Franchisees and franchisors don’t operate in a legal vacuum. There are a number of laws that regulate how the two parties must conduct themselves. These include:
Here is more detail on these three pieces of legislation and their implications for the franchising sector:
The aim of the CPA is to:
The Act considers franchisees as consumers and protects them from being exploited by franchisors. It requires that there must be transparency between the two parties. For example, if a franchisor gets a direct or indirect benefit or compensation from suppliers to its franchisees, the franchisee has to be aware of this. All the details must be in writing.
In terms of the Act, when a franchisee and franchisor get into a business relationship, certain documents must be in place. These documents include:
This document sets out the terms and conditions the franchisee and franchisor must adhere to. This agreement must be in writing.
The agreement has to be easily understandable. In addition, on the top of the first page of the agreement, there must be a clause that allows the franchisee to cancel the agreement by giving notice, in writing, within ten business days after signing. There shouldn’t be any costs or penalties applied if the prospective franchisee walks away within this cooling off period.
A disclosure document includes important financial information as well as details regarding the structure of the franchise group. In terms of the Act, the franchisor must give the franchisee the disclosure document 14 days prior to signing the franchise agreement.
An operations manual is a document that contains information on how the franchise operates. This document helps the franchisee to run the business effectively. We’ve included more information about the disclosure document and operations manual further down in this section.
It’s crucial to comply with CPA requirements
If you don’t comply with CPA requirements, the National Consumer Commission could impose non-compliant penalties.
In addition, if a franchisor doesn’t comply with the Act, franchisees could report them to institutions like:
When it comes to franchising, trademarks and licencing agreements come into play. The Trademarks Act sets out all the requirements regarding trademarks. This means both franchisor and franchisees have to comply with the Act.
As a franchisor, you have to cover all the details about trademarks, intellectual property and licenses to the franchisee in the franchise agreement.
Overall, as a franchisee, you have to conduct due diligences on the business model licenced, in particular the status of the trademarks of the franchise. It’s important to know what you sign and what you’re paying for. As a franchisor, you have to know what you own and intend to licence.
The Competition Act also applies to franchising. Some parts of the Act state how franchisors and franchisees should conduct themselves.
A while back, the Competition Commission (a statutory body constituted in terms of the Competition Act) realised that franchising infringes against several clauses of the Act. The paper is meant to clarify how franchisors and franchisees must conduct their relationships in order to comply with the Act. Click here to read the paper.