Newsletter No.1

Consumer Protection Act (CPA)

 

According to legal experts, the new Consumer Protection Act (CPA) will have a huge impact on virtually every business in South Africa, including the franchise sector.  Franchisors will have to revisit their franchise agreements and insure that they comply with the Act, while franchises will have more protection than ever before.

 

  1. HOW WILL THE FRANCHISE INDUSTRY CHANGE DUE TO THE CPA?

 

The CPA will profoundly affect the franchise sector in numerous ways.  It’s the first piece of legislation in South Africa that contains provisions specifically regulating the sector.  The Act and the regulations in terms of it, when they are finally promulgated, will specify certain terms and information that must be included in franchise agreements. Other provisions that will affect the ways in which many franchise systems have traditionally operated include:

  • A ‘cooling off’ period of ten working days after signing the agreement, during which the franchisee may cancel it ‘without cost or penalty’.
  • A prohibition on obliging a franchisee to purchase stocks and supplies from the franchisor of a supplier prescribed by the franchisor, unless there is an economic benefit to the franchisee, or the specific goods are related to the branded foods of services on the franchise is based.  However, if the goods or services are reasonably related to the franchisor’s branded products of services, the franchisee must use the franchisor’s primary unique or most important products.
  • An obligation for the franchisor to deposit any moneys paid in anticipation of services to be rendered in the future to the franchisee into a separate bank account and only draw down on it as and when those services are rendered.  This will prevent franchisors for taking large upfront franchise fees for which no services are rendered.

 

In addition, franchisees, as suppliers of goods and services themselves, will be affected by the provisions of the Act, and will have to comply with the requirements of the Act with regard to their sales and marketing practices.  This will affect issues such a way in which goods can be marketed and displayed labeling of goods and services and liability for defective products.

 

  1. 2.      WHY IS THE FRANCHISE INDUSTRY EXPECTED TO BE IMPACTED BY THE CPA?

 

There is little question that the enactment of the Consumer Protection Act is the most significant legal development for the franchising sector since the enactment of the Competition Act in 1998.  It will probably have an even greater impact.  The Act may be seen as a first step to regulate franchising in South Africa, in line with the law in countries such as United States. Australia, Canada and the United Kingdom.

Ian Jacobsberg is a partner at Eversheds

 

  1. 3.      WILL THE CPA APPLY TO FRANCHISE AGREEMENTS WHICH WERE SIGNED BEFORE THE BILL IS PASSED?

 

It seems 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.

 

  1. 4.      WHAT OTHER ADVANTAGES WILL THE ACT OFFER FRANCHISES?

 

The CPA includes numerous provisions requiring honest and fair dealing, which precludes undue influence or pressure and unfair tactics.  False, misleading or deceptive presentations concerning material facts are also not allowed.

 

  1. 5.      HOW ARE THE COURTS LIKELY TO REACT TO FRANCHISES THAT DO NOT TOW-THE-LINE?

 

In addition to the Consumer Protection Authorities, the South African Courts have been grated certain powers to sever or redraft provisions which are unfair, unreasonable of contravene the Consumer Protection Act.

 

 

  1. 6.      FLY BY NIGHT OPERATORS.

 

The few “fly by night’ or ‘poor’ franchisors will find it difficult to operate in the context of the CPA.

 

The act will not be too onerous for the majority of leading franchisors, but will certainly be welcomed by prospective franchisees that required assistance against the ‘poor’ and ‘fly by night’ franchisors.

 

 

  1. 7.      NAMES OF COMPANIES USED BY FRANCHISEE.

 

The purposed new Companies act will also have an effect on the names used. In the past a name like XYZ (Pty) Ltd  trading as STEAKHOUSE franchise could be used. In future the name of the company and the name of the franchise must be the same. i.e.  STEAKHOUSE (Pty) Ltd and not as trading as.

 

The problem with this is that all the franchises will then have the same name. To overcome this the propose manner will be, STEAKHOUSE CAPE TOWN ( Pty) Ltd and the next franchise will be say STEAKHOUSE BELLVILLE ( Pty) Ltd.

 

 

Contributors

 

Entrepreneur magazine

Gill Abrahams

Ian Jacosberg – Eversheds

Eugene Honey, – Bowman and Gilfillan.

Muller and Partners Accountants

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