Franchisees' protection a feature of new bill

The landmark Consumer Protection Bill lays the foundation for a new era of consumerism in SA by introducing a single, comprehensive legal framework for consumer protection, says Chris Charter, director at law firm Cliffe Dekker Hofmeyr.

“It is far-reaching and the first legislation of its kind in SA, codifying the common law in relation to consumer rights.”

The bill (the CPB) aims to achieve consumer protection through promoting a fair, accessible and sustainable marketplace for consumer products and services. It is the tangible outcome of the trade and industry department's intention to create and promote an economic environment that supports a culture of consumer rights and responsibilities. The bill only requires Presidential assent to become law.

Charter says that while the bill has a broad and general application to all goods and services delivered or rendered in the ordinary course of business, it contains specific provisions for franchise agreements.

“The present situation is that there is no legislation dealing specifically with franchising. Certain general provisions in the Competition Act would be relevant to franchising, such as that a franchisor may not fix a franchisee's prices.”

The status quo of the franchising industry is that it relies on self-regulation through the Franchising Association of South Africa (Fasa) and its voluntary code of ethics, which is supported by best-practice guidelines that among other aspects require each franchise agreement to have a disclosure schedule and an operations and procedures manual.

“But despite these industry guidelines there is still the danger of fly-by-night franchisors that can ruin the lives and destroy the savings of franchisees. Any remedies need to be enforced in a civil court, which is expensive and time consuming. For instance, franchisees of a leading video rental chain have alleged a number of unfair practices on the part of the franchisor but have been forced to seek free legal aid or a lawyer acting on contingency in order to take action.”

Charter says the CPB is specifically concerned with the franchise sector, as many small businesses and individuals choose this route when seeking an entrepreneurial venture, perhaps after leaving corporate life for various reasons or simply not being able to find employment.

“Franchisees are a potentially vulnerable group of consumers and it is most positive that the bill seeks to regulate transactions between franchisee and franchisor, a relationship that historically is weighted in favour of the franchisor. Reputable and ethical franchisors should have no problem complying with the provisions of the bill when it is enacted into law.”

The devilish details

The bill specifically defines a franchise agreement, the key elements of which are that in return for payment the franchisee has access to the franchisor's know-how and intellectual property, while at the same time the franchisor has substantial control over key aspects of the franchisee's business.

The bill sets out requirements that will apply to franchise agreements. Firstly, a valid franchise agreement must be in writing and signed by the franchisee. Secondly, a franchisor will need to provide certain information as may be prescribed in separate regulations to be issued once the CPB comes into effect.

It is not yet clear what will be required, but the regulations are likely to take their cue from existing Fasa guidelines that require a comprehensive disclosure document containing information such the outcome of a feasibility study, the details of existing franchise members, estimated costs and expected returns. All of these would then allow a potential franchisee to consider objectively the viability of the business venture before committing.

Finally, as with all transactions under the CPB, franchise agreements must comply with the requirements of Section 22 in that the agreement and all related documentation and notices must be in plain and understandable language.

Charter says that for franchisees having second thoughts about entering into this type of business arrangement the bill gives a franchisee the right to cancel such an agreement, without cost or penalty, within 10 business days of signature, by written notice to the franchisor.

One aspect of the franchisor/franchisee relationship that can and does lead to strain is the typical requirement that franchisees are contractually obliged to acquire certain goods and supplies from the franchisor or suppliers nominated by the franchisor. There has been publicity about this type of condition, with some video rental franchisees claiming the franchisor was compelling them to stock unpopular DVD titles and sell certain lines of confectionery in the retail outlets, conditions they claim were causing them to lose money.

The CPB's Section 13 contains the general prohibition that a supplier may not require, as a condition of supply or agreement that the consumer must purchase other goods and supplies from it or a designated third party or enter into additional agreements or transactions with it or designated third parties.

Charter says the overriding sentiment is that the right of the consumer to select his own suppliers and products will be entrenched in this new regime.

“Looking at this in the context of a franchise agreement it means that the starting point is that a franchisor may not require a franchisee to purchase goods or services from the franchisor or a designated party. However, this type of arrangement, commonly referred to as bundling, will be permitted if its convenience to the franchisee outweighs any limitation on freedom of choice, or the bundling results in economic benefit to the consumer — the franchisee or its customers.

“While economic benefit is not defined, the concept probably extends beyond mere price to related factors such as quality and reliability. In the specific context of a franchise arrangement, bundling will also be permitted if the bundled goods and services the franchisee is compelled to acquire from or at the direction of the franchisor are reasonably related to the branded products or services that are the subject of the franchise agreement.

Charter says that it is unclear whether this carve-out applies only to branded merchandise, such as packaging, menus or furniture, or whether this notion could be extended to cover more esoteric product attributes, such as the type of hamburger bun or the circumference of the burger patty.

“A case in point may be KFC's secret blend of herbs and spices, where the franchisor is likely to be permitted to designate a single point of supply to ensure a uniform brand experience."

Charter says that many general provisions throughout the CPB are specifically carved out, or excluded, from applying to franchise arrangements.

“The rationale for many of these exclusions is to preserve the franchise system as an efficient and cost-effective means to distribute good or services in a manner that is not too onerous to franchisors, many of whom start out as small businesses themselves.”

He says strict disclosure requirements to be imposed on franchisors have rendered unnecessary separate provisions regulating disclosure, for instance in catalogue marketing in section 33.

Besides the specific provisions relating to franchise agreements, the fundamental consumer rights enumerated in Chapter 2 of the CPB will continue to apply. These include adhering to principles of fairness and honesty in regard to marketing, to refrain from making false, misleading and deceptive representations, to ensure fair just and reasonable terms and conditions and to produce goods and services of fair value and quality.

“What is clear is that even tried and tested franchise agreements will need to be reviewed in light of the new legislation to ensure compliance."

When things go wrong

Like all consumers, franchisees will be able to avail themselves of enforcement mechanisms introduced by the CPB. A national consumer commission will be established with the power to investigate any complaints against prohibited conduct and to issue compliance notices to suppliers in default, as well as to promote the informal settlement of disputes. The tribunal established under the National Credit Act will double as an adjudicator into alleged misconduct, together with any consumer courts established in a particular province or, where applicable, the equality court. A contravention of the provisions of the CPB can attract a fine of up to R1m, while an aggrieved consumer can apply to a civil court for damages.

Effective date of application

The general effective date of the CPB will be 18 months after signature by the President. Charter says that although the provisions are not retroactive, even franchise agreements entered into before the general effective date will be affected. This is because it appears that the ongoing supply of products to franchisees under an existing agreement will be subject to the CPB, while any formal notices issued under an existing agreement will need to be in plain language and easily understood. Although the CPB is not express on this point, any automatic or agreed renewal of a franchise agreement after the general effective date will probably need to comply with the letter of the law.

The flip side

Charter says that while the CPB gives franchisees some significant protection regarding the relationship with the franchisor, equally it imposes obligations insofar as they deal with consumers on a daily basis. “The CPB regulates the relationship between consumers and suppliers of goods and services across most sectors. Moving on to the next stage of the supply chain in a franchise arrangement, franchisees will have to comply with all provisions in the CPB with regard to their relationship with their own customers, and these can be quite onerous at times.”

Source: Business Day

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