Franchises and the CPA – who’s who in the zoo

If you are a franchisor in South Africa (or are considering concluding a franchise agreement in the future), it is vital to know that there is a new law that will forcibly change the way franchises operate. Franchisees are deemed to be consumers in terms of the Consumer Protection Act 68 of 2008 (CPA) and now have a whole variety of consumer rights.

The whole franchising process will also be regulated by the CPA and its detailed regulations. Not only will your relationship with franchisees have to comply with the CPA, but the franchise agreement that governs the relationship will have to contain prescribed clauses and information in order to be compliant with the law.

Definition of a franchise agreement in the CPA

The Act defines a franchise agreement as an agreement between a franchisor and franchisee in terms of which:

• The franchisee pays the franchisor for the right to carry on business within a specific part or all of South Africa under a system or marketing plan developed and controlled by the franchisor.
• The operation of the business of the franchisee is closely associated with the advertising or trademarks, branding etcetera of the franchisor.
• The business relationship between the franchisor and the franchisee is governed by the agreement.

Transactions in terms of the CPA

Section 5(1)(a) of the Act provides that the Act will apply to every transaction that takes place in South Africa. In terms of s 5(6) any interaction between a franchisee and franchisor is regarded as a transaction.

At first glance, it appears that certain bigger franchisees are not protected under the Act. This is because S5(2)(b) states that the Act does not apply to any transaction where a consumer is a juristic person whose asset value or annual turnover at the time of the transaction, equals or exceeds R2 million.

However, S5(7) provides that, notwithstanding s 5(2)(b), the Act will apply to every transaction contemplated in s 5(6)(b) to 5(6)(e) irrespective of the size of the juristic person.  In terms of S5(6) (b)-(e) the following transactions are not exempted:

• a solicitation of offers to enter into a franchise agreement;
• an offer by a potential franchisor to enter into a franchise agreement with a potential franchisee;
• a franchise agreement or an agreement supplementary to a franchise agreement; and
• the supply of any goods or services to a franchisee in terms of a franchise agreement.

Therefore, a franchise agreement will have to comply with the requirements of the Act, despite a potential franchisee having an annual turnover or asset value of more than R2milion. The probable reason for a franchisee being treated as a consumer is that franchisees have much less bargaining power than franchisors and they are vulnerable to abuse.

What are the requirements of a franchise in terms of the Act?

The requirements of a franchise agreement include that the agreement must be in writing and signed by at least the franchisee.  In addition, the franchisor must ensure that the required information, as required by the regulations is contained within the agreement.

The regulations provide, amongst other requirements, that a franchise agreement must contain the exact wording of S7(2) of the act which provides that a franchisee may cancel a franchise agreement without cost or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor. Franchisors must not only provide a potential franchisee with a disclosure document but there is also a list of terms that must be in every franchise agreement.

What parts of the Act apply to franchise agreements?

The following sections of the CPA apply to franchise agreements:

Part C: Consumer’s Right to Choose

• S13 – Consumer’s right to select suppliers: This will especially come into play where a franchise agreement stipulates that a franchisee MUST purchase stock exclusively from the franchisor and when products are bundled together a franchisor must prove that the bundled product reasonably relates to the branded products that are the subject of the franchise agreement.
• S21 –Unsolicited goods or services: This relates to the amount and time of delivery of goods. In certain circumstances, unsolicited goods become the property of the franchisee without it having to give any payment for them.

Part D: Right to disclosure and information

• S22- Right to disclosure in plain understandable language: All documents, notices, and agreements must be in clear and understandable language drafted for the type of person who is likely to enter into a franchise agreement.

Part E: Right to fair and responsible marketing

S29- General Standards for marketing of goods and services: This section deals with false and misleading representations by a supplier franchisor about:

• The franchise (the way goods or services will be supplied and their price)
• The nature, properties, advantages, or uses of the goods or services;
• Any other material aspect of the goods or services
• S30: Negative option marketing: No marketing on an “opt-out” basis

Part F: Right to fair and honest dealing

S40- Unconscionable conduct: A franchisor may not use physical force or coercion in:

• Marketing goods or services;
• Negotiation of the franchise agreement;
• Enforcement of a franchise agreement;
• Demand for or collection of payment for goods or services; or
• Recovery of goods from the franchisee.

S41 – False, misleading, or deceptive representations: This relates to representations about material facts of the goods and services, exaggeration etcetera which could result in loss or damage for the franchisee.
S44 –  Consumer’s right to assume supplier is entitled to sell goods: This will be an implied provision of a franchise agreement.

Part G: Right to fair and just and reasonable terms and conditions

• S 48 –  Unfair, unreasonable or unjust contract terms: This section prohibits unfair dealings, terms, obligations and waiver of warranties.
• S49 – Notice requirement for certain terms and conditions: If the franchise agreement proposes to limit the franchisor’s liability or place risk on the franchisee, this fact must be drawn to the attention of the franchisee.
• S51 – Prohibited transactions, agreements, terms or conditions: S51 list a number of terms that are completely prohibited for example it is prohibited for a franchisor to contract out of gross negligence.
• S14 which relates to the requirements regarding to the expiry of fixed term contracts generally does not apply to franchises but will apply if a franchise trades in their own name.

What about existing franchise agreements?

With regard to transitional provisions, it appears that the Act will not apply to pre-existing franchise agreements (or transactions) entered into before the “general effective date” which is currently set to be 31 March 2011.

It appears that the Act will apply to the renewal of franchise agreements. Open-ended agreements, however, (agreements that have no fixed expiry date) will be deemed to expire two years after the CPA takes effect. New franchise agreements and renewals of existing franchise agreements will have to comply with the requirements of the CPA from 24th October onwards and it is safe to assume that in most instances, substantial rewrites will be required. Incidentally, franchise agreements aren’t the only documents that are affected by the CPA, disclosure documents and operations manuals will also have to be amended.

It must however be kept in mind that after the “general effective date” that the supply of goods and services to a franchisee will be governed by the Act.

Where do I start with compliance?

Current and future franchise agreements will be largely impacted by the CPA and therefore business owners must acquaint themselves well with the ambit and workings of the CPA before entering into this type of agreement.

We also offer half day and full day workshops to customers where we give you a customised presentation of the impact and implication of the Consumer Protection Act on suppliers.  It might be a good idea to get all the managers together to attend one seminar in order to empower them and make them aware of their rights.  We also offer various other Consumer Protection Act services.

Your most important document is your franchise agreement. Not only must it be drafted into plain language, all unconscionable clauses removed and all terms that may involve placing the risk on consumers need to be brought under the consumer’s attention, but the new regulations also have a list of requirements that need to be met.

However, as with many challenges it can also be seen as an opportunity for you as a franchisor to assure your franchisees of your commitment to their wellbeing.  If you are a franchisee, it will benefit you greatly to make sure you understand your rights and that you are not coerced into entering into a franchise agreement before 31 March 2011 that doesn’t comply with the Act as you will lose out.