The Consumer Protection Act ("the Act") will apply to franchise agreements and is likely to pose significant challenges to many weaker franchisors, including those which do not abide by best franchise practices or provide reasonable value to their franchisees.
In terms of the Act, a "franchise agreement" means an agreement:
• Where a franchisor, for consideration, grants to the franchisee a right to carry on business under a system or marketing plan, substantially determined or controlled by the franchisor or its associate;
• The business will be substantially or materially associated with advertising schemes or programmes, or a trade mark or any combination thereof used or licensed by the franchisee or its associate; and
• 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 the franchisor, or by its associate.This definition is fairly broad and may well extend to, not only full business concept franchise agreements, but also license, agency and distribution agreements.
In terms of the Act, the franchise agreement must be in writing and signed by or on behalf of the franchisee. It must also include prescribed information such as information which would generally be found in a disclosure document and must be stated in plain and understandable language. The disclosure requirements will be set out in the regulations which should be published during or about March 2010. The regulations are also likely to set out additional information which will be necessary in relation to certain categories of information or industries.
There is a 10 (ten) day cooling off period during which a franchisee may cancel a franchise agreement, without cost or penalty, by simply giving notice to the franchisor.
The general effective date of the Act will be on or about 24 October 2010. In terms of the transitional provisions, the Act will not apply to pre-existing franchise agreements, as at that date. It appears however that that it will apply to any franchise agreements renewed thereafter. The Act will from that date probably apply to at least some transactions which are entered into between the franchisor and franchisee, in relation to the sale of products or provision of services.
The Consumer Protection Act is in the nature of a consumer bill of rights and includes many key concepts such as the right to equality; privacy; choice; disclosure and information; fair and responsible marketing; honest dealing and fair agreements; fair value, good quality and safety and suppliers accountability, certain of which will be briefly covered below.
With regard to the right of choice, Section 13 of the Act provides, that a supplier (franchisor) must not require as a condition of offering to supply or supplying any goods or services or as a condition of entering into an agreement, that the consumer must:
• purchase any other goods or services from that supplier;
• enter into any additional agreement with the same or another supplier; or
• agree to purchase any goods or services from a designated third party;
unless the supplier can show that the convenience to the consumer in bundling the goods and services outweighs the consumer's limitation of choice; or the bundling of these goods or services appears to result in economic benefit to consumers. It is a defense to any contravention of this section, if the goods or services are reasonably related to the franchisor's branded products or services. This phrase is not particularly clear. It is suggested that consideration be given to, for example, providing for core and non core products and services in franchise agreements. The core products or services would be the primary, unique or the most important products or services which are related to the brand or franchise. "Reasonably related" to the brand is also not defined and a brief justification or explanation about how the products are unique, important and related to the brand, might reduce any vulnerability.
With regard to the aforementioned key concepts of the Act, the following should be noted:
• A person must not use physical force, coercion, undue influence, pressure or unfair tactics in the marketing or supply of goods and services.
• A supplier must not by words or conduct express or imply a false, misleading or deceptive representation concerning a material fact or fail to correct an apparent misapprehension.
• A supplier must also not supply goods and services at manifestly unfair, unreasonable or unjust prices, or require a consumer to waive any rights including terms that are unjust, unfair or unreasonable.
• A term or condition will be unfair, unreasonable or unjust if it is excessively one sided, inequitable or the consumer relied on a false, misleading or deceptive representation, or notice of an onerous or unusual clause was not given.
• The attention of the consumer must be drawn to any limitation of liability of the supplier, assumption of risk of the consumer, any indemnity and any fact acknowledged by the consumer.
• Any provision of an unusual character or nature or the presence of which is not reasonably to be expected, must be notified to the consumer.
The powers of a court or tribunal to ensure fair and just conduct, terms and conditions are substantial. If such a court or tribunal determines that a transaction or an agreement is in whole or in part unconscionable, unreasonable or unjust, the court may:
• Make a declaration to this effect;
• Make an order it considers fair and reasonable in the circumstances including the restoration of money or property to the consumer and compensation to the consumer for losses or expenses in relation to the transaction; and
• Order the supplier to cease any such practice.
In addition a court may also make an order severing any part of an agreement, provision or notice, or if it is reasonable to do so, alter it to render it lawful. It may also declare the entire agreement, provision or notice void, as from the date it took effect and may make any order that is just or reasonable in the circumstances.
As a result franchisors should could keep a full document trail and record of all communications with franchisees. They should also ensure that all communications and dealings with the franchisees are true, accurate, fair and reasonable. Franchisors should require a franchisee to do a proper assessment on the location and the franchisor should to the same. Franchisors should also choose franchisees very carefully and complete and sign the franchise agreement properly. The franchisors should also point out any unusual or onerous clauses and should wait for the 10 (ten) day cooling off period to lapse before doing anything further.
The franchisor should also honour obligations in terms of the franchise agreement, as well as all representations made by its employees, as well as those set out in the disclosure document. It will be in the best interests of the franchisor to support and encourage the franchisee to perform as soon as possible, so as to avoid difficulties. Franchisors should also provide good quality products and services promptly at reasonable prices. Every statement, representation, non disclosure, action or inaction may be relevant to legal proceedings at a later stage.
It is also very important to note that circumstances, provisions or terms of an agreement which are reasonable at the time of signature of the agreement may become unreasonable or unjust at a later time. As a result the franchisors should, on an ongoing basis, have an awareness of and comply with the provisions of the Act.
It is further recommended that franchisors audit their franchise agreements and disclosure documents for compliance regarding the following:
• The general franchise provisions of the Act;
• The industry and activity specific requirements to be set out in the regulations; and
• To ensure that the disclosure document is accurate, sufficiently comprehensive, reasonable and fair.
It is anticipated that there will be a flurry of litigation and difficulties once the new Act comes into force on or about 24 October 2010. The trend would certainly be towards value for value, equity, reasonableness, and no unjust prices. Franchisors now have a very important opportunity to get their houses in order so as to reduce any vulnerabilities and also to ensure their survival. It is envisaged that weak franchisors may not survive. If franchisors do not take the opportunity to refine their franchise business models and become competent franchisors providing quality products and services, promptly at reasonable prices and otherwise deal with the franchisees in a fair, reasonable and equitable manner, it is likely that difficulties will arise.
Many franchisors are however already stepping up to the plate and the future for those franchisors is likely to be brighter.
Written by: Eugene Honey of Bowman Gilfillan.