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Franchises are essentially contracts between independent firms. Historically, and contrary to the situation in other countries, franchises were not specifically regulated in South Africa, but the Consumer Protection Act, 2008 now protects franchisees by regulating the content of franchise agreements, providing for a cooling-off period in favour of the franchisee and requiring disclosure of essential business information at the time of contracting or renewal of the franchise.
Franchises are essentially contracts between independent firms. Historically, and contrary to the situation in other countries, franchises were not specifically regulated in South Africa, but the Consumer Protection Act, 2008 now protects franchisees by regulating the content of franchise agreements, providing for a cooling-off period in favour of the franchisee and requiring disclosure of essential business information at the time of contracting or renewal of the franchise.
Franchising is a useful business model that allows the franchisor, the originator of a business idea and method with accompanying intellectual property (IP), to benefit from the idea and developmental investment, without having to take all the risk for the production and distribution of the goods and services. In a franchise, this is done by the franchise network. Franchises give opportunity to firms, including small independent businesses to enter the market with the comfort of a business plan and IP, franchisor wisdom and guidance on tap, which reduces some of the risks associated with the establishment of a business. But the franchisee remains an independent firm, risking its own capital, having to pay its own expenses and enjoying the profit or suffering the loss of the franchised business. This, for example, means that a franchisor may not determine the prices at which its franchisees may re-sell goods as the franchisee is not an agent or an extension of the franchisor’s business, and to do otherwise would typically amount to prohibited minimum resale price maintenance under the Competition Act, 1998.
Franchise opportunities are found in many sectors of the economy, well known in food, and retail, but also to be found in the construction, motor and services markets. Franchise formats are also various, ranging from limited franchises involving mainly IP exploitation to a comprehensive franchise that includes all the business recipes to conduct the franchise outlet.
In order to protect their franchise ideas and IP, and their value, franchisors typically contract to allow them to terminate a franchise relationship that may harm the network, which franchisees may experience as unduly oppressive. For example, in a recent Western Cape High Court case, the franchisee sought to renew its Woolworths franchise, but he had failed to pay the franchise business premises rental to its landlord and to make payments for stock on time, failed to submit timely turnover certificates, failed to keep sufficient stock and diverted custom to his other franchises – all breaches of the franchise contract. Upholding Woolworths’ contention that the franchise could not be renewed in the circumstances, the Court said that –
"The clause under consideration must be interpreted in a manner to give it business efficacy and is clearly inserted by (the franchisor) in order to avoid being saddled, after the expiry of the franchise agreement, with a franchisee whose performance of its obligations during the currency of the agreement has been unsatisfactory."
About a decade ago, Seven-Eleven franchisees complained that their franchisor had earned secret discounts and rebates from suppliers on their purchases instead of them benefiting from their purchases. The Supreme Court of Appeal concluded that the specific franchise deal did not entitle the franchisees to early settlement discounts and rebates on their purchases, which the franchisor could legitimately enjoy.
Under the CPA it is unlikely that franchisees will harbor such misconceptions. At the time of clinching a franchise agreement or upon its renewal, franchisees are deemed to be consumers under the CPA, and may reconsider and withdraw from their franchise contract without consequences within 10 days. Furthermore, the CPA requires an extensive explanation of the attributes of the franchise in the contract and in a disclosure document. The explanation covers a detailed description of the franchise business model, the past performance of the franchise, the number of franchisees, the percentage growth of turnover and net profits of the franchisor, written future projections, any benefits earned by the franchisor from supply relationships, the control and application of advertising joint marketing fund, the purpose of upfront payments, details of any direct or indirect franchise compensation and other payments to the franchisor (including incentives by third party suppliers based on franchisee purchases). This information on the franchise should go a long way to offer franchisees some protection against the empty promises that might be made by attractive marketing devices and dispel essential misconceptions of what the franchise may entail.
Properly applied, it is likely that the CPA will obviate the need for future complaints by franchisees that they were hoodwinked or unfairly treated.
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Petra Krusche is a director in Cliffe Dekker Hofmeyr's Competition practice. She is involved in all aspects of that field of law and has gained a good understanding of the FMCG sector through work for firms in FMCG retail and supply.... VIEW MY PROFILE |
