The Consumer Protection Act (CPA) in South Africa aims to protect consumers from unfair business practices and empower them to make informed decisions. This includes specific protections for franchisees, recognizing the unique challenges they face.
The South African law of obligations is ‘mixed’, albeit in rather unequal parts. Most of its general principles derive from the civil law tradition, but there have also been notable common law influences, and, more recently, signs that indigenous customary law may enhance its further development. The CPA was crucial to improve the lot of millions of consumers, most of whom were the victims of a system that perpetuated severe inequality.
The Act establishes fundamental consumer rights, including the right to fair disclosure, privacy, choice, and fair marketing and contract terms. It regulates transactions between suppliers and consumers involving the supply of goods or services in South Africa, prohibiting unfair, misleading and discriminatory business practices.
Franchise Agreements and the CPA
The CPA expressly governs franchise agreements, and treats the franchisee as a consumer under a franchise agreement, irrespective of whether or not the franchisee is a natural person or juristic entity, and irrespective of the size of the franchisee’s asset value or annual turnover. The CPA treats the franchisors as suppliers of goods and services to the franchisee, and records various obligations to which they must adhere. As such, understanding how the CPA governs franchise agreements is of vital importance.
Franchise agreements govern the relationship between a franchisor and a franchisee, and record their different roles and responsibilities in those capacities. A franchisee owns his franchised business and its infrastructure, but must operate the franchised business under the terms of the franchise agreement, including its operational guidelines. As such, a franchisee’s position as a business owner is markedly different to that of other business owners who are not subject to such rules and oversight, or time limitations on their business.
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Franchisee agreements are often presented by a franchisor to the franchisee as a standard form contract which is not open to much amendment for a specific franchisee. In addition, the franchise agreement often places onerous obligations on the franchisee because the franchisor is seeking to protect the goodwill of the franchise chain for his and the other franchisees’ benefit.
For the various reasons mentioned above, some protection of franchisees through legislation is understood to be necessary.
Regulation of the Franchise Industry in South Africa
In the late 1990s the South African government recognised the important role that franchising could play in the economy, and established a task team to investigate how the industry could be regulated. Although the task team recommended that specific legislation be enacted to govern the franchise industry, the recommendation was never implemented. Instead, franchise agreements were specifically brought under the scope of protection of the CPA.
When considering what governs franchise agreements, franchise industry codes must also be considered. Currently, the franchise industry is subject to self-regulation under certain codes. However, in terms of section 82 of the CPA, the Minister may prescribe a franchise industry code on the recommendation of the Commissioner of the National Consumer Commission.
The potential of the provisions of section 48 to influence the content of franchise agreements significantly and within a relatively short period of time s... The Consumer Protection Act aims to promote fair, open and ethical business practice. It addresses all aspects necessary to protect the consumer from business transactions that take place.
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Unfair Contract Terms and the CPA
Franchisees, in their capacity as consumers under franchise agreements, enjoy most of the protections recorded in Chapter 2 of the CPA which is entitled Fundamental Consumer Rights. Part G of Chapter 2 specifically deals with unfair contracts terms and is entitled ‘right to fair, just and reasonable terms and conditions’.
Within Part G of Chapter 2, only the following sections apply to franchise agreements: section 48 (entitled ‘Unfair, unreasonable or unjust contract terms’, and which generally prohibits such terms), section 51 (entitled ‘Prohibited transactions agreements, terms and conditions’ which lists certain prohibited terms) and section 52 (entitled ‘Power of court to ensure fair and just conduct, terms and conditions’).
Section 48(1), in summary, prohibits the franchisor from:
- charging fees to franchisees at prices which are unfair, unjust or unreasonable;
- concluding a franchise agreement on terms that are unfair, unjust or unreasonable; or
- requiring the franchisee to waive any rights, assume any obligation or waive any liability of the franchisor on terms that are unfair, unjust or unreasonable.
Section 48(2) contains guidelines which the courts can take into account when determining if a term of, or an entire, franchise agreement, is unfair, unjust or unreasonable. Under this sub-section, the term or the franchise agreement will be presumed to be unfair, unjust or unreasonable if:
- it is excessively one-sided in favour of the franchisor;
- the terms of the franchise agreement are so adverse as to be inequitable;
- the franchisees relied on false, misleading or deceptive representations or statements of opinion provided by or on behalf of franchisors, to their detriment; and
- the franchise agreements contained certain terms which should have been drawn to the franchisees’ attention and which were not.
In considering whether a term or a franchise agreement is unfair under the terms of the CPA, it has been recommended that courts take into account how other jurisdictions have formulated the concept of unfairness. Consideration of appropriate foreign and international law when interpreting or applying the CPA is specifically allowed in section 2(2) of it.
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It is also likely that courts will take into account the difference between negotiated, non-negotiated and core terms in a franchise agreement when they are determining fairness, and pronounce less easily on negotiated terms being unfair (although the CPA allows the courts to pronounce on negotiated terms). This is because the franchisee as a consumer would know what the negotiated and core terms are, and could have shopped around for better terms, negotiated those terms and/or refused them.
Who is classified as a promoter? The term ‘promoter’ is defined widely in Section 36(1)(c) of the CPA, and includes not only a person who directly or indirectly promotes, sponsors, organises or conducts a promotional competition, but a person for whose benefit such competition is promoted, sponsored, organised or conducted.
Section 36(3)(a) of the CPA stipulates that other than the reasonable cost of posting and otherwise transmitting an entry form or device a promoter must not require a participant to pay consideration to partake in the competition. Section 36(4) goes on to explain that a promoter is regarded as having received consideration in two instances. Firstly, if a participant has to pay for access to the competition or for a device by which a person may participate in the competition.
Section 36(7) to (9) of the CPA makes it clear that, inter alia, the right to participate in a promotional competition is fully vested in a participant immediately upon them complying with the conditions required by the specific competition. In accordance with section 36(11)(b) of the CPA, the Minister has prescribed a lengthy list of minimum standards for keeping records associated with the promotional competition.
The CPA casts a wide net in how it regulates promotional competitions.
Agent mandates are to be in writing and signed with the agent on behalf of the franchisee or property seller. “Direct marketing is an advertising strategy that relies on the individual distribution of a sales pitch to potential customers. Estate agents may not use unethical marketing techniques. They are to remain impartial and not use physical force, manipulation, harassment or clandestine tactics to finalise the deal.
The buyer who purchases his property off plan from a developer, may at any time cancel the transaction. These contracts specify that these agreements may not run for longer than 24 months. Buyers are afforded protection in terms of the Consumer Protection Act with regard to the time, place and cost of delivery and how risk is allocated.
If that is not done, the transfer is at the seller’s liability. Property brokering businesses must insert a detailed clause specifying the condition of the property, dealing with both patent and latent defects. Attorneys recommend that sellers and their agents obtain detailed reports on all patent defects from home inspectors and attach these to deeds of sale. The consumer must be satisfied with the goods delivered without defect.
Ultimately, the legislature may be compelled to amend section 69 and provide the consumer greater freedom in terms of the choice of institutions to approach for relief under the CPA.
Table summarizing key provisions of the CPA relevant to Franchise Agreements:
| Section | Description |
|---|---|
| Section 48 | Prohibits unfair, unreasonable, or unjust contract terms. |
| Section 51 | Lists prohibited terms in franchise agreements. |
| Section 52 | Grants the court power to ensure fair and just conduct, terms, and conditions. |
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