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SABizOps.co.za  News
Franchising in 2010: The Consumer Protection Act
By: Tanya Woker
Date: 2010/02/01
Professor Tanya Woker runs through a number of typical franchisee/franchisor scenarios, detailing how the Consumer Protection Act will effect prospective buyers, franchisees and opportunity sellers.
The Consumer Protection Act was signed into law on 29 April 2009. It is anticipated that the law will be fully operative from October 2010 when the Consumer Commission is established and the regulations as required by the Act have been prepared. The Act specifically applies to the franchise sector. Franchisees are regarded as consumers and franchisors are suppliers. The consumer protection measures as set out in the Act will therefore apply to franchise agreements which are defined in the Act.
The Definition of Franchise Agreements
The Act defines a franchise agreement as an agreement where a franchisor grants to a franchisee for consideration the right to carry on business under a system or marketing plan substantially determined or controlled by the franchisor. In addition, the franchisee’s business must be substantially associated with the advertising schemes, programmes or trade marks of the franchisor.
This definition is important because entrepreneurs may try to avoid the implications of the Act by calling their multi-unit operations by another name such as a partnership, agency or distributorship. However, once such an arrangement satisfies the definitional requirements, the Act will apply. Since franchise laws were introduced in America, many companies that did not intend to be franchisors in the traditional sense (or who were attempting to avoid America’s extensive franchise legislation) have discovered that their ways of doing business are franchises in the legal sense.
The Right to Disclosure and Honest Dealing
The Act aims to ensure that consumers (and in this instance franchisees) understand the terms and conditions of their contracts and that they make informed decisions. In order to curtail allegations of unfair conduct, the first requirement is that franchise agreements must be in writing and they must be signed. Agreements must also be in plain and understandable language so that the average franchisee with minimal experience of franchising will be able to understand the content, significance and import of the contract. Franchisees have the right to cancel the agreement, without cost, within ten business days after they sign.
The Act does not specify the information which franchisors must disclose but it does provide that the Minister may make regulations in this regard. It is to be expected, therefore, that regulations will be introduced which will set out in detail exactly what information must be provided.
If the example in other jurisdictions is followed franchisors may be obliged to disclose details regarding their business experience; litigation history; financial background; existing franchises; the premature termination of franchise agreements or refusal to renew; franchise territory; intellectual property; supply of goods and services; marketing or advertising funds; financial requirements; franchisor obligations; franchisee obligations; restraints of trade; termination of the franchise agreement; obligation to sign related agreements and earning information.
In addition, there may be a general requirement that franchisors disclose other information that is necessary for franchisees to make informed decisions.
The Right to Fair Dealing
Unconscionable conduct, in terms of the Act, includes the use of force, coercion, undue influence, pressure, harassment, unfair tactics or other similar conduct. Although it is unlikely that franchisors will resort to such tactics to market franchises, this section will apply to tactics used by franchisors when enforcing their agreements.
A particular area of potential dispute is when franchisors threaten to cancel or refuse to renew franchise agreements because of some perceived breach of contract on the part of franchisees or because franchisees are refusing to abide by changes to the agreement. Nevertheless, franchisors are responsible for monitoring and controlling the franchise network and they do have to ensure that errant franchisees are removed. Clearly, a proper balance will have to be struck between the rights of franchisors to fulfil these obligations and the rights of franchisees not to be subjected to harassment or undue pressure. The penalties for such behaviour are severe because, if franchisors act unconscionably, a court may restore franchise fees to franchisees and it may order that franchisees be compensated for any losses or expenses.
The Right to Fair Terms
Franchisors may not enter into franchise agreements at prices or on terms that are manifestly unfair or unjust. In deciding whether or not the agreements are manifestly unfair or unjust the following factors are taken into consideration: the fair value of the franchises; the circumstances of the agreements; the nature of the parties to the agreements; their relationship to each other and their relative capacity, education, experience, sophistication and bargaining position.
Transactions will be regarded as manifestly unfair or unjust if the agreements are excessively one-sided in favour of franchisors, the terms of the transactions are so adverse to franchisees as to be inequitable, or franchisees relied on a false, misleading or deceptive representations or statement of opinions made by or on behalf of franchisors, to the detriment of franchisees.
Franchisors are not entitled to exempt themselves from gross negligence. Contractual terms which purport to do so are prohibited. A number of similar clauses are also void unless the fact, nature and effect of these provisions are brought to the attention of consumers before the contract is concluded. An example is a clause which purports to exonerate franchisors from liability for misrepresentation.
Information Courtesy Giuli Osso of GO Communications on behalf of FASA.
Comment by Tanya Woker - Professor, University of KwaZulu-Natal
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