[Lord Knight of Weymouth]

For how long did the noble Viscount’s steering pump parts last if he had to store them? What was their shelf life?

[Viscount Eccles]

We did not know how soon Delphi would change its designs because there was a range of power steering pumps. Let me assure the noble Lord that there was no question of storing them. Delphi wanted them to come in and be fitted straight on to the machines. For many years I was a supplier to Marks and Spencer. The schedules changed every two or three days. That is the way of the interaction between suppliers and the retail market, particularly for anything that has a short shelf life. The noble Lord is quite right, if it has a longer shelf life, one can be a little more relaxed.

I do not therefore see that the problems raised by the noble Lord will come at all easily within the purview of the adjudicator. We shall shortly consider the investigations clause, and I am not at all confident, even if they do come within the adjudicator’s purview, that any substantial progress will be made from the point of view of those who want the supplier’s life made easier and the returns made greater. I do not see it working.

My noble friend is quite right to say that the Competition Commission stated that if there was no satisfactory agreement with the supermarkets it would be necessary to introduce an ombudsman. We should note that we are actually proposing to introduce something quite different to an ombudsman, and we should not therefore pray in aid the Competition Commission without any qualification.

I should add that the decision was, I suppose, made in 2007—it takes quite a long time for these decisions to get into a final published report—which is almost five years ago and the circumstances are different. The high street is under tremendous pressure that is much greater than it was when the report was written. The shares on the London Stock Exchange of the four British-based supermarkets on the list are all languishing near the bottom of their 12-month range.

I therefore feel that anything we do to erode the highly successful competitive model of the supermarkets and their suppliers—including, I may say, Nestlé, Kellogg’s, and Unilever and its subsidiaries—is not going to serve the public well. However, at this stage, and I may come back to this matter—

[Lord Razzall]

Before the noble Viscount sits down, is he prepared to address my point that the proposal was in all three political parties’ manifestos? He obviously knows better than all three political parties.

[Viscount Eccles]

Luckily, I am just a vulnerable ancient Conservative Back-Bencher who does not feel in any way committed to the three parties’ manifestos. I should also point out that they were published in 2010 and we are now in 2012, and there is always time for amendment in life. I am just hoping that that still applies. In the mean time, I have much pleasure in withdrawing my amendment.

Amendment 2 withdrawn.

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[Viscount Eccles]

Very briefly, I am sure that the noble Lord recognises that in doing this he goes far beyond the recommendations of the Competition Commission. The one thing that the commission did not do was go up the supply chain, as I would call it, but never mind. It declined to do that. The code is between direct suppliers—although I recognise that the Bill includes something about indirect suppliers—and supermarkets. It is based on the supply agreements between the supermarkets and those suppliers. If we go down the road that the noble Lord indicated, we are in for regulatory creep, exactly as the professor predicted.

[Lord Grantchester]

I support my Front Bench colleague at this stage. As at Second Reading, I declare my interests as a dairy farmer in Cheshire and in having been involved in dairy supply-chains both with farmer co-ops and on behalf of the Royal Association of British Dairy Farmers over many years. In support of the comments made in response to the previous amendment of the noble Viscount, Lord Eccles, there is an extremely delicate relationship between a supplier and the supermarket, and it takes quite some managing. It is not necessarily a question of fear. I am often reminded of the words in the Bible that the lion will lie down with the lamb. When I was in with the supermarkets, I always wanted to make sure that I was a lion but I never quite achieved that status. It is an extremely delicate relationship.

The noble Viscount said that the groceries code has been in existence for two years. It is eminently sensible that we complete this legislation to get the adjudicator in place and then, two years after that, have the review that the noble Viscount looked for. That would be an excellent time to review whether the code should be extended further up the supply chain to the suppliers of suppliers: the consolidators and the processors that have that direct relationship. I am sure that we will then find that there are lots of parts that the code does not cover, to which my noble friend from the Front Bench has alluded already. For example, I point to the practice of offsetting invoices from the supermarkets to suppliers and the charges that they think are quite acceptable to deduct from the suppliers. Those lead to long, detailed arguments and a very awkward time between a supplier and the supermarket. I am sure that putting that review on a statutory basis would, in two years’ time, allow Parliament—it would be wider than just the Competition Commission—to be consulted on the reach of the GSCOP code.

