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Do you have to buy from a franchisor-approved supplier?

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Inside Franchise Business: franchises use approved suppliersWhat are the rules around franchisees sourcing products?

Franchise networks typically specify approved suppliers from whom franchisees may or must acquire goods, services and equipment.

There are many reasons why a franchise network may seek to regulate suppliers. These include quality control, consistency of offering, supply certainty, buying power and access to rebates.

owever, must a franchisee acquire goods, services and equipment only from an approved supplier?

There are a number of ways a franchisor may seek to regulate suppliers. These include:

  1. Requiring the franchisee to acquire specified goods, services or equipment from a specified supplier;
  2. Requiring the franchisee to acquire specified goods, services or equipment from the franchisor or a related entity of the franchisor; or
  3. Prohibiting the franchisee from acquiring goods, services or equipment from non-approved suppliers.

Until recently, franchisors were prohibited from requiring franchisees to acquire goods, services or equipment from third parties, unless they had first lodged a ‘third line forcing’ notification with the ACCC. The law was recently changed and now, this type of conduct is only prohibited if it has the purpose, effect or likely effect of substantially lessening competition.

Franchisees need to understand that they can,generally speaking, be required to purchase from third parties regardless of quality, price advantage or other benefits. Therefore, they need to ensure they consider this in their assessment of the franchisor and the franchise offer.

There are some limits to the powers of franchisors.

For example, in certain circumstances, where a specified supplier is unable to supply as franchisee through no fault of the franchisee (or through the fault of the franchisor), a franchisor may need to permit the relevant franchisee to acquire an appropriate substitute from an alternative supplier, until such times as the specified supplier is able to supply the franchisee.

Clauses that provide franchisors with an unfettered discretion to change supply arrangements beyond what is reasonably required in order to protect the legitimate interests of the franchisor, may also fall foul of laws prohibiting unfair contract terms in certain contexts.

In addition, the Franchising Code of Conduct requires franchisors to disclose (amongst other things) details of supply arrangements, including:

  1. any requirement for the franchisee to maintain a level ofinventory or acquire an amount of goods or services
  2. restrictions on the acquisition of goods or services by the franchisee from other sources
  3. an ownership interest of the franchisor or an associate in any supplier from which the franchisee may be required to acquire goods or services; and
  4. whether the franchisor will receive a rebate or financial benefit from the supply of goods or services to franchisees, including the name of the business providing the rebate or financial benefit.

Franchisees should carefully consider these disclosures and the relevant provisions of their franchise agreement, prior to acquiring a franchised business.

Warren Scott

Warren Scott is the Partner at Mills Oakley Lawyers. Warren is a recognised expert in franchising law. He heads the Mills Oakley franchising team, which offers a premium service nationally. Warren advises both franchisors and franchisees and has recently been selected by his peers for inclusion in the Eighth Edition of Best Lawyers in Australia in the practice area of franchising law. View More...
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