Franchisors will be familiar with the prohibition on "third
line forcing" contained in s47 of the Trade Practices Act
1974 (Cth) (TPA). Third line forcing, where in simplified
terms A supplies goods or services to B on the condition that B
acquires goods or services from C, is prohibited irrespective of
its impact on competition.
In the franchising context, the franchise agreement would
clearly be a contract for the supply of services from A to B.
Supply of goods or services by A to B is permitted, even if the
goods or services come to A from C, but a requirement for the
franchisee B to acquire goods or services from third party supplier
C (unless C is a related company of A) creates a problem. Typical
situations where problems can arise include the supply of stock,
and requirements in relation to point of sale technology and
hardware, food/beverage service equipment and advertising/marketing
services and material.
Many franchise systems have successfully implemented these
arrangements using the Notification process contained in the
Trade Practices Act. In considering the proposed conduct
the ACCC will have regard to the potential impact on competition.
The ability to tie supply in a franchise network can be very
pro-competitive in assisting franchisees and franchisors to compete
with larger corporations, so the ACCC will often allow the proposed
conduct to take place. However the ACCC will look at each case on
its merits, and it should never be assumed that all third line
forcing arrangements will be accepted by the ACCC. The ACCC's
successful prosecution of Bill Express Pty Limited (BXP) and
Technology Business International Pty Ltd (TBI) in September last
year shows that the ACCC does not always regard third line forcing
as being appropriate.
BXP and TBI supplied to merchants an online payment system known
as the "Bill Express Payment System" and the hardware
necessary to operate the system. The Bill Express Payment System
enabled merchants to receive bills and other payments owed by their
customers to various third parties. In order to obtain the supply
of the Bill Express Payment System, merchants were required to
enter into two contracts – the Merchant Contract with BXP
for the supply of the online payment system and the Rental Contract
with TBI for the supply of the hardware platform which hosted the
online payment system. Entry by merchants into both of these
contracts was required by BXP and TBI as part of the merchants'
application for the supply of the Bill Express Payment System.
The Court was satisfied that the supply of the Bill Express
Payment System did involve the imposition of a condition by BXP
that merchants enter into the Rental Contract (and, conversely, the
imposition of a condition by TBI that merchants enter into the
Merchant Contract), thereby falling foul of the per se prohibition
against third line forcing under the TPA. No Notification or
application for Authorisation had been lodged with the ACCC, so
once the ACCC initiated the prosecution the conduct of BXP and TBI
was simply assessed against the third line forcing prohibition.
There was no scope for the court to consider the conduct in the
context of its effect on competition, as third line forcing is
absolutely prohibited irrespective of the effect on
This case reinforces the importance of obtaining legal advice
from experienced competition and trade practices lawyers when any
form of tied supply or exclusive arrangement is proposed,
particularly if 3 or more 2 parties are involved.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Making the right decision on whether to use a deed, standard contract or an agreement can make a significant difference to the success of a transaction or project.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).