It appears that even though the Consumer Protection Act, 68 of 2008 (“the CPA”), has made it a legal requirement for Franchisors to provide prospective franchisees with a written disclosure document, many franchisors continue to fall foul of that requirement and in doing so expose themselves to enormous risk.
What does the CPA require in terms of the disclosure document?
In terms of the CPA franchisors must provide prospective franchisees with a written disclosure document which:
- must contain certain information as listed in the CPA regulations;
- must be dated and signed by an authorised officer of the franchisor; and
- must be given to the prospective franchisee at least 14 days prior to the signing of the franchise agreement.
Whereas the franchise agreement sets out the rights and obligations of the franchisor and the franchisee and the operating manual contain the know-how and day to day operating procedures necessary to operate the franchise business, the disclosure document contains key information about the franchisor, its network and a particular franchise opportunity.
The disclosure document is much more than a mere company profile in that it must disclose at the very minimum the information as provided for in the CPA so as to ensure that the prospective franchisee is well informed about every aspect of the business relationship that will be established with the franchisor and is able to make an educated decision before concluding the franchise agreement.
What happens if franchisors don’t comply?
In terms of the CPA franchisors were granted until the 30th September 2011 to ensure their legal documents, including their disclosure documents complied with the CPA. Since the expiry of that date failure to comply with the CPA constitutes prohibited conduct and/or unconscionable conduct. In terms of the CPA there are substantial penalties for those that engage in such conduct. An aggrieved franchisee can lodge a complaint with the National Consumer Commission which may refer the matter to the National Consumer Tribunal. Should the Tribunal find that the franchisor did engage in prohibited conduct it may impose an administrative fine of 10% of the franchisor’s annual turnover or R1 000 000 whichever is the greater.
In the event that a franchisor failed to disclose where there was a duty to disclose, it may be construed as unconscionable conduct in terms of the CPA and the franchisee would be entitled to sue the franchisor directly in the relevant High Court of South Africa.
Article by Pieter Swanepoel (Director – PAS Attorneys)
This article was produced for information purposes only and does not constitute formal legal advice. Neither Pieter Swanepoel nor PAS Attorneys Inc. is liable for any losses suffered as a result of reliance upon information contained in this article.