Thursday, May 29, 2008

The fourth version of the Consumer Protection Bill (“CPB”) has been published and there is some good news for the franchising industry.
 It appears that the purpose of the CPB and the key concepts thereof remain the same. Many definitions including of “consumer”, “supplier”, “goods”, “service” and “transaction” remain very broad and relatively unchanged.
 There is a new definition for a franchise agreement which includes an agreement where a franchisor grants to a franchisee for consideration a right to carry on business under a system or marketing plan substantially determined or controlled by the franchisor. In addition, the franchisee’s business is substantially or materially associated with advertising schemes or programs or with the trade marks of the franchisor, or any combination thereof, which are licensed to the franchisee. Further, it is an agreement that governs the business relationship between the franchisor and franchisee, as well as the relationship between them with respect to the goods or services that are supplied to the franchisee.
 The requirements of a franchise agreement include that the agreement must be in writing and signed by at least the franchisee. It must also be in plain and understandable language. In addition the franchisor must disclose certain information to the franchisee which will be set out in regulations to be published by the Minister. The Minister is entitled to make regulations regarding general information and also information within specific categories or industries. The information to be disclosed is likely to be along the lines of those required by the Franchise Association of Southern Africa (“FASA”), as set out on their website at
 The CPB provides a right of choice which includes a consumer’s right to select suppliers and products. In terms of these provisions, a supplier which may include a franchisor, must not require that a consumer or franchisee is required to purchase certain goods or services from the franchisor itself or from another supplier or third party, unless the supplier can show that the convenience to the consumer outweighs the consumer’s limitation of choice or that the bundling of these goods or services appears to result in economic benefit to consumers. It is also a defence, in certain circumstances, to any contravention of the section, if the goods or services are reasonably related to the franchisor’s branded products or services. It appears that this is intended to relate to the franchisor’s primary, unique or most important products, although it is not entirely clear.
 The good news mentioned above relates to the definition of consumer agreements which now specifically exclude franchise agreements. As a result, the early termination provisions in favour of the franchisee and in favour of the franchisor, no longer relate to franchise agreements. Only the “cooling off” termination, on notice within 10 days after signature of the agreement, remains.
 With regard to transitional provisions, it appears that the Act will not apply to pre-existing franchise agreements (or transactions) entered into before the “general effective date”. This date is intended to be 18 months after it is signed by the President. It appears that the Act may apply to the renewal of franchise agreements.
 The CPB also includes numerous provisions requiring honest and fair dealing, which precludes undue influence or pressure and unfair tactics. False, misleading or deceptive representations concerning material facts are also not allowed. Further, the consumer also has a right to fair, just and reasonable terms and conditions, which for example includes, unreasonable or unjust prices or terms or excessively one sided or inequitable provisions. In addition, notice is required to be given in relation to provisions which have an unusual character or nature or are not reasonably to be expected.
 In addition to the Consumer Protection Authorities, the South African Courts have also been granted certain powers to sever or redraft provisions which are unfair, unreasonable or contravene the CPB, as well as declaring the entire agreement or relevant provisions to be void. It is essential that the franchisor should ensure that the disclosure document complies and is accurate, sufficiently comprehensive, reasonable and fair. The disclosure document and the franchise agreement should also be checked and audited for compliance regarding general principals such as fairness, equity, value, reasonableness and clear and understandable language, as well as with the remainder of the CPB’s provisions.
 It certainly appears that the few “fly by night” or “poor” franchisors will have substantial difficulties in operating in the context of the new Consumer Protection Act, which will not be too onerous for many leading franchisors, but will certainly be welcome to prospective franchisees who require assistance against the “poor” and “fly by night” franchisors.
 Eugene Honey is a director in the Intellectual Property department at Bowman Gilfillan