Legal trouble brewing between Ocado and M&S: What might this tiff deliver?

About five years ago, M&S began listing its products on Ocado in a deal that seemed like a match made in heaven.

However, this relationship has since turned sour and the parties are heading towards a possible court showdown.

What happened between the pair?

In 2019, M&S signed a 50-50 JV deal with Ocado to sell M&S food via the separate entity Ocado Retail.

As part of the agreement, M&S paid over £560m upfront. M&S was expected to pay an additional £187.5m based on specific performance targets to be met.

However, in 2023, M&S chairman Archie Norman said he was “not happy” with the joint venture’s financial performance.

While Ocado Retail’s revenue was £2.4bn in 2023, EBITDA (earnings before interest, tax, depreciation and amortisation) was only £10.4m.

Ocaco Retail share price boomed during the pandemic, briefly reaching 2,800p per share (making the company more valuable than Tesco), but it’s since plummeted to around 236p.

The business owed its pandemic boom to a rush of shoppers looking for alternatives to in-store grocers, but struggled to progress post-pandemic as demand dropped off.

It also now faces competition from supermarket’s own delivery services, which became rapidly more efficient and developed during Covid.

The boss of Ocado Group, Tim Steiner, threatened M&S with legal action if it didn’t pay the final nearly £190m payment of their joint venture. At the time, the chief executive said the company believed it had “a very solid case to get full payment”.

Ocado Retail is one of two joint ventures that Ocado Group has a stake in, with the other being MHE JVCo 50:50 venture with Morrisons. It also has a 26.3 per cent stake in Karakuri, a robotics business involved in the development of automation for quick-service restaurants.

The parent company will transfer responsibility for reporting of Ocado Retail to M&S in April. Despite this, it will continue to retain its share in the partnership and account for the business in its financial statements rather than reporting Ocado Retail’s results.

If Ocado Group moves to sue M&S, it will be named as a claimant on any potential court filing.

It is unclear whether Ocado Retail would be named on any potential court documents, as this depends on the parties’ deconsolidation terms.

A ‘strong negotiating position’

Last week, Ocado Group vowed to use “all available means” to force M&S to hand over the payment ahead of the deadline in April.

The tech retailer believed it had a “strong negotiating position” to achieve a satisfactory settlement, and the pair was still in “constructive discussions.”

At the same time, Ocado Group reported another year of losses despite a strong performance in its online delivery arm. It revealed its loss before tax of £374.5m, down from £393.3m in 2023.

This comes as Ocado is set to cut around 500 roles in its technology teams in an automation drive. The company reduced its headcount by a further 1,000 staff last year.

Sarah Murray, head of commercial litigation at Stevens & Bolton, told City PM that “this dispute highlights the complexities and potential pitfalls of clauses providing for performance-based payments in joint venture agreements.”

What may happen next?

Shoosmiths partner Fleur Turrington explained that if the retailers fail to settle and the case proceeds to court, “the contract terms related to performance metrics and force majeure would undergo a thorough examination to assess their applicability in the context of the pandemic.”

Daniel Astaire, managing partner at Grosvenor Law, added, “It appears that M&S will be seeking a strict interpretation of the language used, whereas Ocado may look to rely on legal issues such as the prevention principle or some form of tortious interference by M&S, arguing the latter’s behaviour has made targets and KPIs unattainable.”

Turrington noted Ocado’s confidence is “perhaps understandable” due to recent rulings in similar business interruption disputes related to the pandemic.

But she added that M&S also appear confident “due to their strict interpretation of the performance metrics and their belief that the agreed-upon targets were not met.”

As Murray pointed out, “Given both companies’ high profile, and the fact that the outcome could set a precedent for joint venture agreements already in place between other commercial parties, the stakes for both sides are high.”