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Pitfalls And Difficulties With The CPA

Pitfalls And Difficulties With The CPA

The Consumer Protection Act (“CPA”) came into operation on or about 1 April 2011. As you are aware, this substantially changed the legal franchising landscape in South Africa in that we now have the franchise relationship regulated by legislation.

There have been a number of difficulties and pitfalls with the CPA and certain of these are briefly dealt with below.

Firstly with regard to the definition of a “Franchise Agreement”, this is fairly broad and reads as follows:

“Franchise agreement” means an agreement between two parties, being the franchisor and franchisee, respectively –

  1. (a)  in which, for consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business within all or a specific part of the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor;
  2. (b)  under which the operation of the business of the franchisee will be substantially or materially associated with advertising schemes or programmes or one or more trade marks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor; and
  3. (c)  that governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor.”

The definition is extremely broad and this has resulted in similar agreements such as license, authorised dealer, agency and distribution agreements, which is possibly unintended, being included in the ambit of the CPA. The consequence is item that any such agreements falling within the definition need to comply with the CPA including Regulations 2 and 3.

Various points including technical points have been raised to attempt to avoid the provisions of the CPA applying to a relevant agreement. By way of example, the issue of “for consideration paid, or to be paid” has been identified as a possible technical point to avoid inclusion, on the basis that no consideration has been, or will be paid. It may be that no particular upfront or ongoing royalties may be paid in terms of certain agreements, where, for example, goods are continually purchased from the proprietor of the brand. In this instance, it could certainly be argued that the payments for the products to the proprietor of the brand include payments for the use of the intellectual property. This as well as other technical points, will have to be considered on their own merits in each instance depending upon the terms of the written agreement between the parties and the actual arrangement.

Section 14 deals with expiry and renewal of fix term agreements. Concerns have been raised regarding the applicability of this section to franchise agreement. The section provides inter alia, that contracts can be terminate simply on notice. It should however be noted that this section relates to consumer agreements and in the definition of a “consumer agreement”, it is specifically stated that this “means an agreement between a supplier and a consumer other than a franchise agreement”.

Section 5 deals with the application of the Act. I have been advised on a number of occasions, for example, if the specific franchised business falls above the threshold, then the CPA does not apply. In relation to a consumer juristic person (corporate entity), other than franchises, if the business is greater than the current monetary threshold determined by the Minister from time to time then the CPA will not be applicable. The CPA is intended to primarily apply to individuals and small businesses.

It should however be noted that section 5(6) provides that “for greater certainly, the following arrangements must be regarded as a transaction between a supplier and consumer, within the meaning of this Act:

  1. (a)  …
  2. (b)  a solicitation of offers to enter into a franchise agreement;
  3. (c)  an offer by a potential franchisor to enter into a franchise agreement with a potential franchisee;
  4. (d)  a franchise agreement or an agreement supplementary to a franchise agreement; and
  5. (e)  the supply of any goods or services to a franchisee in terms of a franchise agreement.”

Section 5(7) further provides that the CPA “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.” The consequence of these provisions is that it is clear that if an agreement or arrangement falls within the ambit of the definition of a “franchise agreement”, the CPA applies.

With regard to Regulation 2 of the CPA, it seems that there is little difficulty with Regulation 2(2)(a) with the statement to be included at the top of the first page of the franchise agreement. However, with regard to Regulation (2)(b), there appear to have been some issues. This Regulation reads as follows:

“(2)(b) A franchise agreement must contain provisions which prevent –

  1. (i)  unreasonable or overvaluation of fees, prices or other direct orindirect consideration;
  2. (ii)  conduct which is unnecessary or unreasonable in relation to the risks to be incurred by one party; and
  3. (iii)  conduct that is not reasonably necessary for the protection of the legitimate business interests of the franchisor, franchisee or franchise system.”

It is specifically stated that the agreement must contain provisions which prevent the issues specified. It therefore seems that there is no alternative but to include this wording in the agreement itself, unless the provisions are essentially otherwise included.

