Franchising and Supply Agreements

Can a franchisor require the franchisee to buy all supplies from an approved supplier? Known as third line forcing, a franchising agreement can require you to use supplies from a specified supplier. Generally such provisions are anti-competitive and may fall foul of the ACCC’s (Australian Competition & Consumer Commission) policy on promoting competition. However, where a franchise agreement provides for this arrangement, it is possible for a franchisor to seek the ACCC’s approval first and then include this arrangement in the agreement. If approval has been received, it is very difficult for a franchisee to then have that approval revoked and ask the ACCC to investigate.

Sometimes an agreement allows you to choose your supplier but will specify a certain quality or standard of goods are to be used.

Working along side the ACCC and the law surrounding competition is The Franchising Code of Conduct. The Code requires franchisors to disclose the name of the supplier, if they will receive a rebate or financial benefit from any supply arrangements and whether they share the rebate or benefit with the franchisee. Franchisors do not have to state the amount or value of the rebate or financial benefit.

If you are entering into a franchising agreement, check if there are any provisions that require you to purchase goods from a specified supplier. Ask for a copy of a current price list so you know how much it will cost to re-supply your business. It may be that the nominated supplier is more expensive then an alternative you wish to use. However, the ACCC has recognised that a franchisor has an interest in maintaining a level of quality of goods used by individual franchisees and the increased efficiencies for the franchisor in using the one supplier.

We provide a detailed advice to prospective franchisees that include considering third line forcing issues. It is important that any concerns you have about the nominated supplier, are raised with the franchisor before you enter into the agreement. Being unable to afford the supplier’s price or being unhappy with their service will not allow you to end the agreement.