Fran­chisors must watch word­ing

It is easy for fran­chisors to over­look the Con­sumer Pro­tec­tion Act in terms of agree­ments with fran­chisees

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - LUCINDE RHOODIE

IT HAS now been al­most three years since the Con­sumer Pro­tec­tion Act, No 68 of 2008, came into force and still its im­pact has not fully been ap­pre­ci­ated by fran­chisors. Leav­ing aside for the mo­ment the sub­stan­tive pro­vi­sions of the act that pro­tect fran­chisees against un­fair con­tract terms and prod­uct li­a­bil­ity, there are fun­da­men­tal con­se­quences of the act that are of­ten over­looked.

Fran­chisors who en­tered into fran­chise agree­ments prior to the gen­eral ef­fec­tive date of the act, 1 April 2011, sighed with re­lief think­ing that they had es­caped the con­se­quences of the act. Un­for­tu­nately fran­chisors with fran­chise agree­ments sub­ject to an op­tion or right to re­new are mis­taken. Reg­u­la­tion 2(4) pro­mul­gated in terms of the act pro­vides that “a fran­chise agree­ment which is re­newed af­ter the gen­eral ef­fec­tive date is a new fran­chise agree­ment for the pur­poses of sub-reg­u­la­tions (2) and (3)”.

Ac­cord­ingly, as soon as a right or op­tion to re­new is ex­er­cised, the pre­ex­ist­ing fran­chise agree­ment is sub­ject to the pro­vi­sions of the act.

So what does this mean? One of the di­rect con­se­quences is the ap­pli­ca­bil­ity of reg­u­la­tion 2(2)(a), which pro­vides that ev­ery fran­chise agree­ment must con­tain the ex­act text of sec­tion 7(2) of the act at the top of the first page of the fran­chise agree­ment, to­gether with a ref­er­ence to the sec­tion and the act. Sec­tion 7(2) pro­vides that a fran­chisee may can­cel a fran­chise agree­ment with­out cost or penalty within 10 busi­ness days af­ter sign­ing such agree­ment, by giv­ing writ­ten no­tice to the fran­chisor.

So what is ex­pected of fran­chisors in cir­cum­stances like this? Is it ex­pected that a new agree­ment (ac­tual doc­u­ment) must be en­tered into re­flect­ing the word­ing of sec­tion 7(2) on the front page or not? In an­swer­ing this ques­tion one must con­sider what the con­se­quences are of not do­ing so.

Reg­u­la­tion 2(e) pro­vides that any term in a fran­chise agree­ment to which the reg­u­la­tions ap­ply which is in con­flict with the reg­u­la­tion is void to the ex­tent of such con­flict.

A fail­ure to have the word­ing of sec­tion 7(2) ap­pear on the front page could be re­garded as fun­da­men­tal non- com­pli­ance with the reg­u­la­tions caus­ing the fran­chise agree­ment to be void, at least from the com­mence­ment of the re­newal pe­riod.

The par­ties are of­ten, if not mostly, un­aware of this po­ten­tial con­se­quence and continues with their fran­chisor/ fran­chisee re­la­tion­ship, al­beit in terms of a void agree­ment.

When, for ex­am­ple, in such cir­cum- stance where the fran­chise agree­ment is, un­be­known to the par­ties, void there is a breach by the fran­chisee of a pro­vi­sion of the fran­chise agree­ment, the fran­chisor will not in law have a dam­ages claim as a re­sult of such breach, as there is no agree­ment in force.

For in­stance, in to­day’s commercial sphere, the ma­jor­ity of fran­chise agree­ments con­tain re­straint of trade clauses. This is nec­es­sary to pro­tect a fran­chisor’s in­tel­lec­tual property.

If the fran­chise agree­ment is void the fran­chisor will not be able to en­force any of the terms of the re­straint of trade clause against the fran­chisee. This will leave the fran­chisor in a very vul­ner­a­ble po­si­tion.

So what is the an­swer? Un­for­tu­nately, to date the courts have not dealt with these reg­u­la­tions. Un­til such time as the courts deal with the mean­ing and ef­fect of reg­u­la­tion 2(2)(a) and 2(4), it will be pru­dent for fran­chisors to in­sist that a new doc­u­ment, even if in the form of an ad­den­dum, be signed upon re­newal of a pre-ex­ist­ing fran­chise agree­ment dis­play­ing the re­quired word­ing of sec­tion 7(2) as read with reg­u­la­tion 2(2)(a).

This will also af­ford the fran­chisor the op­por­tu­nity to in­clude in the ad­den­dum all the other terms which may be nec­es­sary to align the fran­chise agree­ment with the pro­vi­sions of the Con­sumer Pro­tec­tion Act.

Fran­chisors be­ware — the mere fact that your fran­chise agree­ment was en­tered into be­fore the com­mence­ment of the Con­sumer Pro­tec­tion Act does not nec­es­sar­ily ex­empt you from com­ply­ing with its pro­vi­sions.

Pic­ture: THINKSTOCK

FRAN­CHISORS CAN BE CON­SUMER ACT TAR­GETS The fact that your fran­chise agree­ment was en­tered into be­fore the com­mence­ment of the Con­sumer Pro­tec­tion Act does not nec­es­sar­ily ex­empt you from com­ply­ing with its pro­vi­sions

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