The Consumer Protection Act 68 of 2008 (CPA), which came into effect on 1 April, will affect existing and new franchise agreements and will significantly impact on the franchise industry.

Entrepreneurs generally regard national or international franchise chains as a viable opportunity for establishing successful start up businesses. Up until now, the franchisor has traditionally held the bargaining power when negotiating franchise agreements and could sometimes unfairly define the terms and conditions of the agreement.

Imbalances of this nature will be regulated through the introduction of the CPA.

The CPA defines franchisors as "suppliers" and franchisees as "consumers" (section 5(6)(b) – (e)). Franchisee rights are included in the definition of "services” (section 1).

In addition to the franchisee's rights to the use of trade names and logos, franchise agreements generally define the supply of goods. Consequently, the sections of the CPA relating to the consumer's right to choose, examine and return goods, and in respect of the delivery of goods, will apply to franchise agreements.

A fundamental change affecting the franchise industry is that every franchise agreement must, in terms of the CPA, now contain a cancellation clause. In terms of section 7 of the CPA, the franchisee needs only to give written notice to the franchisor within 10 business days after signing the franchise agreement, in order to cancel the agreement without incurring costs or penalties.

Typically, a franchisor will outlay certain capital costs before awarding a new franchise. In terms of the new regulations, if the franchisee exercises its right to cancel the franchise agreement, the franchisor will have no remedy to recover from the franchisee any loss suffered as a result of the cancellation of the agreement. It seems likely that franchisors might, therefore, become far more judicious in negotiating franchise agreements in the future, which could then adversely affect would be entrepreneurs.

Two other sections of the CPA that will impact franchise agreements are the following:

Section 13, which governs the right of a franchisee to select suppliers. Franchisors can now only dictate supply in terms of branded goods, or goods reasonably related to the branded products or franchise service. If the non-branded good could replace the branded item without detracting from the corporate profile of the franchise, the franchisee can't be forced to buy the branded good.

Section 21, which prohibits the supply of unsolicited goods. A franchisor will risk losing ownership of, and non-payment for, any goods supplied or services performed that the franchisee has not specifically requested.

In addition to the specific sections of the CPA, the draft regulations (regulations) published in November 2010, will significantly alter the terms and conditions of franchise agreements and shift some power to the franchisee. Although currently in draft form, it is unlikely that these regulations will be amended.

Sections 7 and 51, read with regulation 2, specifically mark the parameters of clauses that must be included in a franchise agreement, as well as some that cannot be included.

In terms of the regulations, every defined term must be included in any franchise agreement and, any fundamental clauses omitted will be deemed to be incorporated in the agreement. (The complications that this regulation will cause are not discussed in this article).

A franchise agreement cannot contain clauses which have the effect of waiving or depriving franchisees of their rights, or allowing franchisors to avoid their obligations or duties. Nor can it contain any provision that is in conflict with the regulations. Such clauses will be deemed to be void in as far as they contravene the CPA and/or its regulations.

A major concern is the effect of the CPA on existing franchise agreements.

Schedule 2 to the CPA provides that the CPA does not apply to any transaction concluded or agreement entered into before the general effective date.

Unfortunately, the regulations contradict the provisions in the schedule. In terms of regulation 2(1)(f), where a franchise agreement does not meet the requirements of these regulations on the date the regulations commence, then the franchisor and franchisee have a window period of six months either to sign an annexure to the franchise agreement or, at the choice of the franchisee, enter into a new agreement to ensure that the agreement regulating their relationship meets the CPA requirements.

If the draft regulations are adopted, franchisors will be faced with a huge administrative burden. Not only will they have to ensure that all future franchise agreements comply with the CPA and its regulations, but they must also see to it that all franchise agreements existing on the effective date of the new regulations, have the requisite annexure in place. Alternatively, they will have to enter into new franchise agreements with existing franchisees.

The regulations oblige franchisors to provide prospective franchisees with a disclosure document at least 14 days prior to entering into a franchise agreement. The minimum specified information that must be contained in the disclosure document includes a viability statement relating to the franchisor's net profit and turnover, and a list of current franchisees. If adopted, this regulation will put at risk confidential information on the franchisor, which is currently only made available to a prospective franchisee.

The franchisee, as a consumer, has the right to seek recourse through the industry ombudsman (should one be created), the National Consumer Tribunal, the consumer courts, and/or the National Consumer Commission.

Other sections of the CPA which are most relevant to franchise agreements include:

· section 22 – right to information in plain, understandable language;
· section 41 – false, misleading, deceptive representations;
· section 44 - consumer's right to assume a supplier is entitled to sell goods;
· section 48 – unfair, unreasonable or unjust contract terms;
· section 49 - notice required for certain terms and conditions.


The practical effects of non-compliance with the CPA by franchisors when negotiating and concluding franchise agreements will only become apparent in years to come, after the Tribunal, the courts and/or the Commission have made findings on these issues. One thing is certain, though: the CPA will change the face of the franchise industry in South Africa. Whether for better or for worse, only time will tell.

Notes:

· Cliffe Dekker Hofmeyr is one of the largest commercial law firms in South Africa with some 115 directors/partners and 250 qualified lawyers located at offices in Johannesburg and Cape Town.

· Cliffe Dekker Hofmeyr lawyers specialise in services covering the complete spectrum of business legal needs in 11 core areas of practice. The firm also has dedicated sector-led teams consisting of lawyers with experience in a wide range of industries and the public sector.

· Cliffe Dekker Hofmeyr is the South African member firm of DLA Piper Group, an alliance of legal practices, which includes firms with offices around the globe that are affiliated to members of the DLA Piper Practice but are not themselves members of it.

· Cliffe Dekker Hofmeyr's Africa practice, in conjunction with DLA Piper Africa Group, is unrivalled in terms of pan-African legal services and geographical coverage.

· DLA Piper is an international legal practice with over 3,500 lawyers located in 30 countries and 69 offices throughout Asia, Europe, the Middle East and the US.

Written by Lucinde Rhoodie, Director and Belinda Scriba, Associate, Dispute Resolution: Litigation, Arbitration and Mediation Practice, at Cliffe Dekker Hofmeyr business law firm