With the popularity of franchises on the increase, it is no surprise that a legal regulation framework has been developed.
The CPA’s effects on the franchise industry in South Africa are far reaching as it provides that the established threshold, which determines whether or not a transaction will fall within the scope and ambit of the act, does not apply to franchise agreements.
Consequently, if an agreement falls within the Act’s definition of a franchise agreement it will be controlled by the provisions in the Act regardless of the value of the transactions involved.
A franchise agreement exists if:
- a franchisee pays the franchisor for the right to carry on business within all or a specific part of the country under a system or marketing plan developed and controlled by the franchisor; and
- the operation of the business of the franchisee is closely associated with the advertising, trademarks, branding etc. of the franchisor; and
- the business relationship between the franchisor and franchisee is governed by the agreement.
There has long been an imbalance in power when negotiating franchise agreements with the franchisor usually being in the stronger bargaining position.
In the past, because any improper conduct by the franchisee could be prejudicial to the franchise group, severe measures were often included in the agreement to protect the franchisor and oblige the franchisees to maintain a strict code of conduct relating to the products, the operation and the business in general.
These franchise agreements were often perceived to be one-sided because of their controlling provisions.
The CPA now provides that all franchise agreements must be in writing and signed by or on behalf of the franchisee. ‘Unreasonable protection’ or ‘undisclosed benefits’ are no longer permitted and the agreement must be ‘fair and reasonable’ and ‘…in plain and understandable language’.
The regulations to the CPA set out essential terms and elements that must now be included in the agreement and certain facts that must be disclosed including all statements reflecting the franchisor’s financial position and growth, as well as the franchisor’s expected growth, must be disclosed.
Perhaps the most fundamental change affecting this industry is that every franchise agreement must now contain a clause that a franchisee may cancel a franchise agreement without costs or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor.
An express reference to this must be made at the top of the first page of the agreement.
As a franchisor, it is vital to be aware of this provision because there appears to be no right for them to recover, from the franchisee, any loss (including any capital cost outlay) suffered as a result of the cancellation of the franchise agreement. This may result in franchisors becoming more cautious in negotiating franchise agreements terms.
The CPA also provides the franchisee with the right to select suppliers. The past practice of insisting all goods and services (“bundling”) are purchased from the franchisor is no longer permitted unless the convenience of bundling for the franchisee outweighs the limitation in the franchisee’s right of choice.
The only arena in which the franchisor can now dictate supply is in terms of branded goods or goods reasonably related to the branded products or franchise service.
Of great concern is the effect of the CPA on existing franchise agreements. Although the CPA does not apply to pre-existing franchise agreements generally, the regulations to the CPA provide that certain aspects of the CPA apply to any pre-existing franchise agreement.
It could be argued that any provisions of a pre-existing franchise agreement that conflict with the sections of the CPA made applicable to pre-existing franchise agreements will be void and the franchisor will have to enter into addendums with its franchisees in order to regularise the relationship.
In addition a franchise agreement which is renewed after the general effective date is regarded to be a new franchise agreement and will have to be amended upon renewal to ensure that the prescribed terms as set out in the CPA are included.
The practical effects of non compliance with the CPA when negotiating and concluding franchise agreements will only become apparent after the National Consumer Tribunal, the Consumer Court and/or the National Consumer Commission has made relevant findings in due course. However, it is prudent to avoid being the test case.