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Bolstering the rights of franchisees

Recent years have seen the popularity of franchising in South Africa rise significantly, emerging as one of the key economic sectors for starting and growing a successful business.

Franchising is used as the preferred vehicle for expansion by companies active in a diverse range of markets and today approximately 25 000 franchisees in South Africa have combined annual sales of over R200 billion.

The Consumer Protection Bill which, according to the DTI will become law within six months, contains what may at first appear to be radical changes to the way franchises are run in South Africa.

Many of the provisions, however, merely concretise what has been advocated by the Franchise Association of South Africa since the early 1990s and expand on existing provisions of the Competition Act, 1998.

Franchisees are explicitly included as ‘consumers’ and are given a plethora of consumer rights including the right to equality, privacy, choice, information, disclosure, fair responsible marketing, honest dealing, fair agreements, fair value, good quality, safety and supplier accountability.

In addition franchisees are protected against undue influence or pressure; unfair tactics; and false, misleading or deceptive representations concerning material facts. 

The right to disclosure is the fundamental thrust behind the inclusion of franchisees in the Bill because the DTI found that many franchisees had been devastated financially after pooling their life savings into a franchise which was ‘sold’ to them as far more profitable than it ever would be.

The franchisor will in future be required to disclose information to the franchisee that will be set out in regulations. 

Franchisees have always had limited protection against unfair practices by franchisors in terms of the Competition Act, particularly in relation to the tying or bundling of unrelated products by a dominant franchisor or, when it comes to exclusive dealing, namely the prohibition that prevents a dominant firm from requiring or inducing a supplier or customer not to deal with a competitor.

These complaints are, however, extremely difficult to prove and furthermore the franchisor in question has to be dominant or have market power.

Accordingly, the Bill has taken these particular prohibitions in the Competition Act and applied them across the board, regardless of whether the franchisor is dominant.

The new law will prohibit bundling or tying of products by a franchisor unless the franchisor can show either that the bundling results in economic benefits for consumers or that the convenience of bundling outweighs any restriction on consumer choice.

Alternatively, the bundled goods or services must be offered separately and at individual prices.

The Bill guards the right to consumer choice even further by providing that franchisors must not require, as a supply condition or as a condition of entering into an agreement, that the franchisee purchase goods or services from the franchisor or from any other supplier.

As a result many franchisors will find themselves in a difficult position where they are no longer able to be the sole supplier of goods and services to a franchisee, unless it can be shown that the products and services are reasonably related to the brand.

There is a proviso to this section in that it is a valid defence to show that products or services that the franchisee was required to purchase from or at the direction of the franchisor are reasonably related to the branded products or services that are the subject of the franchise agreement.

It remains to be seen how closely linked to the brand ‘reasonably related’ will need to be to excuse such a requirement by a franchisor.

Franchisors should take care to ensure that products and services essential to the protection of their brand are explicitly listed in their franchise agreements to reduce any later issues regarding interpretation.

The Bill looks set to dramatically improve the lives of approximately 25 000 franchisees in South Africa.

The provisions are not as drastic as they might appear but it will certainly require a shift in mindset.

And franchisors will need to audit their franchise agreements and practices to ensure that they are compliant.

Rosalind Lake is an Associate in the Competition Law Department at Deneys Reitz Inc.