What the CPA means for Franchises
(First Published in Your Business Magazine, August/September 2011 edition)
Author: Emmie de Kock
The new Consumer Protection Act (CPA) came into force on April 1 and applies to all transactions in which goods or services are supplied – where the “consumer” is a person, close corporation, company or other type of recognised legal entity with an annual turnover or asset value under R3-million.
As prospective franchisees are usually start-up operators; it’s not surprising that they are viewed as consumers under the CPA. As a result, franchisors are required to take all steps necessary to protect their franchisee’s rights as consumers, specifically by updating their legal documents to comply with the new minimum information requirements.
The R3-million threshold mentioned above will not limit the application of the CPA in the case of franchising, as the following transactions are exempt:
- Invitations and requests 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
- The supply of any goods or services to a franchisee in terms of a franchise agreement
All franchises therefore have to comply with the CPA regardless of their size and value.
What does the new law say?
All franchise systems are likely to undergo some changes this year as a result of the new consumer laws.
In general terms, “franchising” describes the licensing of a business system and its intellectual property. Prior to the CPA, franchise agreements didn’t receive specific mention in statutes. And even now the CPA doesn’t include a statutory definition for the term “franchising”, but it does include a wide definition for the phrase ‘‘franchise agreement”:
- An enterprise that pays to carry on business in a specific geographic region, or across the whole of South Africa, under the same marketing plan controlled by the franchisor;
- A business that is associated with the trade marks, advertising and get-up of the franchisor;
- The agreement governs the relationship between the franchisor and franchisee with respect to the goods or services to
be supplied at the direction of the franchisor.
How are franchise agreements affected?
The CPA says that all franchise agreements must:
- Be in writing and signed by or on behalf of the franchisee;
- Include or address any prescribed information prescribed by the relevant Minister by publishing regulations;
- Comply with Section 22 which requires that the franchise agreement must be drafted in plain understandable language; and
- Indicate on the top of the first page that a franchisee may cancel the franchise agreement by giving written notice within 10 business days after signing, without costs or penalty.
Franchise documentation generally includes at least three types of documents:
- A franchise agreement,
- Disclosure document, and
- Operational Manual.
The franchise agreement outlines the obligations of the franchisor and franchisee, the disclosure document contains key financial information and details on the structure of the franchise group, and the operating manual contain the know-how necessary to operate the franchise system. The disclosure document must be provided to the franchisee 14 days prior to signing the franchise agreement.
The CPA outlines what must be contained in the franchise agreement and disclosure documents, and gives franchisors until
September 30 to bring all their legal documentation in line with the Act.
Franchise agreements for new franchisees must now include:
- Name and description of goods or services which the franchisee is entitled to provide , produce, render or sell
- Obligations of the franchisor and franchisee
- A description of the franchise business system
- Fees payable by the franchisee
- Territorial rights, if rights are limited geographically
- A description of the site or premises
- The conditions under which the franchisee or its estate may transfer or assign the rights and obligations under the franchise
- Description of trade marks and any other intellectual property owned by the franchisor and licensed for use to the
- Identity details of the master franchise, if the agreement is subject to a master franchise (for instance, in the case of any international franchise)
- Particulars of initial and ongoing training and assistance to be provided by the franchisor to the franchisee
- Particulars relating to the amount payable by the franchisee to contribute to a marketing or similar fund and details of the financial and management statements to be kept, made available and audited relating to such contributions
- Effect of the termination or expiration of the franchise agreement
- Extensions or renewal terms, if such options are available
- The franchisor’s legal name, trading name, registered office, and franchise business office, street address, postal address, email address, telephone and fax numbers
- The name, identity numbers, town of residence, job titles and qualifications of the franchisor’s directors or equivalent officers
- Particulars of any restrictions imposed on the franchisee
- The nature and extent of the franchisor’s involvement or approval in the process of site selection
- The terms and conditions relating to termination, renewal, goodwill and assignment of the franchise
- Confirmation that any deposits paid by a prospective franchisee will be deposited of how these deposits will be dealt with
- Full particulars of the financial obligations of the franchisee including payment of the initial fee payable, funds required to be established, initial working capital, total investment required, clear statement on what is included in purchase price, possible amount available from the franchisor, any fee payable for management services
What happens to existing franchisees?
Existing franchise agreements which do not meet the requirements of the CPA, must sign an addendum to that franchise agreement. At the choice of the franchisee, a new franchise agreement can be concluded which comply with the CPA. Franchise agreements renewed after March 31, 2011, are regarded as new franchise agreements.
On a practical level, depending on the amount of changes required to an existing franchise agreement, it may make sense to get existing franchisees to sign addendums reflecting changes to their franchise agreements, rather than terminating the existing agreement and signing new ones.
What happens if franchisors don’t comply?
Franchisors that don’t comply with the CPA regulations by September 30, may find themselves in hot water with the National Consumer Commission. Franchisees can also lodge complaints with the National Prosecuting Authority, the National Consumer Tribunal, the Competition Commission, provincial consumer courts, FASA (Franchise Association of South Africa) (if the franchisor is a registered FASA member), or the relevant High Court of South Africa. Non-compliance may therefore result in the franchisor being sued.
Administrative fines, which can be imposed in terms of the CPA, amount to 10% of the franchisor’s annual turnover during the preceding financial year or R1-million.
Emmie de Kock is a trade mark attorney and heads De Kock Attorneys.
Please note that the above remarks are not meant as formal legal advice. Each case should be fully considered by an attorney with appropriate knowledge and experience in trade mark law.