Section 7 of the Consumer Protection Act, No 68 of 2008 (CPA) sets out certain formalities that all franchise agreements must comply with:
- Firstly, all franchise agreements must be concluded in writing and signed by or on behalf of the franchisee.
- Franchise agreements must include prescribed information or prescribed categories of information including, but not limited to, the obligations of the franchisor, a description of the applicable franchise business system and the name and description of the types of goods or services which the franchisee is entitled to provide. Prescribed information may also be determined by the Minister of Trade and Industry.
- In addition, the franchise agreement must be written in plain and understandable language.
- Perhaps the most significant provision from the franchisor's perspective is the cooling off period set out in s7(2) of the CPA.
The cooling off provision in the CPA allows the franchisee to cancel the franchise agreement without cost or penalty within 10 business days after signing the franchise agreement. Accordingly, where a franchisee elects to exercise this cooling off right, it may do so without incurring any costs or penalties.
Regulation 2 of the CPA stipulates that the exact text of this cooling-off provision must be included at the top of the first page of the franchise agreement. This means that page one of every franchise agreement must include the following wording "In terms of section 7(2) of the Consumer Protection Act No 68 of 2008, the franchisee may cancel this franchise agreement without cost or penalty within 10 business days after signing this agreement, by giving written notice to the franchisor".
This provision poses a significant risk to franchisors which incur expenses in anticipation of the franchise arrangement. By way of example, where the franchisor incurs shop fitting expenses or costs through modifications to the franchised business in accordance with the terms agreed to with the franchisee, or where the franchisor incurred legal expenses in preparation of the agreement, it would not be able to recover these expenses from the franchisee. This provision serves as a warning to franchisors to enter into franchise agreements with circumspection. Franchisors should rather err on the side of caution and where possible, should wait for this cooling off period to lapse before incurring additional costs in relation to the franchise agreement.