Corporate and Commercial

Franchisees' Protection Under the Consumer Protection Act

Posted 08 August 2023

Nolwazi Mngadi

The CPA grants consumers a multitude of rights, and is based on the principles of fairness and equity, which certainly casts a wide net when it comes to protecting the rights of franchisees. Unlike most other contracts, the franchise agreement is an exception in that a franchisee, who is deemed a consumer in terms of the CPA, can invoke fairness and equity in the event of a dispute with a franchisor, who is deemed a supplier. In most other contracts, one is bound only by the four corners of the agreement.

One such avenue of protection is section 5(6) of the CPA, which provides greater certainty as to what is regarded as a transaction. Section 5(6)(c) states that “an offer by a potential franchisor to enter into a franchise agreement with a potential franchisee” is deemed to be a transaction. This is significant for two reasons. The first is that it prevents franchisors from taking advantage of prospective franchisees even in the initial stages of the potential franchise relationship. The second is that franchisees who have sustained damages as a result of misrepresentations by franchisors have access to remedies which would otherwise not be available were it not for the CPA.                                             

Franchisors must be careful, even in the early stages, not to act unfairly or engage in any unconscionable conduct in their dealings with potential franchisees. An example of this is when a franchisor offers to enter into a franchise agreement with a potential franchisee, but requires them to incur costs for shopfitting, architects and/or engineers to prepare the premises for the franchise business.

If the franchisor then arbitrarily decides not to proceed with the transaction before the franchise agreement is executed, they could face legal action on the basis of non-compliance with section 5(6)(c). The franchisor is seen to have made a misleading representation which induced the potential franchisee to prepare the premises at their own cost. Alternatively, it could be argued that the franchisor failed to correct an apparent misapprehension on the part of a consumer, being that the two parties were to continue with the transaction. So the fact that a franchise agreement has not been signed does not exempt the franchisor from fulfilling their statutory obligation to act fairly, equitably and reasonably in their dealings with potential franchisees.

Another form of protection for franchisees exists in section 5(6)(d), which states that “a franchise agreement or an agreement supplementary to a franchise agreement” are transactions in terms of the CPA. The legislator’s intention by including supplementary agreements in this section is to prevent franchisors from unlawfully circumventing the CPA in any agreement which the franchisor purports to be directly related to the franchise agreement.

An example of a supplementary agreement is where a franchisee of a restaurant franchise signs an agreement with the franchisor for the supply of goods to the restaurant. Because this second agreement would not exist but for the franchise agreement, it is deemed to be a supplementary agreement. The same goes for where the franchisor is also the landlord of the premises from which the franchise outlet operates, and the parties entered into a lease agreement. Due to these agreements being supplementary to the franchise agreement, they are subject to fairness and equity as required by the CPA.

What qualifies as a supplementary agreement depends on each individual case’s specific circumstances. But when viewed against the provisions of the CPA that attempt to protect franchisees against exploitation from incorrect representations, it is advisable for franchisors to apply caution and establish a clear distinction and degree of independence between agreements.

The CPA expressly states and provides that the terms of a franchise agreement must be reasonable, fair and equitable, and cannot be excessively one-sided. In particular, the CPA forbids a franchisor from using pressure, undue influence or unfair tactics when negotiating or enforcing the terms of a franchise agreement. It is therefore crucial that franchisors follow the CPA to the letter in all dealings with franchisees in order to ensure that any action taken does not violate the rights of the franchisee.