We recently read an article in The Times newspaper which prompted us to elaborate on this topic, as we are in agreement with the author, Lucinde Rhoodie, director, Dispute Resolution Practice, Cliffe Dekker Hofmeyr.
We all are aware (or should be aware) that the Consumer Protection Act of 2008 (CPA) has come into force and is applicable to franchising, especially providing regulations on information requirements in the Franchise Agreement and Disclosure Document. The CPA did not apply retrospectively, meaning it was only applicable from the date from which it came into effect. Many franchisors had already signed their agreements with existing franchisees prior to the CPA’s effective date and therefore did not need to amend their existing agreements to be compliant with the CPA.
However, this does not mean that these franchisors are completely excused from considering the CPA Regulations. As per the abovementioned article in The Times, “Regulation 2(4) promulgated in terms of the CPA provides that ‘A franchise agreement which is renewed after the general effective date is a new franchise agreement for the purposes of sub-regulations (2) and (3)’”
This means that when renewing an agreement with franchisees, the new franchise agreement renewing the relationship needs to comply with the provisions of the CPA and its Regulations, therefore franchisors at this point will need to accordingly amend their franchise agreements.
However, it is important for these franchisors to remember that upon renewing their franchise agreements, the new agreements will need to comply with the CPA and its Regulations, with failure to do so possibly having the effect of the non-complying terms in the franchise agreement being declared void. The consequences of a void agreement could have a detrimental impact on franchisor, for example: confidentiality and restraint of trade clauses which protect the franchisor’s intellectual property being voided meaning they are unenforceable.
We would recommend that all franchisors revisit their franchise package and commission legal assistance, if needed, to ensure their franchise packages are compliant with the CPA to avoid all associated risks.
Rhoodie, L ,2014, “Franchisors, beware: ensure that your franchise agreement is compliant”, The Times, 28 March 2014, p. 3.