Pub companies: follow-up - Business, Innovation and Skills Committee Contents

Supplementary memorandum submitted by the Department for Business, Innovation and Skills

  Due to time pressures at the BIS Committee meeting on 19 January, I understand that there were some questions that you were unable to ask Peter Mandleson during the session. These questions related to public houses and supermarkets.

  I have taken the questions in the order that they were asked in the email of 26 January and the responses are contained within the attached Annex A.

Annex A

How similar do you see the relations in the grocery sector between farmers and supermarkets to that in the pub sector between pubcos and lessees?

1.   Your Department has recently announced the need for an Ombudsman in the grocery sector to enforce codes of practice-is this something you would be prepared to do in the pub industry, should that industry fail to implement robust reforms?

  The markets and relationships are very different as are the circumstances surrounding the outcome of the competition authorities' investigations.

  Government has been responding to a two year market investigation by the Competition Commission (CC) on the market for the supply of groceries in the UK following a referral from the Office of Fair Trading (OFT) in 2006. The CC identified a number of issues which it concluded had an adverse effect on competition (AEC). Where the CC has identified an AEC it is obliged to decide whether action should be taken by it or others to remedy the AEC or any detrimental effect on consumers. Whilst the CC was able to implement a number of its own remedies it made three recommendations over concerns it had in respect of certain supply chain practices and planning. The CC has drawn up a new statutory code for the largest supermarkets and believes that it will not be effective without monitoring. Government has accepted that independent monitoring is necessary and is taking steps to progress the recommendation.

  There are no such recommendations from the competition authorities in respect of the pub market. The competition authorities have looked at the beer market over a number of years. Most recently in response to the Campaign for Real Ale (CAMRA) super-complaint the OFT has said that there is not a competition issue to be remedied. However, CAMRA has disputed and appealed this decision with the Competition Appeal Tribunal (CAT). A case handling conference is scheduled for 8 February.

  The business models of the organisations involved in the two sectors are very different. For example:

    — The markets are very different in size.

    — The pubcos own little more than the property and have debts to service.

    — Grocery retail in supermarkets is growing, pub beer sales have been in decline.

    — Grocery stores are firmly in the retail sector competing on price, whilst pubs are part of the service sector which will include other factors such as location, ambience etc.

    — The product range covered by the tie is narrow compared to product ranges offered by supermarkets.

    — Clear contracts exist between pubco and licensee whilst often there has been no formal contract between suppliers and large grocery retailers. Longer term agreements can last up to 25 years in the pub trade.

    — In groceries the small business supplies the supermarket with produce and but in the pub market it's the pubco that supplies the product. In groceries this relationship impacts on the ability of the small supplier to complain to the supermarket for fear of being delisted. The same situation does not arise in the pub market.

  I wrote to you on 8 December to express my current view that it was too early to take a decision on whether Government needs to intervene. Officials recently met with the British Institute of Innkeeping (BII) and the Royal Institution of Chartered Surveyors (RICS). We remain vigilant in monitoring progress on the activity being taken forward by the sector.

2.   What effect will the recent decision of your Department to revoke the Land Agreement Exclusion Order have for the beer tie?

  On 13 January we announced our decision to revoke the order that currently excludes land agreements from the prohibition in Chapter I of the Competition Act 1998. This arose out of a recommendation from the Competition Commission recommendation in relation to the impact of the order in the groceries market.

  We are satisfied it is no longer appropriate or necessary to exclude land agreements from the effect of that prohibition. Getting rid of the exclusion means competition law will apply consistently to land agreements in the same it does to all other types of agreement, removing any scope for doubt about this. Parties to land agreements must assess their agreements and ensure they are properly compatible with the law. This will help promote vigorous competition between enterprises in a way that is wholly beneficial to consumers.

  In addition we are delaying the effect of the order's revocation by one year. This will ensure business has time to undertake necessary self-assessment of relevant agreements. The OFT will provide updated guidance to help businesses carry out this work.

  On the more specific point of the impact on the beer tie, the Competition Commission concluded that restrictive covenants are not land agreements for the purposes of the exclusion order. Accordingly, the use of such covenants by pub companies is not a practice that is currently protected by the exclusion order. We believe revocation of the exclusion therefore has no impact at all on this matter.

  I know that the issue of restrictive covenants was considered and addressed separately by the OFT in its response to the super-complaint brought by the Campaign for Real Ale in 2009. The OFT concluded that the use of restrictive covenants by pub companies would be unlikely to give rise to a significant adverse effect on competition in markets. However, it indicated that further action on this issue remained possible if such practices became more persistent and widespread.

3.   Equally what would be the consequences of the removal of the EU block exemption?

  The current EU block exemption on distribution agreements (the Vertical Agreements and Concerted Practices Block Exemption No. 2790/1999) is under review and will be replaced by a revised Block Exemption and guidelines, which is due to come into force on 1 June 2010. As part of the review, I understand that the European Commission has received and is considering submissions in respect of beer ties. The European Commission will be reporting on the review at a meeting with Member States and national competition authorities on 2 February. I am sure you will understand that, as a final version of the Block Exemption and guidelines is expected in the next few weeks, it is too early at this stage to conclude on the implications for the beer ties. My officials are, however, following this review closely and will be reporting to me on progress.

4.   Do you recognise that there is an unfair balance of relations between big business and small business for example: supermarkets and farmers/pub companies and publicans? Is there a need for unfair contract legislation to be extended to business contracts?

  Government recognises that that both parties to a business contract do not always have equal bargaining power, especially small businesses.

  As the law currently stands, there are two major pieces of UK legislation governing unfair contract terms. The Unfair Contract Terms Act 1977 (UCTA) deals with exclusion clauses and covers both consumer and business contracts, and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) implements Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts and deals with all unfair terms but only in relation to consumer contracts. In January 2001 the Government invited the Law Commission to consider the feasibility and desirability of re-writing the law of unfair contract terms as a single regime, in a clearer and more accessible style. At the same time they were asked to consider whether to extend legislation to protect smaller businesses, in particular small enterprises.

  The Law Commission published their report in February 2005 setting out their detailed recommendations and a draft Bill. The Report recommended rewriting the existing law on unfair contract terms into a single, unified piece of legislation, which preserves the existing level of consumer protection. It also recommended the creation of a new regime extending the protection against unfair contract terms to the smallest businesses (those employing nine or fewer employees) which would extend to such businesses the protection against unfair terms given to consumers by the UTCCR.

  In 2006 the Government accepted, in principle, the recommendations of the Law Commission subject to an evaluation of the impact of the reforms, and subject to securing Parliamentary time. However, in 2008 the European Commission published the EU Consumer Rights Directive which will repeal four existing consumer Directives including unfair contract terms, and will set out more consistent rules for both business and consumers through use of a maximum harmonisation clause, whereby Member States could not maintain or adopt provisions providing greater protection than those laid down in the Directive. As this new EU Consumer Directive is based on maximum harmonisation it would obviously be risky to propose changes to UK legislation until the EU Consumer Directive takes shape.

  As announced in its recent Consumer White Paper "A Better deal for Consumers", (published 2 July) the Government will simplify and modernise existing UK legislation at the same time as it implements the new Consumer Rights Directive. This will cover Unfair Contract Terms legislation—the Consumer Rights Directive will be used as a basis for simpler, clearer and unified regime on unfair business-to-consumer contracts. At the same time the Government will consider the issues around extending protections to the smallest businesses in business-to-business contracts.

8 February 2010

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