A franchise agreement is an agreement that regulates the relationship between a franchisor and franchisee. In South Africa, there is no specific legislation that regulates franchise relationships. There is, however, legislation that impacts a franchise business (for example: consumer protection laws, intellectual property laws, tax laws, competition laws, data protection laws). A franchisee is granted a right to operate a business or license, by a franchisor, under specific conditions.
Applicable laws
From a Consumer Protection Act 68 of 2008 (CPA) perspective, the franchisor and franchisee should conclude a written franchise agreement. An agreement that sets out the terms and conditions that the franchisor and franchisee must abide by. In terms of the CPA, a franchisee is considered as a consumer thus, ensuring that franchisees are not exploited by franchisors. The CPA protects the rights and interests of franchisees in franchising arrangements. There are safeguards that have been put in place, under the CPA, to ensure transparency and fairness in franchise arrangements. These safeguards are set out in the provisions of Regulations 2 and 3 of the CPA respectively, in terms of which certain clauses must be included in the franchise agreement.
The clauses required for inclusion in the franchise agreement are the following (without limitation):
- obligations of the franchisor and franchisee.
- terms and conditions regarding termination; goodwill; assignment; intellectual property, renewal and other terms.
- description of the goods or services.
Regulation 3 deals with the content of the disclosure document that must be provided to the franchisee 14 days prior to signature of the franchise agreement. This document provides the franchisee with all information required to make an informed decision.
In addition to the above, the franchise agreement must contain a cancellation clause, failing which the agreement may be declared void. In this regard, section 7(2) of the CPA provides that, a franchisee may cancel a franchise agreement, without costs or penalty, within 10 business days after signing the same. It is imperative for franchisors to take note of this risk, as they have no right to recover any loss suffered due to cancellation of the franchise agreement within the period mentioned herein.
An express reference to the abovementioned section of the CPA must be made at the top of the first page of the franchise agreement.
Failure to comply with the CPA may result in penalties, a complaint to the National Consumer Commission or issuance of a compliance notice.
The franchising arrangement must also comply with the Competition Act 89 of 1998 (the Act) to avoid any anticompetitive conduct (conduct that substantially lessens competition in the market). There are certain aspects of the Act which the franchisee must examine against the provisions of the franchise agreement to ensure that the provisions of the franchise agreement comply with the Act.
In conclusion, it is clear from the information contained herein that, a franchise arrangement should be viewed through a professional legal eye, as there may be complexities (some of which are not covered in this article) that may be overlooked by parties seeking to conclude a franchise agreement. Therefore, please seek legal counsel prior to entering into a franchise agreement.
MHM Attorneys
This article is for information purposes only and should not be taken as legal or other professional advice. No liability whatsoever, in whatever form, arising from reliance upon any information herein shall be accepted. Please contact an attorney for legal advice specific to your own unique circumstances.