Seemingly, Regulation 2(2)(c) also provides that 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 with an explanation of how it will be applied.” This is fairly clear and it is suggested that such a clause should be specifically included as stated.

Regulation 2(3) provides that a “franchise agreement must as minimum contain the following specific information …”. It seems that some information or at least the essentials of the relevant requirements need to be included, but the extent of the detail is not specified, leaving some uncertainty. The provisions are fairly clear and simply stated. It is clear what needs to be dealt with. Nevertheless there is some duplication in that in a number of instances the same requirements seem to be included in different ways in different sub-regulations.

It is to be noted that the precise good and/or services which are to be sold and/or rendered are often not included in any detail in agreements. Seemingly the intellectual property which is being licensed to the franchisee including predominantly Trade Marks, Copyrights and Know-How are also often not included. By way of example Regulation 2(2)(l) and (o), as well as (v) all deal with renewal. Similarly with regard with to payments, Regulations 2(2)(b)(i), (e) and (y)(i), (ii), (iii), (iv), (v), (vii) and (viii) (aa), (bb) and (dd), deal with payments.

There has also been some confusion or a lack of clarity around section 13 which deals with a consumer’s right to select suppliers.

“13 Consumer’s right to select suppliers

  1. (1)  A supplier must not require, as a condition of offering to supply or supplying any goods or services, or as a condition of entering into an agreement or transaction, that the consumer must –
    1. (a)  purchase any other particular goods or services from that supplier;
    2. (b)  enter into an additional agreement or transaction with the same supplier or a designated third party ; or
    3. (c)  agree to purchase any particular goods or services from a designated third party,unless the supplier –
    1. (i)  can show that the convenience to the consumer in having those goods or services bundled outweighs the limitation of the consumer’s right to choice;
    2. (ii)  can show that the bundling of those goods or services results in economic benefit for consumer; or
    3. (iii)  offers bundled goods or services separately and at individual prices.
  2. (2)  Except to the extent that any other law provides otherwise, in any transaction between a franchisee and franchisor in terms of their franchise agreement, it is a defence to an allegation that the franchisor, as supplier to the franchisee, has contravened this section if any goods 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.”

Thus, if the supplier can essentially show that the convenience to the consumer in having those goods or services bundled, outweighs the limitation of the consumer’s right to choice, the relevant goods or services can be excluded. The same is applicable if the supplier can show that the bundling of those goods or services results in an economic benefit for consumers, or if the supplier offers bundled goods or services separately and at individual prices. The key issues appear to be around a convenience to the consumer and an economic benefit to the consumer. These can certainly be very broad and all encompassing terms. The franchisor is therefore advised to prepare broad and all encompassing justifications under the heading of convenience to the consumer and economic benefit to the consumer.

Further, there is a defence available to the franchisor. In the event there is an allegation that the franchisor has contravened this section, if the franchisor is able to show that the relevant goods or services “are reasonably related to the branded products or services that are the subject of franchise agreement”, difficulties will be avoided. The phrase “reasonably related to the branded products or services” is certainly not entirely clear. The phrase “reasonably related” is not specific and nor are the concepts of “branded products” or “branded services”. There is certainly a range in some franchised outlets of the products sold and services rendered. Certain products may be very close to and core to brand of that franchise, whereas other products also sold by that specific franchised outlet may be found in most similar or competing business, such as certain leading branded beverages. Franchisors are therefore advised to prepare broad justifications in relation to their products and/or services so as to, wherever possible and appropriate include any such products and/or services within this defence, failing which the franchisor will not be able to insist that the relevant products or services be obtained from it or nominated or approved suppliers.

It is not clear when opportunities will arise to make representations regarding the updating of, at least the Regulations and possibly the Act. It is however envisaged that the CPA and its Regulations will be in operation for a few years before any opportunity will arise to update the Act and/or the Regulations.

Eugene Honey

eugene.honey@adamsadams.co.za