Franchise Agreements, we all know what they are, but do we really know how they work? We all know the famous Franchise Agreements namely: McDonalds, KFC and Burger King to name a few. However, what makes these Franchise Agreements so successful.
Previously, South Africa did not have legislation regulating Franchise Agreements. The Franchise Association of Southern Africa was created in 1979 to fill the gap. However, since 2012, the Consumer Protection Act 68 of 2008 (hereinafter “the CPA”) changed the position. In addition, various provisions of the Competition Act 89 of 1998 (hereinafter “the Competition Act”), the Trademarks Act 194 of 1993 and the Copyright Act 98 of 1978 (hereinafter “the Copyright Act”) applies and needs be considered.
Important factors to consider
The CPA requires that the Franchise Agreement be reduced to in writing and that it sets out the Terms and Conditions of the Franchise Arrangement. In terms of the CPA, the Franchisee is viewed as a consumer and therefore has right to assess certain documents when considering a franchise opportunity within 14 (fourteen) days prior to signing the Franchise Agreement. Furthermore, the Franchisee has the right to cancel the Franchise Agreement within 10 (ten) business days without a penalty, this is referred to as the “cooling-off” period. Notably the most impactful development from the CPA’s introduction is that Franchisors are not able to blindly compel Franchisees to buy from their suppliers or to dictate terms unilaterally anymore, which is in line with the principles of fair competition.
The Competition Act states that there must be “a balance between the protection of the franchise system and the interest of Franchisees and the public in ensuring adequate competition.” To comply with the Competition Act and to avoid anti-competitive conduct the Franchise Agreement should set out and regulate the resale price, jurisdictional restrictions, exclusive dealing and tying (to name a few). As such, supply as well as the business model as a whole need be carefully considered and constructed.
However, this does not leave the Franchisor without protection. The Franchisor may require that the Franchisee signs a non-disclosure agreement (“NDA”). This agreement along with the protection afforded by the Trademarks’ Act aims to protect the Franchisor’s intellectual property as well as a copyright in terms of the Copyright Act. Furthermore, it is the Franchisor that proposes the Franchise Agreement and after all, it is in the best interests of both parties that the Franchisee is provided with all the necessary information to the Franchisee to enable him/her to operate the Franchise successfully. This includes funding agreements, operations manuals and in some instances assistance to help enter into a lease agreement for the premises. Another important development with the introduction of the CPA, is that Franchise Agreements are to be written in plain language so that anyone without a legal background can understand the contents.
Considering the above, it is vital that Franchise Agreements contain all the necessary detail. It would naturally follow that these are not simple agreements and should be professionally constructed to deal with aspects such as the intellectual property issues, operational details and financial arrangements. The Franchise Agreement should further include the initial and ongoing rights and obligations of the Franchisor and Franchisee and what would happen once the Franchise Agreement ends or is otherwise terminated.
The day to day running and overall operational aspects are generally dealt with in manuals. Franchisees are to acquaint themselves not only with the agreement but also the manual, even as they are updated from time to time.
Franchise Agreements are no simple matter. It is crucial and in the best interests of both parties that these are correctly constructed. As such, professional advice is crucial. We recommend that you contact a professional at SchoemanLaw for all your advisory and drafting needs.
© Beata Warnich – Schoemanlaw Inc. – 2018