Refusing to supply – a brief checklist for your business

It might sound counter-intuitive at first – why would you ever want to refuse to supply a paying customer?

In most cases, when a potential customer is asking to buy your goods or services, you would probably think that you’d be unlikely to refuse.

However, there are circumstances where you may not want to supply a particular customer, for a wide range of commercial reasons. For example:

• you might have limited supply of product and need to be selective with the customers you choose to deal with;
  
  
• you might be the owner of the brand / goodwill in the product or service and have, or are considering, a distribution arrangement where the distributor doesn’t sell a competitor’s product or have reservations about the reputation of the potential customer. This is particularly relevant if the potential customer is going to resell your product or service;
  
  
• selling your service may also be tied to significant costs in maintaining the service (e.g. if you provide a SaaS product). If a customer (or group of customers) is too small, it may not be commercially viable for you to service them, especially if your pricing models are based on usage as opposed to fixed rates.

It may be surprising, but these scenarios come up more often than you think and businesses are left wondering whether refusing to supply a potential customer might have any legal consequences.

We’ve prepared a list of things to keep in mind if you are considering refusing to supply an existing or potential customer.

Refusing supply is okay… unless it’s not

In most cases, you have the right to decide who you supply your products or services to for legitimate commercial reasons, such as a customer's unreliability, inability to pay, or failure to meet specific requirements. However, if you refuse to supply it can be unlawful if it involves anti-competitive behaviour or engaging in misleading or deceptive conduct.

Anti-competitive behaviour can arise when a supplier is:

1. involved in a cartel or a boycott;
   

2. imposing minimum prices on retailers; 

3. misusing their market power; or
   

4. engaging in exclusive dealing.

The first two behaviours are offences regardless of their effect on competition, while the last two won’t be a breach unless it has the likely effect of substantially lessening competition.

1. Involvement in a cartel or a collective boycott 

It is illegal for businesses who would normally be competitors to agree to act together instead of competing. Cartel conduct can take many different forms, including price fixing, market sharing and collective boycotting. 

Example – several major suppliers of construction materials, including cement and steel, agree to collectively refuse to supply their products to a new entrant in the construction market, "BuildCo." The established suppliers, who are direct competitors, form an agreement to boycott BuildCo because they perceive it as a threat to their market share. This collective refusal to supply is aimed at preventing BuildCo from obtaining the necessary materials to operate, thereby hindering its ability to compete effectively in the market.

2. Imposing minimum prices on retailers

It is illegal for a business to impose minimum resale prices for its products or services with its retailer or reseller customers. Similarly, a business cannot refuse to supply a customer with product unless they agree to a minimum resale price.

Example – A manufacturer of high-end electronics tells retailers they must sell its products at no less than a specified price. When a retailer attempts to offer a discount, the manufacturer refuses to supply further products. This conduct may constitute illegal price maintenance.

3. Misusing market power

While it is not illegal for a company to have a substantial amount of market power, it cannot misuse that power in a way that has the purpose, effect or likely effect of substantially lessening competition in the market (including the market to which it supplies products or services into).

Some conduct which may amount to a misuse of market power, includes refusing access to an essential input in that market, loyalty rebates and margin or price squeezing.

Example - A large telecommunications company with substantial market power refuses to supply network access to smaller internet service providers (ISPs) who can offer cheaper services. This refusal makes it difficult for the ISPs to compete, potentially leading to decreased competition and higher prices for consumers.

4. Exclusive dealing

Exclusive dealing occurs when one business imposes restrictions on how / with who another business can deal with. We often see this with exclusive distributor arrangements.

Example – A brand owner refuses to supply its products to a distributor unless the distributor agrees to not sell the products of the brand owner’s competitor. This arrangement is often under the guise of brand protection, particularly if the competing product is a cheaper or less premium product. This practice is common and generally permitted unless the refusal to supply substantially lessens competition. In this case that is usually by depriving consumers of choice.

Responding to potential customers – avoid misleading representations

When refusing to supply a customer, you must ensure that any representations you make are legitimate and not misleading. 

If you make representations which are disproven, this could constitute common law misrepresentation or misleading or deceptive conduct in breach of the Australian Consumer Law (ACL). Misleading or deceptive conduct is prohibited under the ACL, in ‘trade or commerce’ so it applies to any conduct in connection with other businesses, not just with individual consumers.

For example, if you sell a particular product and represented you had ‘limited supply availability’ as a reason for refusing to supply a customer with that product, when you have an abundance of the product, the representation of limited supply will likely be misleading. Whether a customer will pursue a claim depends on if they suffer any loss. In this situation a customer might suffer a loss if they had to acquire the same product from an alternative supplier at a higher price than you could have supplied the product to them.

If unsure, seek advice

While businesses generally have the discretion to choose who they supply to, it's essential any refusal to supply is legally sound and commercially justified.

The examples above are simplified illustrations. In practice, the legal tests for misleading or deceptive conduct and for whether conduct substantially lessens competition are complex and fact specific.

If you're unsure about your obligations or the risks involved in refusing to supply, seek legal advice which considers your specific circumstances. If an allegation is made, particularly if the matter is raised by the ACCC, it is critical to seek legal advice promptly to assess the risks and respond appropriately.

Authors: Jason Sprague & Puria Davoodi

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.