Does your franchise agreement comply with the CPA
WHAT IF YOUR FRANCHISE AGREEMENT DOESN’T COMPLY WITH THE CPA?
You, the Franchisor signed a franchise agreement that you believed was valid. You carefully checked that the agreement contained all the pertinent details discussed with the Franchisee. You made sure that it followed the same format and contents as other agreements that had worked well.
Yes, that is good practice, but did you check that the franchise agreement complies with the Consumer Protection Act No. 68 of 2008 (the CPA)? What could possibly go wrong?
In South Africa, when preparing a franchise agreement, it must take the following into account:
- The terms of the CPA;
- The regulations of the CPA;
- Certain clauses of the Competition Act 89 of 1998 (insofar as clauses in that act may grant a Franchisee greater rights than set out in the CPA); and
- Case law i.e. where a judge grants an order, alternatively makes comments that are pertinent to franchising law.
Presently there is no case law to reference as a guide as how to resolve a clash between a franchise agreement and the CPA. Will the court declare the franchise agreement to be invalid? The purpose of this article is to alert you so that your franchise agreement can be in sync with the regulations. If it does not, a court could render your franchise agreement invalid or voidable (which means it may be set aside at the request of the Franchisee).
Section 7 of the CPA states that a franchise agreement must:
Be in writing and signed by and on behalf of the Franchisee. A verbal, alternatively tacit franchise agreement is no longer binding since the enactment of the CPA; and
- Include the prescribed information (which is contained in the regulations as issued by the relevant Minister).
The Regulations of the CPA prescribe information that must be contained in the franchise agreement, which consists of approximately 40 prescribed information.
It is pertinent to note that Regulation 2(2)(e) provides that any provision in a franchise agreement that conflicts with a regulation is void to the extent of such a conflict. This means that if there is a clause in the franchise agreement that is inconsistent with the regulations then that clause (not the whole agreement) is void.
It is good practice to include the prescribed information, in the same way in which it is reflected in the Regulations. Otherwise it is possible that a court may declare that the franchise agreement is null and void, alternatively may be voidable.
According to the Regulations one of the prescribed information is that you must provide the Franchisee with your fax number. Will a court invalidate a franchise agreement just because it does not contain the Franchisor’s fax number? Highly unlikely. However, the further one strays from the Regulations, the more a court may be inclined to declare the franchise agreement to be invalid.
Section 52 of the CPA states that if a court determines that a franchise agreement was in whole, or in part, unconscionable, unjust, unreasonable or unfair, the court may make a declaration to that effect, or make any further order that the court considers just and reasonable. It is arguable that if a franchise agreement does not comply with the provisions of the CPA (which includes the Regulations), the court has the authority (in light of Section 52) to declare the whole, or part of, the franchise agreement to be invalid.
The CPA was created to protect consumers. A Franchisee is considered a consumer in terms of the CPA. A franchise agreement which only addresses the commercial matters between the Franchisor and Franchisee may not be valid, or may be voidable, if it does not contain the prescribed information contained in the Regulations. It is best practice (and prudent) to have your franchise agreement checked for compliance by a franchising attorney.
ATTORNEY AND SOLICITOR
© D’AMICO INCORPORATED ATTORNEYS
REFERENCES AND SUGGESTED READING
This article has been compiled for information purposes only and does not constitute legal advice. Legal advice needs to be tailored to the specific needs and circumstances of the case on hand. It follows that D’Amico Incorporated cannot accept liability for any loss or damage caused to any individual or entity that has acted or omitted to act on the basis of this information.