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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