LEGAL: Consumer Protection Act Wakeup Call for Franchisors
Recent Gauteng Business News
This is a wakeup call for franchisors, says Candice Meyer, partner at Webber Wentzel.
“The Act and Regulations grant franchisees substantial new rights. This development is good but challenging for franchisors and will necessitate the review of business processes and re-drafting of franchise agreements and other documentation to ensure compliance.”
She warns that failure to comply with the Act and Regulations could result in substantial penalties of up to 10% of turnover and potential civil damages.
Until recently the industry was self-regulated through the Franchise Association of South Africa’s voluntary code of conduct for members.
The new regulatory regime applies to all franchise agreements entered into or renewed after 31 March 2011. Limited provisions of the Act may apply to pre-existing franchise agreements.
Franchise agreements are now subject to a cooling-off period. Within 10 days of signing up, a franchisee can walk away from the contract with no cost or penalty. Of great concern to franchisors will be the protection of intellectual property and proprietary information that franchisees may receive in terms of the franchise agreement prior to expiry of the cooling-off period.
The content of Franchise agreements is now highly regulated advises Meyer. Franchisors will still be able to define limits for franchisees but these limits must comply with the fairness provisions of the Act.
The regulations stipulate what must be specified in the franchise agreement and what can no longer be included. They also prescribe that a disclosure notice be given to franchisees at least 14 days ahead of signing of the franchise agreement.
The franchise agreement must include full particulars of the franchisees’ financial obligations. While clarity on franchise fees is to be welcomed, the franchisor must also outline what it might cost the franchisee to set up the franchise.
“Franchisees will be afforded almost all of the same consumer rights in their relationship with the franchisor, as any other consumer has under the Act. Therefore franchisors will have to factor the Act’s provisions into their business processes in order to ensure that fundamental consumer rights are not infringed.” says Meyer.
Amongst other specifications, there are rules regarding what franchisors can do with the funds allocated to marketing and advertising in terms of the franchise agreement. This is guided by the principle that the funds be spent in a way that benefits the franchisee.
“The first step for franchisors would be to amend their activities, agreements and processes to ensure compliance with the Act. This must be followed by staff training to ensure proper implementation of the changes.”
“It is imperative that every franchisor who markets in South Africa, carefully assesses the extent to which the Act impacts on its operations, and the extent to which the Act imposes obligations and liabilities on it and adapts accordingly.”
“The new risks and challenges franchisors are exposed to under the Act can be mitigated and managed.” advises Meyer.
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