1 October 2009

Application of the Consumer Protection Act to franchising

The Act will significantly change the landscape within which franchise arrangements operate.

Up to now, there has not been any legislation in place dealing specifically with franchise arrangements, and the franchise sector has relied on self regulation. In the new regime, franchise arrangements and transactions between franchisors and franchisees are expressly regulated by the Act.

In terms of the Act, a franchisee is regarded as a "consumer" as defined in the Act and consequently franchisees are afforded various protections, as consumers, under the Act although certain provisions of the Act are expressly stated to not apply to franchisees.

The Act defines the term 'franchise' as "including a solicitation of offers to enter into a franchise agreement; an offer from a potential franchisor to enter into a franchise agreement with a potential franchisee; a franchise agreement; an agreement supplementary to a franchise agreement and the supply of any goods or services to a franchisee in terms of a franchise agreement."

The Act prescribes that franchise agreements must be in writing and signed by the franchisee. Furthermore, franchise agreements must comply with the 'plain and understandable language requirements' detailed in section 22 of the Act (and as explained elsewhere in this newsletter). In addition, franchise agreements must also include the terms and information that will be prescribed by the Minister of Trade and Industry from time to time.

Section 13 of the Act provides that consumers have a right to choose suppliers and products. The Act further provides that a franchisor may not require a franchisee to purchase goods or services from the franchisor or a designated third party unless the franchisor can show convenience to the franchisee that outweighs the limitation on the franchisees' freedom of choice and results in an economic benefit to the franchisee as a consumer. If the franchisor is unable to meet these requirements, then the franchisor is permitted to show that the goods or services that the franchisee was required to purchase reasonably relate to the branded products or services germane to the franchise and that forcing the franchisee to purchase them is justifiable as a method of not diluting the franchise brand.

The Act also provides that the franchisee may cancel a franchise agreement in writing (without having to show cause for the cancellation), without cost or penalty within 10 business days of the franchisee signing the agreement.

Franchisors need to become familiar with the provisions of the Act dealing with franchise agreements and ensure that they will conduct their franchise arrangements in a compliant manner from the general effective date of the Act.

Cézanne Britain-Renecke,
Senior Associate, Corporate and Commercial

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