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The Consumer Protection Act January 2011

FRANCHISORS BEWARE UPDATE YOUR FRANCHISE AGREEMENT! By Maria D'Amico of D'Amico Incorporated

The Consumer Protection Act, No. 68 of 2008 ("the Act") will come into effect on 31 March 2011.

The Department of Trade and Industry published the proposed regulations, which complement the Act, on 29 November 2010 in the Government Gazette. The public were invited to comment on the regulations and had until 31 January 2011 to do so.

These regulations have specific implications for the franchising industry. Chief among them is the prescribed information that now needs to be incorporated in any franchise agreement. All franchise agreements must comply with the Act. An agreement that is in force at the date of commencement of the regulations, which does not meet the requirements of the regulations, will need to be amended either by way of a new agreement or an addendum being prepared. Therefore, all franchisors have to revise their agreements or prepare addendums to them. Clauses in agreements that do not comply will be considered void.

Section 7(1) of the Act sets out the requirements of a franchise agreement in that it must be:

1 in writing and signed by or on behalf of the franchisee;

2 include any prescribed information, or address any prescribed categories of information;

3 in plain and understandable language.

Section 7(3) of the Act states that the Minister may prescribe information to be incorporated in a franchise agreement, generally, or within specific categories or industries.

Regulation 2 of the draft regulations states that:

1 Every franchise agreement must contain the exact text of regulation 7(2) of the Act at the top of the first page of the franchise agreement, together with a reference of the section and the Act. Regulation 7(2) states 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";

2 Every franchise agreement must contain, as a minimum, the contents provided for in sub-regulation 3, which will be discussed later;

3 Any provision in the regulations not included in a franchise agreement will be deemed to be included in that franchise agreement, and where applicable, on terms and conditions reasonable in the sector or industry to which that franchise agreement pertains;

Therefore, should a franchise agreement not contain relevant information as prescribed by the regulations, then it will be deemed to contain such information.

4 A franchise agreement must contain clauses stipulating that:

4.1 a franchisor is not entitled to any undisclosed direct or indirect benefit from suppliers to its franchisees or the franchise system. Any such benefit must be disclosed in writing to a franchisee with an explanation of how it will be applied; and

4.2 the principles of honesty, fairness, reasonability and equality must guide the interpretation of the franchise agreement and relationship between the parties;

Clearly, franchisors are now required by law to disclose any rebates that they receive from suppliers and must also describe the use of these rebates.

5 If, on the date of commencement, a franchise agreement does not meet the requirements of the regulations, an annexure must be signed within six months. Or, if the franchisee wishes, a new agreement that meets the requirements must be entered into, also within six months.

The Act is unclear as to whether existing franchise agreements need to comply with its provisions. The DTI believe that it does apply to existing agreements. It may be argued the six month period given for franchisors to amend their existing agreements is an attempt to rectify what was not envisaged in the Act. However, this is another debate. Presently, the draft regulations as published state that ALL franchise agreements, regardless of when they were signed, must either be re-signed or an addendum must be prepared incorporating the required information. This is an opportune time for franchisors to review their agreements.

6 Any provision in a franchise agreement in conflict with the regulations is void to the extent of such a conflict; and if a clause in the agreement is contrary to the Act or regulations, such a clause will not be enforceable by law.

7 Regulation 3 sets out the minimum information which a franchise agreement must contain, which includes but is not limited to:

7.1 the obligations of the franchisor and the franchisee;

7.2 a description of the products;

7.3 details relating to the advertising fund;

7.4 the effect of the termination or expiration of the franchise;

Previously, information about the franchise executives and shareholders was described in the disclosure document, but it must now be included in the franchise agreement. This includes information about the franchisor's executive officers, and should the members or shareholders differ from the executive officers, then information relating to the members and shareholders must also be included.

7.5 full particulars of the financial obligations of the franchisee in terms of the franchise agreement or otherwise related to the franchised business.

The above list is not exhaustive, but sets out some of the information that will need to be included in a franchise agreement.

As mentioned previously, these are draft regulations and the final regulations should be published before the Act comes into effect on 31 March 2011.

Franchisors are urged to ensure that their franchise agreements contain the relevant information as reflected in the draft regulations. If not, then they are urged to consult a franchising attorney to either update their agreement, should a franchisee be amenable to signing a new one, or signing an addendum to incorporate the required information.