Franchising supply arrangements and restrictions

About supply arrangements

It is common for franchisees to be required to purchase goods or services from franchisors, related businesses or specific third-party suppliers. For example, franchisors making franchisees purchase certain cleaning supplies or ingredients from a particular company.

Sometimes the products and services that franchisors tell franchisees to buy may not be what franchisees would choose if it was up to them. In some cases these products or services may even be more expensive than what franchisees can find by shopping around.

The franchisor may make money from controlling supplies to the franchisee. One way that franchisors may make money from supply arrangements is by getting a rebate or other financial benefit from the supplier. This means that the franchisor has a financial incentive to make their franchisees buy from that supplier.

Watch a short video about supply restrictions

Disclosure rules for supply arrangements

Franchisors must disclose supply arrangements

Franchisors must tell potential franchisees in the disclosure document if there are rules about goods or services that franchisees must buy or sell when running the business.

Franchisors have to tell franchisees about rebates and other financial benefits

To make sure that franchisees are aware of the franchisor’s financial interests in supply arrangements, the Franchising Code of Conduct says that franchisors must tell franchisees about rebates and other financial benefits that the franchisor, master franchisor or an associate of the franchisor or master franchisor gets from suppliers.

They must tell franchisees about these rebates and other financial benefits in the disclosure document. This includes details of:

• what the financial benefit is
• the name of the business giving the financial benefit
• the total amount of financial benefit the franchisor gets from the supplier expressed as a percentage of total group purchases from the supplier (excluding franchisor, master franchisor or associate stores)
• if the financial benefit is shared with franchisees. However, franchisees do not have to share rebates or other financial benefits with franchisees.

Supply arrangements and the law

Exclusive dealing

Supply restrictions are also known as ‘exclusive dealing’. Exclusive dealing is when one person trading with another has rules limiting with whom, in what, or where the other person can deal.

Exclusive dealing supplier arrangements are allowed as long as the conduct doesn't have the purpose, effect or likely effect of substantially lessening competition in the relevant market.

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 are not permitted under the Australian Consumer Law and only apply if certain requirements are met.

Supplier restrictions video

Watch a short video about supply restrictions. The video is available in English, Hindi, Chinese simplified and Chinese traditional.

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