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[Lord Borrie]

The only thing that I can say is that it has been the deliberate intention of the Government through their drafting of the Bill to deprive the adjudicator and to deprive anybody else except civil courts—in a completely different process—of the ability to determine a civil claim or something like it. As the noble Lord, Lord Browne, has considered this matter very deeply and carefully, there cannot be a lot between us. We are talking about a matter of title or name. Whatever that is, it does not seem suitable for the Judicial Appointments Commission to be involved in the appointment of this individual in a narrow field of the grocery trade, with the fairly narrow role provided by the Bill.

[Viscount Eccles]

Perhaps I could ask the noble Lord, Lord Browne, whether we have any other adjudicators.

[Lord Browne of Ladyton]

The honest answer to the noble Viscount is that we have many adjudicators. We call them judges. However, I am not aware—although the Minister may be—of the use of this term in another set of circumstances that could be instructive to the Committee in analysing the process. I have no doubt that the noble Baroness will quickly leap on the alibi granted to her by the noble Lord, Lord Borrie, that the drafters of the Bill unfortunately came up with this unhelpful title. My argument is that, if it walks like a duck and quacks like a duck, it is a duck. When they created the position and wondered what to call it, they must have said, “It is an adjudicator, so let us call it that”, and they were right.

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Before I move the amendments, I should say that I have been greatly assisted in their preparation by Michael Clancy, the director of law reform at the Law Society of Scotland. Indeed, he has helped with all the other amendments to ensure that they comply with the drafting rules. I pay tribute to his work. He makes a significant contribution to legislation in Parliament and he deserves recognition for the assistance he gives to Back Benchers, parties and, indeed, to Governments. I am grateful to him for his help on this occasion. I hope that I have made clear to Members of the Committee the reasons for these amendments so that they can be debated if necessary, and I beg to move.

[Viscount Eccles]

My Lords, I do not know if this will help or at least shorten what I need to say in the debate on whether Clause 2 should stand part of the Bill. I want to consider what the situation is and has been since 4 February 2010. The dispute resolution scheme is set out in the code in Part 5. Paragraph 11(5), of course, does not conform to the Bill. It states:

“The arbitration will be administered by the Ombudsman, if established. In the event that the Ombudsman is not established, or has a conflict of interest in relation to a particular Dispute, the arbitration will be administered by a single arbitrator appointed in accordance with the Rules of the Chartered Institute of Arbitrators in force for the time being.”

My understanding would be that it is a contractual obligation of the retailers that that is included in their contracts with their suppliers, exactly as I have read it out. It goes on in 11(6) to say:

“To the extent that they do not conflict with this Article 11, the arbitration will be conducted in accordance with the Rules of the Chartered Institute of Arbitrators in force for the time being”;

and in 11(9):

“Nothing in this Article will prevent a Designated Retailer including in a Supply Agreement a right for the Designated Retailer also to refer a Dispute to arbitration if the Dispute is not resolved … within 21 days”.

We need to know what the present situation is with the operation of the code. If the arrangements which have been set out with care by the Competition Commission, and included in the order are working perfectly well then I am bemused as to why the adjudicator would ever want to play any part in arbitration at all. I cannot see why it would be sensible for the adjudicator to play any part, because it is all there. Surely the adjudicator is to monitor whether these arrangements are working satisfactorily?

It may be, of course, that the further sophistication suggested by the noble Lord, Lord Browne, would also be a sensible thing to do. I have no view on that; I am not sufficiently expert. However, I cannot understand—and I need to be given some sort of comfort—why the adjudicator is involved in arbitration, as opposed to simply taking note of the fact that arbitration is taking place, and probably coming to a view as to whether, when it took place, it was a satisfactory procedure or not?

[Baroness Wilcox]

The noble Lord, Lord Browne of Ladyton, has raised an important question that it is well worth us examining closely. It is correct that the adjudicator will have two separate main roles. One will involve arbitration, as set out in Clauses 2 and 3 of the Bill. The other will involve investigations and is set out primarily in Clauses 4 to 10 of the Bill. Both roles will be carried out fairly and impartially. The two functions will be distinct from each other and it is important, as the noble Lord, Lord Browne said, that they remain so in order to prevent any conflict of interest.

The noble Lord, Lord Browne, asked whether the adjudicator would always be conflicted. Not necessarily. If arbitration is sought on a subject where the adjudicator has not carried out an investigation or given advice, it is likely that there would be no conflict of interest. We do not consider it inherent in the functions of the adjudicator that he or she will be conflicted in carrying out arbitrations.

It is important to remember that the adjudicator will carry out all their functions fairly and impartially. It is not the role of the adjudicator to act as an advocate for suppliers in carrying out investigations, but it is possible that conflicts will arise in particular cases, and the Bill provides the flexibility to deal with each situation as it arises. The Government consider that Clause 2(1)(b) in particular will help ensure that the distinction between the adjudicator’s arbitration and investigation functions is maintained and that any conflicts of interest are prevented. This clause allows the adjudicator to appoint another person to arbitrate a dispute. The Government envisage that this will be used in cases where a conflict of interest may exist, for example where the adjudicator has previously advised on, or investigated, an issue which is relevant to the dispute. To assist the noble Lord, Lord Browne, the powers to arbitrate are applied at the request of the supplier or retailer. No previous investigation is actually needed.

The adjudicator will be required to act responsibly and will refer any cases where a conflict may arise. However, in cases where there is no conflict of interest, the Government believe that it is sensible to allow the adjudicator to arbitrate. This was envisaged by the Competition Commission in its drafting of the groceries supply order. The adjudicator will, after all, probably be the single most experienced person in the workings of the code.

On the proposed procedure for appointing an arbitrator, I do not consider it necessary to set this out in the Bill. As the Explanatory Notes explain, in England and Wales and Northern Ireland, Section 94 of the Arbitration Act 1996 will broadly apply the provisions of Part 1 of that Act to any arbitrations carried out under the groceries supply order and this Bill. In Scotland, Section 16 of the Arbitration (Scotland) Act 2010 will broadly have a similar effect in applying the Scottish arbitration rules.

The arbitration legislation which will apply to arbitrations by the adjudicator or a person appointed by the adjudicator includes protections on fairness and impartiality, including an ability for parties to apply to the court to remove an arbitrator on those grounds. The adjudicator can of course be expected to satisfy himself or herself either that they can carry out an arbitration themselves fairly and impartially, or that the person they appoint will do so, but there is a safeguard in the arbitration legislation if, for some reason, that does not happen properly.

I wanted to respond to my noble friend Lord Eccles, and have now found the speaking note for that. The groceries supply order has already established a dispute resolution scheme for disputes arising between a particular retailer and a particular direct supplier under the groceries code. The order anticipates that the adjudicator, referred to there as the “ombudsman”, will arbitrate these disputes. This will both ensure that the disputes are arbitrated by an individual with a high level of expertise in the sector and will allow the adjudicator to gain a greater understanding of how the code is operating that will be helpful when carrying out his or her functions, such as providing advice or preparing the annual report. I hope that that is helpful.

I hope that these rather long but, we felt, necessary explanations have proved satisfactory to noble Lords. While I would of course be happy to speak further to the noble Lord, Lord Browne of Ladyton, about this matter, I ask him to withdraw his amendment at this stage.

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Debate on whether Clause 2 should stand part of the Bill.

[Viscount Eccles]

I will try to be brief. I start by coming back to Professor Lyons, whose views were set out in paragraph 11.347 of the Competition Commission’s report:

“However, he believed that the Ombudsman would be counterproductive and strongly preferred rapid, independent arbitration of disputes, combined with OFT compliance”.

On the question of independent arbitration, I hope that we will investigate what is happening. It is very normal in conditions of supply and sale for there to be arbitration clauses. I suspect that if we were dealing with a large supermarket and somebody like Nestlé, Kellogg’s or Unilever, there would be arbitration clauses in the supply and purchase agreements. Are we saying that the adjudicator will override those clauses in some way because of the provisions of the Bill? That is one of my main reasons for suggesting that the adjudicator should play no part. That is why Clause 2 should come out of the Bill—and with it, under my Amendment 16, subsection (1) of the following clause. The adjudicator will not be at all well served by having the duty to administer arbitration or, if not being the arbitrator him or herself, to appoint another. That will override a lot of the existing and quite normal arrangements that are set out independently in contracts.

My noble friend said in different terms that the adjudicator will be neutral and fair between suppliers and retailers. I say with some regret that that is not the expectation. The expectation of the adjudicator, and those lobbying for the appointment of one, is that he or she will be in support of suppliers. I do not think that we should blink at that in this Committee. There has been no argument by the retailers of the kind that there has been by the suppliers. I quite accept that that is something to do with the gearing of perceived market power between the two sides, but if the adjudicator does not serve the interests of the suppliers, there will be a lot of disappointment.

