In the past, the natures of franchise agreements were determined only by the contents thereof and the franchisees’ and franchisors’ fates were in the hands of the author of the particular agreement. In many cases, this led to one-sided agreements where the franchisor was given the opportunity to terminate the agreement if everything did not correlate with the franchisor’s expectations and the franchisee had no opportunity of terminating without becoming liable for direct- or consequential damages, often in substantial amounts.
With the introduction of the Consumer Protection Act 68 of 2008, (“the Act”), a franchise agreement has been defined as follows:
“‘franchise agreement’ means an agreement between two parties, being the franchisor and franchisee, respectively— (a) in which, for consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business within all or a specific part of the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor; (b) under which the operation of the business of the franchisee will be substantially or materially associated with advertising schemes or programmes or one or more trade marks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices, that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor; and (c) that governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor.”
Implications of the Act on franchise agreements
Although the above definition seems rather broad, there are specific references and sections in the Act governing franchise agreements. Some of the most considerable implications on franchise agreements are the following:
- In terms of section 7(2) the franchisee/consumer is now given the opportunity to cancel a franchise agreement with the franchisor/supplier without cost or penalty, as long as it is cancelled in writing within 10 days after signing such agreement.
- The agreement should be written in plain and understandable language which will necessarily imply that legal jargon and Latin terminology needs to be left out when drafting such agreements. The background of the franchisee is irrelevant which means that even a highly qualified person or entity enters into a franchise agreement, he will need to understand what he signs.
- The franchisee will have the right to elect his own suppliers of goods or services and no conditions in an agreement may exist in which the franchisee is forced to use suppliers as elected by the franchisor.
- At least 14 days before signing a franchise agreement, the franchisee will have the right to request disclosure documents from the franchisor. The franchisor will have no right to refuse delivery of such documents and it will need to be signed and dated by an authorised officer of the franchisor. It will at least contain the following information:
- A viability statement in which the turnover and profit of the franchisor is addressed.
- An indication of whether there are other outlets franchised by the franchisor including the number thereof./li>
- A description of the growth of the net profit in the 12 months leading up to the delivery of the disclosure documents.
- If a deposit is paid by the prospective franchisee, a statement by the franchisor in which it is declared that the money has been paid into a separate bank account with the concomitant dealings thereof as per agreement, will be included.
- A further statement by the franchisor that it has reasonable grounds to believe that the franchisee will be able to pay its debts when they fall due.
- Written projections of potential income, sales, gross or net profits and the potential selling price of the franchised business.
It needs to be mentioned that this list of implications is not exhaustive and quite a number of other provisions can be added. These provisions will include provisions which prevent the overvaluation of fees or unreasonable conduct in relation to the risk to be incurred by a party when entering into a franchise agreement.
The regulatory framework applicable to franchise agreements in South Africa has been changed dramatically. The impact it has can have far-reaching consequences.
Franchisors therefore need to ensure that their franchise agreements are in line with the Act. They also need to deal with franchisees in a fair, reasonable and equitable manner.
The importance of consulting with an attorney specialising in this field to gain assistance can only be reiterated.
Douw Breed, director at Barnard Incorporated.
Barnard Incorporated is a firm of attorneys situated in Centurion, Pretoria.