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About supply arrangements
Some franchisors make their franchisees buy products and services from them or specific suppliers. For example, franchisors making franchisees buy specific packaging or ingredients from one company. This is called a supply arrangement or restriction.
Sometimes these products and services:
- aren’t what the franchisee would choose if it was up to them
- are more expensive than what the franchisee could find by shopping around.
A franchisor might make money through a supply arrangement. For example, they may get a rebate or other financial benefit from a supplier they make franchisees buy from. This creates a financial interest for the franchisor to make franchisees buy from that supplier.
Sometimes when you buy a franchise it’s not up to you where you buy your supplies.
Imagine you’ve just bought a café. You want to make the best coffee in town at the best price. You can buy your milk from anywhere, but you can only buy your coffee beans from one supplier, and they are expensive. You can get coffee much cheaper from other suppliers, but your franchise agreement won’t let you. This is a supply restriction.
Supply restrictions are listed in your disclosure document and your franchise agreement. In many cases supply restrictions are legal. If they are legal and in your franchise agreement, you will have to follow them, even if it costs you more money.
Not sure about the supply restrictions? Get independent advice from a lawyer, accountant, and business adviser about the franchise. Make sure they have franchising experience.
For more information see the website.
Authorised by the Australian Government, Canberra.
Disclosure rules for supply restrictions
Franchisors must disclose any rules about goods or services that franchisees must buy or sell when running the business.
The disclosure document given to prospective franchisees and current franchisees must include:
- all supply arrangements
- any restrictions on franchisees buying goods and services
- any ownership or interest in a supplier a franchisee must use
- any financial benefit from a supply arrangement.
Financial benefit includes rebates and other benefits the franchisor, master franchisor or an associate of the franchisor or master franchisor gets from suppliers.
View the financial benefit information that franchisors must disclose. See supply arrangements and rebates in the disclosure document.
Supply arrangements and the law
Exclusive dealing
Supply restrictions are also known as ‘exclusive dealing’. Exclusive dealing is when one business trading with another business puts conditions on the other’s freedom to choose:
- who it does business with
- what business it does
- where it does business.
Exclusive dealing supply arrangements are legal when they do not substantially lessen competition.
Franchisors can seek an exemption from the ACCC to engage in the conduct if they are concerned that their supply arrangements may raise competition concerns.
Unfair contract terms
Some supply restrictions may be unfair contract terms.
To be unfair, a term must:
- cause a significant imbalance in the parties’ rights and obligations
- not be reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
- cause financial or other detriment, such as delay, to a small business if it were relied on.
However, when deciding if a contract is unfair, a court will look at the contract as a whole, including if there are other benefits.
Unfair contract terms in a franchise agreement can attract significant penalties.
See our report on unfair contract terms in franchise agreements to learn more about compliance checks on franchisors and unfair contract terms:
