As you may be aware the definition of a franchise agreement in terms of the Consumer Protection Act is fairly broad and this includes a full business concept franchise arrangement, as well as similar arrangements such as license, distribution and agency arrangements or contracts.
It is very important to note that in terms of the Act, there is no threshold whatsoever in relation to any franchise or similar agreement or arrangement. As a result any such agreement or arrangement falls within the Consumer Protection Act and its regulations.
There are fairly comprehensive provisions in the regulations as to what a “franchise agreement” should include and these are set out below.
Firstly, a franchise or similar agreement must reflect at the top of the first page, a statement to the effect that:
“A franchisee may cancel a franchise agreement without cost or penalty within 10(ten) business days after signing such agreement, by giving written notice to the franchisor.”
Secondly a franchise agreement must contain provisions which prevent the following:
Thirdly a franchise agreement must also contain a clause in terms of which the franchisor is not entitled to any undisclosed direct or indirect benefit or compensation, unless this is disclosed in writing, together with an explanation thereof.
Fourthly a franchise agreement should contain numerous other provisions and we would like to highlight the following:
Although certain of the points are traditionally found in the average competently drafted franchise or similar agreement, franchisors, licensors, distributors and the like will now need to check and audit their agreements so as to ensure that they are compliant. The regulations may of course be updated from time to time and it will therefore be necessary to remain abreast with any such new or updated regulations. Further, if any written explanation of a term or section is given, this must be legally correct, failing which the franchisor risks being bound to an incorrect explanation.
Although international best practice has for many years dictated that competent disclosure should be given to franchisees, this has previously not been law in South Africa. The Franchise Association of South Africa has however for many years required for membership that franchisors should furnish franchisees with a competent agreement, a compliant disclosure document, as well as an operations manual. The CPA regulations also set out requirements in relation to disclosure documents which are required to be furnished to franchisees, licenses, distributors or agents, at least fourteen days prior to the signing of such an agreement.
As a result the legal landscape for franchise and similar agreements7 has changed and steps should be taken as soon as possible, to ensure that the agreement and disclosure document, as well as all related requirements, are complied with