Franchisee Obligations: Do I Need to Purchase from Approved Suppliers?

Franchisors provide many franchisees with franchise agreements that require the franchisee to purchase goods or services from a particular supplier. This is not uncommon, and many franchisees fail to think twice about this requirement. After all, this is one of the known reasons why the franchise system works well: the franchisor can rely on the quality and consistency of the goods and services the franchisee is providing. However, the franchisee should be aware that it is not always lawful for the franchisor to require you to purchase only from approved suppliers. This article will explain why and will provide you with some common issues to address with the franchisor.

Third Line Forcing

As a party to the franchise agreement, the franchisor may act as the middle-man between you and a supplier. Third line forcing occurs when Party A (franchisor) provides goods or services to Party B (franchisee) on the condition that Party B purchase goods or services from Party C (supplier). This is not necessarily detrimental as the franchisor may require this arrangement for them to maintain their system. However, it is important to be aware that this may be an issue for the franchisor if it significantly reduces competition.

Notification Requirements

If the franchise documents require that you purchase goods or services from approved suppliers only, it would be prudent to query the franchisor as to any ACCC notifications that have been lodged. If the ACCC have approved a notification by the franchisor, the franchisor has a statutory protection of their supplier arrangement. This means that you do have to comply with the purchasing of goods or services from the franchisor’s approved suppliers.

Opportunity Cost: Benefits and Detriments

When considering whether a franchisor should be able to have statutory protection of their supplier arrangement, the ACCC considers the opportunity cost from the perspective of the general public. Some factors to consider include:

• Reliance of the general public for consistency with the franchise brand;
• Efficiency of the operation of the franchise model that may have positive flow-on effects to the general public; or
• Increased bargaining power within the franchise.

Thoroughly completing your legal due diligence and analysing the franchisor’s supplier arrangements will position you decide whether you are in an overall better position than if the supplier arrangement didn’t exist. Although this varies between franchises, you can ascertain, for example, whether any rebates or financial benefits will be passed on to you as the franchisee. Or, whether you will save time and efficiency by following the franchisor’s system for supply and the cost benefits you may receive from choosing a supplier on your own.

Key Takeaways 

Although the requirement to abide by the list of approved suppliers is a relatively minor part of the franchise system as a whole, understanding how this may impact your business will be important when reviewing and negotiating the terms of the franchise documents. If you have any questions, let our franchise lawyers know on 1300 544 755.