[Lord Knight of Weymouth]

I am grateful to the noble Lord. As we have already heard, Waitrose, as one of the big retailers, is fully supportive of the establishment of not only the code but the adjudicator as well.

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[Viscount Eccles]

I am grateful to the noble Lord, Lord Knight. I have looked at that with some care and he is quite right that the things said by Waitrose during these procedures have been more positive than some of the things said by other supermarkets. If you read the compliance reports in the supermarkets’ annual reports and accounts—those that are available—you will find that they are all complying, and doing so in cheerful and positive way. That is why I want the OFT, under paragraph 7 of the code—it gets all the reports and it has all the information—to give its assessment and judgment of the extent to which the supermarkets are complying in a cheerful and positive manner with this code. My belief is that they are complying. I have sought to find out the views of the supermarkets and all their responses have been 100% positive; not one has put up any kind of negative response. Their trade association’s response has been, “We are going to make this thing work. We are making this thing work. We do not really think that an adjudicator will help, but we may have to have one”. That is perhaps the attitude I am taking—if we have to have an adjudicator, we will get on with it. I do not think the argument that Waitrose stands out as an exception runs.

[Lord Knight of Weymouth]

Given that the noble Viscount had said that there were no suppliers, I merely wanted to offer the information to the Committee that clearly there was one.

[Viscount Eccles]

I am only talking about expectations. It is up to Members of the Committee to make up their minds as to where the expectations that might arise as a result of this Bill being enacted lie. We all make up our own minds. In conclusion, I would much prefer it, and I think that it would be much in the public interest, if Clause 2 did not stand part of the Bill.

[Baroness Wilcox]

My Lords, my noble friend Lord Eccles has already made clear that he believes that the adjudicator’s function should be given to the Office of Fair Trading. The Government disagree and consider that with arbitration, just as with investigations, there is merit in establishing a dedicated, independent office which can build up a high level of expertise in the groceries market. I have already discussed this issue in some depth in response to previous groupings and have set out why we have made the provisions for the adjudicator to arbitrate.

The groceries supply order has already established a dispute resolution scheme for disputes arising between a particular retailer and a particular direct supplier under the groceries code. The order anticipates that the adjudicator—referred to there as the “ombudsman”—will arbitrate these disputes. This will ensure that disputes are arbitrated by an individual with a high level of expertise in the sector and allow the adjudicator to gain a greater understanding of how the code is operating that will be helpful when carrying out his or her functions, such as providing advice or preparing the annual report.

In response to the question asked by my noble friend Lord Eccles on whether the Bill will override existing arbitration clauses, the order already gives a right to suppliers to arbitration in accordance with Article 2 of the order. The Bill simply allows the adjudicator to carry out that arbitration role where appropriate. Similarly, with regard to Amendment 16, the purpose of Clause 3(1) is to increase the expertise of the adjudicator—something that will benefit both retailers and suppliers. It is entirely reasonable that just because the adjudicator has not acted as an arbitrator he or she should continue to have access to the information from that dispute. This clause provides the adjudicator with the means of obtaining it. Therefore, with that explanation, although I know it will not please him, I hope that it will persuade him to allow Clause 2 to stand part of the Bill.

[Viscount Eccles]

I am grateful to my noble friend. Perhaps I may ask whether that last comment was on Part 2 of the code of practice, which does not seem to mention arbitration.

[Baroness Wilcox]

It refers to Article 11 of the order.

[Viscount Eccles]

Yes—Article 11.

[Baroness Wilcox]

The order already gives the right to suppliers to arbitration, in accordance with Article 11. I am sorry, did I say Article 2?

[Viscount Eccles]

Yes.

[Baroness Wilcox]

I apologise.

[Viscount Eccles]

I thank my noble friend. I want to reiterate that I do not read anything in Article 11 that currently prevents a supermarket and a supplier entering into their own contractual arrangements about arbitration. Perhaps we could deal with that matter. I am sticking to my point that I would like an answer to the question: do the arrangements proposed in the Bill override normal contractual arrangements that exist between many suppliers and their customers in many markets?

