Supermarkets hold suppliers to ransom over Sudan 1 recall

Manufacturers have blasted moves by supermarkets to charge their suppliers six-figure sums to cover Sudan 1-related "admin" costs as "wildly unreasonable"

Tesco declined to comment, but suppliers claimed it had sent out invoices of up to £500,000 to cover "administrative charges" over and above standard recall costs. The demands were sent to suppliers that used Premier Foods' Worcestershire sauce contaminated by the illegal dye Sudan 1.

One supplier said: "The feeling is that Tesco and Co have well and truly overstepped the mark. We're talking about demands for six- figure sums issued without warning and if suppliers don't pay, the money is deducted from payments, which means they are left trying to claw back their own cash.

"The fear is that insurance will cover standard recall costs, but not punitive damages of this magnitude."

Penalty clauses are illegal under English law, said Hugh Smith, a partner at legal firm Andrew Jackson. However, most contracts in the trade included clauses on such 'admin' charges, which cover anything from loss of profits, to labour costs and loss of reputation, he said. "Not all of these charges can be passed up the chain as some contracts will have terms excluding liability for loss of profit, for example."

Maurice McCartney, deputy director of the British Meat Processors Association, said: "Manufacturing suppliers have devoted considerable time and resource to managing the Sudan 1 issue. Given what is known about the source of the problem, it is hard to see how punitive or admin charges are consistent with the spirit of the supermarket code of practice."

Darren Smith, product liability lawyer at international law firm Reed Smith, said: "What this underlines is how important it is to precisely clarify terms and conditions in contracts and insurance policies. Otherwise, it goes to a straight bun fight. Retailers will claim for loss of profit, loss of reputation, you name it. There will be a whole chain of litigation, and it will make the lawyers a lot of money."

Regardless of Premier's due diligence, the buck would probably stop with its insurers, given that its suppliers were unlikely to have sufficient cover, he said. Premier's exposure was unlikely to become clear for another year: "However, it is rumoured to have £100m of cover. The worrying question is what happens when it comes to renewal time. It's going to cost them. In fact, this will put up insurance costs across the board."

Premier has continued to insist that it has "no material financial exposure" in relation to the recall.