The termination of a franchise agreement by the franchisor does not in itself constitute a transfer of a business as a going concern, even if the franchisor thereafter appoints another franchisee in the same area, and serving the same customers, as the previous franchisee. Therefore, the new franchisee is not obliged to take over the rights and obligations of the previous franchisee towards its employees, as is required in terms of section 197 of the Labour Relations Act on the transfer of a business as a going concern.
In PE Pack 4100 CC versus Sanders and others, the Labour Appeal Court held that, because the core assets used by the previous franchisee in the conduct of its business (the franchisor’s intellectual property and business system) never belonged to the previous franchisee, there was no transfer of those assets to the new franchisee, and section 197 did not apply.
The principle enunciated in this judgement must, however, be applied with caution and could only apply in cases where there is no agreement between the new and old franchisees, and where both transact solely with the franchisor. Alternatively, where the new franchisee, for example, acquires those assets of the old franchisee that do not belong to the franchisor (such as the equipment and customer contracts), section 197 may apply and in such case the new franchisee would be obliged in law to take over the old franchisor’s obligations towards its employees.
Despite the Sanders judgement having been handed down by the Labour Appeal Court, the debate regarding the application of section 197 to franchise agreements may not yet be over. It is likely that in time the question will again arise and it will hopefully then receive the attention of the Constitutional Court and be conclusively determined.
In the interim, when negotiating the "transfer: of a franchise agreement, the effects of section 197 must accordingly still be considered.