By Trishika Veeragudu (Attorney) @ Lucid Living
The Consumer Protection Act (“the CPA”) coming into full force and effect later this year will extend its protection to Franchise Agreements. If you were thinking of entering into a franchise agreement now, it may be worth your while to wait.
Mariam purchases her “dream” franchise called Chips and Things from the franchisee who promises to market her franchise and signs further agreements with Mariam to purchase all her supplies for the franchise from Dealers Deal as a condition to selling her the franchise.
Mariam’s dream franchise business is short lived as she is forced to close down in a year. She believes her downfall was as a result of her franchise not being marketed as promised by the franchisor and because she received no support after signed the franchise agreement. She further evaluates her financial statements and realises that she was paying too much for goods purchased from Dealer Deal which she could have gotten cheaper.
In terms of our current law, there is no legislation that specifically protects a franchisee like Mariam. The CPA offers the protection needed in South Africa by recognising franchisees as consumers deserving of good service from the franchisors.
HOW WILL THE CPA PROTECT THE FRANCHISEE?
• Section 13 of the CPA gives the franchisee the right of choice
The franchisor can no longer compel a franchisee, to purchase stock from a sole supplier, as a condition of sale. You will therefore no longer be forced to purchase goods and service from the franchisor or enter into additional agreements with another supplier at the franchisor’s request.
However if the franchisor can prove their goods and services will bring economic benefit to the franchisee, then only is it regarded as lawful for the franchisor to make you sign additional agreements with their suppliers.
• The CPA gives the franchisee the right to a “cooling off” period
You will have FIVE (5) days from signing the franchise agreement, in which to cancel it without incurring any penalty.
• Franchisor will be required to be more transparent and take full responsibility for the quality of their product and their actions
Franchisors must provide all the information the franchisee needs to make an informed decision. It is therefore necessary for the franchisor to disclose certain information such as: performance of the group, expected sales, commission and profits, if they were forced to close down any franchise operations in the last three years and provide all existing franchisee’s contact details to you. The franchisor must also draw your attention to any limitation of liability.
• The onus of proof will also shift once the CPA comes into effect
Previously the franchisee had to prove a misrepresentation on the part of the franchisor to cancel the franchise agreement. However with the CPA, the franchisor is required to prove that all information was disclosed to the franchisee. This will force the franchisor to be more discerning, regarding projections and forecasts.
• Agreements reduced to writing
All franchise agreements must by law be in writing, signed by the franchisee and must comply with the provisions of the CPA.
• You have the right to challenge a franchisor
Finally, a franchisor can now be challenged in terms of the CPA as the Act defines a consumer as including a franchisee. Previously the law did not allow for challenging franchisors as the franchise industry was unregulated. However in terms of the CPA you may now challenge a franchisor should you feel aggrieved by the franchise agreement or due to non fulfilment of promises made by the franchisor by filing complaints with an Alternate Dispute Resolution Agent, the National Consumer Commission, or the Tribunal
The CPA will come into effect on October 24, 2010 and will apply to a franchise agreement entered into after such date or renewed. So it may be a good idea for you to wait for such time before entering into a franchise agreement.