The Consumer Protection Act: what franchisees need to know
The Consumer Protection Act (CPA) has changed the way franchises are established, sold and run since its inception in 2011. The implementation of the CPA has endured some criticism from business, but the fact that consumers need protection cannot be ignored. As franchises are often bought by individual consumers without business experience, the CPA plays a significant role in protecting new franchisees. Marcel Strauss, Managing Executive of The Fish & Chip Co. discusses how the CPA changes the way franchises.
For the first time in our law, franchise agreements are regulated by legislation rather than the common law. Therefore the definition of a franchise agreement as well as all franchise relationships in South Africa are now governed by the CPA.
As prescribed by the CPA, the franchise agreement must be in plain and understandable language, in writing and signed by both parties. According to regulation 2 made in terms of the CPA, it must also contain the exact words: “a franchisee may cancel a franchise agreement without cost or penalty within ten business days after signing such agreement, by giving written notice to the franchisor. (Section 7(2) Consumer Protection Act. 2008) ”.
It must also contain provisions that will prevent unnecessary or unreasonable conduct regarding any risks and unnecessary conduct to protect the legitimate business interests of both parties and the franchise. Other important provisions are; that it must contain a clause that clearly states that the franchisor is not entitled to any benefit or compensation from suppliers unless the franchisees are informed in writing. Furthermore, the agreement must also give details of the names and descriptions of the goods or services which the franchisee can provide, produce, render or sell, as well as the obligations of the franchisor and the franchisee. It must also describe the franchise system, all direct or indirect payments and give details of any territorial rights, describe the premises and location and explain the conditions under which the rights and obligations of the franchise can be transferred or assigned.
According to the CPA, other important inclusions in the franchise agreement include:
- A description of the trade mark and any other intellectual property of the franchisor that the franchisee can use, must also be included in the conditions of use.
- Particulars of the initial training and assistance and ongoing training must be included as well as the duration and terms for renewal.
- The franchisor’s legal name, trading name, registered office and franchise business office, street address, postal address, email address, telephone number and fax number as well as the directors’ names, identity numbers, towns of residence, job titles and qualifications must also be included in the agreement.
- The nature and extent of the franchisor’s involvement in site selection and the terms and conditions about termination, renewal, goodwill and assignment of the franchise must be included.
- The agreement must confirm that any deposits from the franchisee will be paid into a separate bank account and describe how these deposits will be used. It must also indicate the initial fee payable when the agreement is signed, and what this will be used for. Further, it must give a description of the funds needed to establish the franchised business such as purchase or lease of property, site conversion costs, decor and signage, equipment, furniture, hiring and training of staff opening stock and legal and financial charges and the initial working capital needed and how this is calculated.
- The total investment required must be indicated and a clear statement of any expenses and costs not included in the purchase price as well as the amounts of funding available from the franchisor, the conditions for funding, and the total cost of funding and ongoing amounts payable.
- The franchisor must also state if all or part of the amounts are included in the price of goods and services that must be bought from the franchisor or other preferred suppliers, the date or intervals when the amount is due and if any fee must be paid for administrative services provided by the franchisor and what these services entail.
At The Fish & Chip Co. we take great care to adhere to the provisions of the CPA, not only to avoid being charged with contraventions, but because we believe adhering to the legislation helps to eliminate problems that would usually come to the surface when a business is sold.
Consumers who buy franchises often do so with money from a severance or pension package earned from within other sectors. We cannot expect them to know everything about the business and as the franchisor it is our duty to ensure they get all the information necessary for them to make informed decisions. Franchising is a growing business all over the world and we can only stimulate the growth of the industry in South Africa by treating our franchisees fairly.