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Franchisors beware - update your franchise agreement!

By Maria D'Amico, D'Amico Incorporated

Maria D’Amico of D’Amico Incorporated advises franchisors to update their franchise agreements without delay. This has become necessary because the Consumer Protection Act, No. 68 of 2008 (“the Act”) came into effect on 1 April 2011 (“the effective date”), the consequences of ignoring it could be dire.

The long-awaited regulations to the Act were recently published. Among other things, they set out the prescribed information that needs to be incorporated into every franchise agreement. The draft regulations provided that an agreement in existence on the effective date that fails to comply with the Act must be amended. The final regulations make no mention of this but certain sections of the Act will nevertheless apply to agreements that were signed prior to the effective date.

The following is a list of some of the prescribed information every franchise agreement must contain, although this list is not exhaustive :

1 A notice on top of the first page of the agreement must refer to the 10- day cooling-off period franchisees are entitled to and state the relevant section of the Act.

2. As a minimum, the agreement must include:

2.1 the name and description of the goods/serves which the franchisee is to sell or provide;

2.2 the obligations of the franchisor;

2.3 the obligations of the franchisee;

2.4 the territorial rights granted to the franchisee described in detail;

2.5 a description of the products;

2.6 details relating to the advertising fund;

2.7 the effect of the termination or expiration of the franchise.

3 Information about the franchisor’s directors, members or equivalent officers.

4 Full particulars of the financial obligations that the franchisee incurs in terms of the franchise agreement or otherwise related to the franchised business.

5 Any direct or indirect benefit a franchisor stands to receive from prescribed suppliers due to supplying to its franchisees or the franchise system must be disclosed in writing with an explanation of how it will be applied. Clearly, franchisors are now required by law to disclose any rebates that they receive from suppliers and how they intend to apply them.

A franchise agreement entered into from the effective date must contain the prescribed information as incorporated in the regulations. In addition, a franchise agreement which is renewed after the effective date is considered a new agreement for the purpose of sub-regulations 2 and 3 of the Act.

Any provision contained in a franchise agreement that is in conflict with the regulations is void to the extent of such a conflict. Should a clause in the agreement be contrary to the Act or the regulations, such a clause will not be enforceable by law.

Franchisors are urged to ensure that their franchise agreements comply with the requirements of the Act. Franchisors should contact an experienced franchising attorney without delay to ensure compliance.

Maria D’Amico specializes in franchising law; as a seasoned practitioner and longstanding member of FASA, she is well placed to assist franchisors who need their franchise agreements updated. She also presents workshops on the Consumer Protection Act – essential information for franchisors, their field personnel and their franchisees.

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