Franchisees are always consumers
Franchising is the one area where the R2 million threshold never helps the supplier. The Act deems franchise dealings to be supplier–consumer transactions, and applies to them whatever the size of the franchisee — the point we set out under does the CPA apply? Section 7 then sets the requirements every franchise agreement must meet.
“Despite subsection (2)(b), this Act applies to a transaction contemplated in subsection (6)(b) to (e) irrespective of whether the size of the juristic person falls above or below the threshold determined in terms of section 6.”
Form: writing, plain language, prescribed contents
Section 7(1) sets three baseline requirements for the agreement itself.
“A franchise agreement must— (a) be in writing and signed by or on behalf of the franchisee; (b) include any prescribed information, or address any prescribed categories of information; and (c) comply with the requirements of section 22.”
Section 22 is the plain-language requirement; the “prescribed information” is the long list in regulation 2 set out below. A clause that conflicts with the regulations, or strips the franchisee of CPA rights, is void to the extent of the conflict (reg 2(2)(e)).
The 10-business-day cooling-off (section 7(2))
Every franchisee gets a statutory cooling-off period — and it has to be on the face of the agreement.
“A franchisee may cancel a franchise agreement without cost or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor.”
Regulation 2 then requires that exact provision to be reproduced at the very top of the first page, so a prospective franchisee cannot miss it.
“Every franchise agreement must contain the exact text of section 7(2) of the Act at the top of the first page of the franchise agreement, together with a reference of the section and the Act.”
A franchisor therefore cannot recover set-up costs from a franchisee who cancels within the 10-day window — the cancellation is “without cost or penalty”.
The regulation 2 prescribed contents
Regulation 2 requires clauses that prevent over-charging and unreasonable conduct, that disclose any benefits the franchisor receives, and a long list of minimum contents. The anti-overreach clauses come first.
“(b) A franchise agreement must contain provisions which prevent— (i) unreasonable or overvaluation of fees, prices or other direct or indirect consideration; (ii) conduct which is unnecessary or unreasonable in relation to the risks to be incurred by one party; and (iii) conduct that is not reasonably necessary for the protection of the legitimate business interests of the franchisor, franchisee or franchise system. (c) A franchise agreement must contain a clause informing a franchisor that he, she or it is not entitled to any undisclosed direct or indirect benefit or compensation from suppliers to its franchisees or the franchise system, unless the fact thereof is disclosed in writing…”
The required minimum contents then run to a detailed list — the goods or services, each party’s obligations, the franchise system, fees and consideration, territory, intellectual property, training, renewal and termination, and the franchisee’s full financial obligations.
“A franchise agreement must as a minimum contain the following specific information— (a) the name and description of the types of goods or services which the franchisee is entitled to provide, produce, render or sell; (b) the obligations of the franchisor; (c) the obligations of the franchisee; (d) a description of the applicable franchise business system; (e) the direct or indirect consideration payable by the franchisee to the franchisor…”
The 14-day disclosure document (regulation 3)
Before any agreement is signed, the franchisor owes the prospective franchisee a disclosure document — and it must arrive in good time.
“Every franchisor must provide a prospective franchisee with a disclosure document, dated and signed by an authorised officer of the franchisor, at least 14 days prior to the signing of a franchise agreement, which as a minimum must contain— (a) the number of individual outlets franchised by the franchisor; (b) the growth of the franchisor’s turnover, net profit and the number of individual outlets…; … (d) written projections in respect of levels of potential sales, income, gross or net profits… with particulars of the assumptions upon which these representations are made.”
The disclosure document must be backed by a certificate from an accountant or auditor confirming the franchisor’s financial viability — in short, that it is a going concern.
“The disclosure document… must be accompanied by a certificate on an official letterhead from a person eligible in law to be registered as the accounting officer of a close corporation, or the auditor of a company, as the case may be, certifying that— (a) the business of the franchisor is a going concern; (b) to the best of his or her knowledge the franchisor is able to meet its current and contingent liabilities; (c) the franchisor is capable of meeting all of its financial commitments in the ordinary course of business as they fall due…”
Building the 14-day disclosure timeline, the section 7(2) notice at the top of page 1, and all of the regulation 2 contents into your franchising process is what keeps a franchise agreement enforceable — non-compliant agreements are exposed. For the unfair-terms rules that apply to the agreement itself, see unfair contract terms and the grey list.