by Melissa Eva
The relationship between a Franchisee and Franchisor gives rise to rights and responsibilities between the two parties. It is interesting to note that these rights and responsibilities are not only governed by what they have agreed upon in the franchise agreement, but also by some South African legislation.
The Competition Act No. 89 of 1998 is applicable to business in that it seeks to curtail practices which may be detrimental to a competitive economy. Some provisions of this law could be applicable to a franchise business with regard to:
- whether a Franchisee can be forced to use a certain supplier as nominated by the Franchisor (exclusive dealing arrangements);
- allocation and enforcement of exclusive territories; and
- how a franchise should price products or services (minimum resale price maintenance)
The Consumer Protection Act No. 68 of 2008 and its Regulations have provisions specifically applicable to franchising, which include:
- the requirement for a Franchisor to provide a Franchisee with a disclosure document at least 14 days prior to the signing of the franchise agreement;
- the minimum information to be contained in such disclosure document including information such as Franchisor’s financial information; Franchisee projections, a list and details of current Franchisees etc.;
- the definition of what a franchise agreement is;
- the cooling off period, within which a Franchisee may cancel a franchise agreement without any cost or penalty;
- the requirement that the franchise agreement should be in written format and signed by or on behalf of the Franchisee; and
- an extensive list of minimum information to be contained in the franchise agreement, for this detailed list see article
The franchise agreement signed between the Franchisee and Franchisor will also contain provisions detailing the rights and responsibilities between the two parties including:
- confidentiality undertaking
- details as to what the business system is and how it should be operated
- use of intellectual property, brands; logos and systems etc.;
- payments and contributions by the Franchisee to the Franchisor
- initial and ongoing obligations of the Franchisor e.g.: support and training
- initial and ongoing obligations of the Franchisee
- process on how to sell the business
- suretyship by the Franchisee
- restraint of trade on the Franchisee
- circumstances leading to the termination of the agreement and what happens upon termination of the agreement
From the above-mentioned considerations, it is clear that the Franchisor and Franchisee relationship gives rise to many rights and responsibilities between the two parties.
As a Franchisee, it is important to understand all of your rights and obligations before entering into an agreement with a Franchisor.
As a Franchisor, it is imperative that your franchise strategy and documentation is structured in a compliant manner to avoid penalties and losses.
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