Legal Implications of Franchising in South Africa
Franchisees and franchisors don’t operate in a legal vacuum. There are a number of laws that regulate how the two parties must conduct themselves. These include:
- The Consumer Protection Act and its regulations grant certain consumer rights and protection to potential franchisees.
- Laws governing intellectual property with the Trademarks Act, No. 194 of 1993, being of particular importance.
- The Competition Act, No. 89 of 1989 and the Rules for Conduct of Proceedings in Terms of the Act.
Here is more detail on these three pieces of legislation and their implications for the franchising sector:
The aim of the CPA is to:
- Promote a fair, accessible and sustainable marketplace for consumer products and services
- Ensure consumer protection through national norms and standards
- Encourage responsible consumer behaviour
- Ensure that there’s a system that regulates consumer transactions and agreements
The Act considers franchisees as consumers and protects them from being exploited by franchisors. It requires that there must be transparency between the two parties. For example, if a franchisor gets a direct or indirect benefit or compensation from suppliers to its franchisees, the franchisee has to be aware of this. All the details must be in writing.
In terms of the Act, when a franchisee and franchisor get into a business relationship, certain documents must be in place. These documents include:
This document sets out the terms and conditions the franchisee and franchisor must adhere to. This agreement must be in writing.
The agreement has to be easily understandable. In addition, on the top of the first page of the agreement, there must be a clause that allows the franchisee to cancel the agreement by giving notice, in writing, within ten business days after signing. There shouldn’t be any costs or penalties applied if the prospective franchisee walks away within this cooling off period.
The CPA requires franchise agreements for new franchisees to include:
- The name and description of goods or services the franchisee has to provide, produce, render or sell
- Duties of the franchisor and franchisee
- A description of the franchise business system
- Fees the franchisee has to pay
- Territorial rights, if rights are limited geographically
- A description of the site or premises
- The conditions where under the franchisee or his/her estate may transfer or assign the rights and obligations under the franchise
- A description of trademarks and any other intellectual property the franchisor owns and licenses to the franchisee
- Identity details of the master franchise (this would apply for example, if you’re dealing with an international franchise)
- Information about initial and ongoing training and assistance the franchisor will give to the franchisee
- Details about the amount of money the franchisee will contribute towards a marketing or similar fund.
- Details about the financial and management statements the parties must keep. These will help when there’s an audit on these contributions
- Information on when the agreement comes into effect and when it expires
- Extensions or renewal terms, if such options are available
- The franchisor’s legal name, trading name, registered office.
- The franchisee’s business office, street address, postal address, email address, telephone and fax numbers
- The name, identity numbers, town of residence, job titles and qualifications of the franchisor’s directors or equivalent officers
- Details of any restrictions imposed on the franchisee
- The nature and extent of the franchisor’s involvement or approval in the process of site selection
- The terms and conditions relating to termination, renewal, goodwill and assignment of the franchise
- Confirmation of how the franchisor will deal with any deposits a prospective franchisee pays; and
- Full details of the financial obligations of the franchisee. This includes:
- Payment of the initial fee
- Funds required to be established
- Initial working capital
- Total investment required
- A statement on what’s included in purchase price
- A possible finance amount available from the franchisor
- Any fee payable for management services
A disclosure document includes important financial information as well as details regarding the structure of the franchise group. In terms of the Act, the franchisor must give the franchisee the disclosure document 14 days prior to signing the franchise agreement.
An operations manual is a document that contains information on how the franchise operates. This document helps the franchisee to run the business effectively. We’ve included more information about the disclosure document and operations manual further down in this section.
It’s crucial to comply with CPA requirements
If you don’t comply with CPA requirements, the National Consumer Commission could impose non-compliant penalties.
In addition, if a franchisor doesn’t comply with the Act, franchisees could report them to institutions like:
- The National Prosecuting Authority
- The National Consumer Tribunal
- The Competition Commission
- Provincial consumer courts
- The Franchise Association of South Africa
- The relevant high court of South Africa
Trademarks Act, No. 194 of 1993
When it comes to franchising, trademarks and licencing agreements come into play. The Trademarks Act sets out all the requirements regarding trademarks. This means both franchisor and franchisees have to comply with the Act.
As a franchisor, you have to cover all the details about trademarks, intellectual property and licenses to the franchisee in the franchise agreement.
Overall, as a franchisee, you have to conduct due diligences on the business model licenced, in particular the status of the trademarks of the franchise. It’s important to know what you sign and what you’re paying for. As a franchisor, you have to know what you own and intend to licence.
The Competition Act, No. 89 of 1989
The Competition Act also applies to franchising. Some parts of the Act state how franchisors and franchisees should conduct themselves.
A while back, the Competition Commission (a statutory body constituted in terms of the Competition Act) realised that franchising infringes against several clauses of the Act. The paper is meant to clarify how franchisors and franchisees must conduct their relationships in order to comply with the Act. Click here to read the paper.