Mandatory Purchasing in Taiwan Franchises: Checking Stockout, Alternative Supply and Price Increase Clauses

When choosing a franchise in Taiwan, centralised purchasing requirements can help maintain quality and product consistency. But if a designated supplier runs out of stock, can the franchisee source supplies elsewhere? Before joining a franchise network, look beyond the unit price. Establish who commits to supplying the goods, who approves alternatives, and who bears the losses when there is nothing to sell.

1. Distinguish between specified requirements and specified sellers

A requirement to use ingredients meeting particular specifications is different from a requirement to buy only from a particular company. The former may allow you to compare suppliers; the latter puts purchasing choices in the hands of the franchisor or its designated suppliers. Do not assume that a franchise sales representative’s promise of ‘consistent quality’ means every item must be purchased exclusively from a designated source.

Ask the franchisor for a written purchasing list that specifies, for each item:

• Who you must buy from, and which company actually receives payment and issues the supporting documentation.
• Whether the restriction concerns the brand, recipe, specifications or supplier itself.
• Which general-purpose consumables you may source independently, and which require prior approval.
• Who is responsible for finding an alternative source if a designated supplier stops supplying.

Pay particular attention to whether the contract and operations manual are consistent. For example, if you are told during recruitment that you may buy packaging independently, but the manual requires all packaging to be ordered through the franchisor, resolve this before signing. Record the applicable list and any exceptions in a contract schedule, rather than waiting until the outlet opens to argue over verbal promises.

2. Understand the disclosure rules: disclosure is not a guarantee

Taiwan is not without franchise regulation. The Taiwan Fair Trade Commission’s guidelines on franchisors’ business conduct provide a basis for its handling of relevant cases; they are not a standalone franchise statute. The material information covered includes fees payable during operation and restrictions requiring goods or raw materials to be purchased from the franchisor or designated parties, or requiring specified brands and specifications.

Under these guidelines, the relevant information should be provided ten days before a franchise or preliminary franchise relationship is established, within a period considered reasonable in the particular case, or within a period agreed by both parties. Failure to disclose as required without a legitimate reason may breach Article 25 of Taiwan’s Fair Trade Act if it is sufficient to affect trading order. The disclosure period should not be understood as a fixed ten-day requirement in every situation.

Disclosure obligations and supply commitments are separate matters. Even if the franchisor has disclosed mandatory purchasing requirements, this does not mean it promises uninterrupted supply. Nor does it mean the franchisee automatically has a legal right to buy elsewhere. Mandatory purchasing is not necessarily unlawful in itself; the specific arrangements must be assessed.

Franchise transactions are generally not consumer relationships, so protections under Taiwan’s Consumer Protection Act should not be assumed to apply directly. Issues such as late delivery, defective goods and compensation still need to be assessed under the contract, Taiwan’s Civil Code and other relevant provisions. As well as checking that disclosure is complete, negotiate enforceable supply terms.

3. Turn stockout contingency plans into a workable process

A common gap arises when the franchisee is bound by exclusive purchasing restrictions but the designated supplier makes no corresponding delivery commitment. Before signing, confirm normal lead times, when an order is considered accepted, and who must notify you of an expected delay. If the franchisor merely introduces the supplier, also establish whether it accepts any responsibility for coordination or contractual performance.

Alternative purchasing clauses should answer at least four questions: what triggers the process, who submits the request, how quickly a response is required, and how the suitability of substitute goods will be verified. Prioritise securing a list of pre-approved backup suppliers. Specify the testing records or specification documents required to meet recipe, food safety or brand consistency requirements.

Do not assume that silence from the franchisor means permission to buy elsewhere. If you want to be able to take particular steps when no response arrives by a deadline, the triggering conditions and permitted scope must be expressly agreed. For products subject to safety or statutory requirements, the franchisor’s approval alone does not remove your responsibility.

Also agree whether you may temporarily stop selling specified products during a shortage, and whether doing so would constitute a breach of contract. If the terms require the full product range to be available but contain no exception for supply interruptions, the franchisee could still be held responsible when there is no stock available to buy.

4. Check price adjustment mechanisms and evidence for claims

Mandatory purchasing reduces your flexibility to switch suppliers, so do not assess prices solely as they stand on the signing date. Ask for delivery charges, cold-chain charges, urgent-order fees and other surcharges to be itemised. Confirm whether prices include tax, whether discounts expire, and whether price adjustments can apply to orders already confirmed.

If the franchisor reserves the right to change prices, consider negotiating advance notice, an explanation of the basis for any increase, and alternative arrangements in the event of a substantial rise. These are contractual provisions to negotiate, not statutory rights automatically enjoyed by every franchisee. When assessing costs, include delivery charges for substitutes and any price premium for emergency purchases, rather than comparing only the original unit prices.

Liability clauses should distinguish between the obligations of the franchisor, supplier and franchisee. If the supplier is not a party to the franchise agreement, the franchisor’s description of its role in that agreement may not be enough to bind it directly. Obtain a separate supply agreement or written confirmation where necessary.

Once the outlet is operating, retain orders, order acknowledgements, delay notices, records of approval to buy elsewhere, and receipts for additional expenditure. Whether trading losses can be recovered depends on matters including breach of contract, causation, evidence and limitations of liability. Do not assume that all projected turnover will be recoverable as compensation.

Practical takeaway: Before paying or signing, review the mandatory purchasing list, delivery arrangements, alternative supply procedures and price adjustment mechanism together. If the franchisor insists on designated sources but will not explain how shortages will be handled, resolve that gap before taking on a long-term operating commitment.