Franchises rely heavily on the strength of brands for their success and it is therefore not surprising that franchisors typically prefer to control their franchises quite tightly, as any blunder by even one franchisee can be incredibly damaging to the franchisor’s brand. Consider any fast food chain and it will be apparent that we attribute the sins of one outlet, be it bad service or poor quality of product, not to that particular outlet, but to every franchise in the system.
As important as it is that franchisors have the ability to set strict requirements for franchisees, it is also important that franchisee’s interests are protected. The Consumer Protection Act (“CPA”) therefore aims to prevent unreasonable terms being imposed on franchisees.
One way in which the CPA tries to minimise hardship to franchisees is that it provides that a franchisor may not require a franchisee to purchase goods or services from the franchisor, or from a designated third party, other than in the following circumstances:
1. The purchase must result in some economic benefit to the franchisee;
2. The convenience in having to acquire the goods/ services from the franchisor must outweigh the limitation of the franchisee’s choice;
3. The goods/services must be offered separately and individually priced; or
4. The goods/services supplied must be reasonably related to the branded products or services that are the subject of franchise agreement.
The underlying principle of the above provision is that there must be convenience or some sort of economic benefit to the franchisee. A franchisor should ensure that the franchise agreement contains justifications, specifying the convenience or economic benefit to the franchisee, for requiring the franchisee to purchase specific goods or services. If there are no such justifications for the requirement, the goods or services must form a part of the franchisor’s brand.
Even if the goods or services do form part of the franchisor’s brand, the franchisor may not charge unreasonable prices for them, as follows from the four categories of clauses which must be included in each franchise agreement in terms of the CPA:
1. Provisions which prevent unreasonable or overvaluation of fees, prices or any other direct or indirect consideration;
2. Provisions which prevent conduct which is unnecessary or unreasonable in relation to the risks to be incurred by one party;
3. Provisions which prevent conduct that is not reasonably necessary for the protection of the legitimate business interests of the franchisor, franchisee or franchise system; and
4. Clauses informing a franchisor that it is not entitled to any undisclosed direct or indirect benefit or compensation from suppliers to its franchisees or the franchise system, unless this fact is disclosed in writing with an explanation of how it will be applied.
As a first step, the franchisor should consider whether any clauses in the franchise agreement would result in the conduct which should, in terms of the above provisions, be prevented. If such clauses exist, they should be removed from the franchise agreement, as any provisions in a franchise agreement that conflict with the above provisions are void.
Secondly, provisions must be placed into the franchise agreement which prevent the conduct covered by the provision. An example of a provision which would prevent unreasonable fees is as follows:
“The training fees for the training to be provided by the franchisor to the franchisee from time to time shall be fair and market related.”
As the CPA’s provisions relating to franchising are rather broad, the exercise to be undertaken by franchisors in ensuring that their franchise agreements are CPA compliant should be undertaken in earnest. Failure to do so could result in the franchisor being fined up to 10% of the franchisor’s annual turnover or R1 million, whichever is the greater.