I would also welcome—because I would like to come back to this at the next stage—some reflection on this matter of arbitration and its independence. I think that I am supporting the noble Lord, Lord Browne, because I remain of the opinion that it is almost inconceivable that the adjudicator will not have some perceived conflict of interest. Therefore, once it is perceived, the adjudicator will say, “I think that I had better back out of this and let it be done another way”. Meanwhile, I withdraw my opposition to the Question that the clause stand part of the Bill.

Clause 2 agreed.

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Moved by

[Viscount Eccles]

24: Clause 4, page 2, line 6, leave out “suspect” and insert “believe”

--- Later in debate ---

[Viscount Eccles]

My Lords, I will read out a sentence that is relevant to my amendment and also to the one we have just discussed. The Minister stated:

“After careful consideration, the Government have decided not to restrict the information that the adjudicator can consider”.—[Official Report, 22/5/2012; col. 726.]

That is entirely right. It is a free country, with free speech and so on. However, at the other end of the story, if we were to get into a situation where it was found that something had been brought forward that turned out to be vexatious, it would represent a failure and would be proof that the Bill was not working as well as it should.

I am mindful of the warning of Professor Lyons that he was not at all sure that the investigation potential was all that large, because of the length of the supply chain and because the adjudicator may investigate whether a large retailer has broken the groceries code. That is quite a narrow ground on which to mount an investigation.

In my amendment I put forward the argument that we should take out “suspect” and put in “believe”. There is a lot of hearsay and suspicion in the world, and in the way in which people think about the way supermarkets behave. When considering several Bills recently the House had no problem accepting that “suspect” was too weak and that we should “believe” before we start engaging in the expenditure of public money. I also think that it would be a protection for the adjudicator. This business of investigation is delicate and the adjudicator will have quite a hard time with it.

It is not an answer to say that Amendment 24 is irrelevant, because I think that the Office of Fair Trading should persist. That is my preference but of course I am capable of accepting that we should debate this on the basis that there will be an adjudicator, even though I want to see the continuation of the OFT. The adjudicator would welcome the protection of having to say that he or she “believed” that they had reasonable grounds rather than just “suspected”. I beg to move.

[Baroness Wilcox]

My Lords, the amendment would alter the criterion for starting an investigation so that the adjudicator would have to have reasonable grounds to believe that there had been a breach of the code, rather than reasonable grounds to suspect, before beginning an investigation. The decision on what threshold is needed is always difficult. However, we should consider what is being decided here. It is not guilt, liability or a sanction of any kind. All that is being decided is whether the adjudicator should begin an investigation that will allow him or her to decide, based on the results of the investigation, whether there has been a breach of the code. At this early stage of the process, the term “suspect” rather than “believe” has to be correct, particularly as the adjudicator generally will not benefit from the information powers set out in Schedule 2 until an investigation has started, and so may not be able to establish grounds for belief.

With that explanation, I hope that the noble Lord will see fit to withdraw his amendment.

[Viscount Eccles]

My Lords, I thank my noble friend, although I will come back to the matter because I am not satisfied. I should like to point out that the minute an investigation begins, it threatens a supermarket with an unexpected cost. Starting an investigation is quite a serious matter and is not to be undertaken lightly. The word “believe” should be included in the prelude to an investigation. I also think, given the amount of information that would already be available and will become available to the adjudicator, it should not be too much of a problem to ensure that there is some certainty that the matter is worth investigating. I beg leave to withdraw the amendment.

Amendment 24 withdrawn.

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[Viscount Eccles]

My Lords, I have an amendment in this group. I am in full support of the noble Lord, Lord Browne. My amendments dovetail entirely with what he has just said. I want to drop subsections (3) and (4) of Clause 5 because, in this media age, the idea that an investigation report will be published and that the identity of the retailer will not come out is not workable. Again, it feeds the whole world of suspicion, innuendo and investigation of another kind. On subsection (4), if a retailer’s name is given, apart from the reasons for the decision having been given, the retailer would have been given an opportunity to make a comment and to know which way the report was going, as is normal in order that it could be agreed by one and all to be a well balanced and fair report.

[Baroness Byford]

I will speak to my Amendment 34 in this group. It is a simple, probing amendment to ask whether the wording implies that a supplier will never be mentioned and that, if a supplier is mentioned, he or she does not need or deserve a second chance to comment. For example, if a retailer is mentioned in the draft, it can see the copy and comment on it. As a result, the draft may be changed. Should it not be open to all parties involved in the investigation to know both the original wording and the comments made?