South Africa Sets Out Requirements for Franchise Agreements, Disclosure Documents

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

South Africa has adopted franchise regulations that became effective April 1, 2011. The regulations set out detailed requirements that must be contained in franchise agreements and in disclosure documents, which must be provided to a prospective franchisee at least 14 days prior to the signing of a franchise agreement.

Among the numerous requirements, “a franchise agreement must contain provisions which prevent: (i) unreasonable or overevaluation 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 business interests of the franchisor, franchisee or franchise system.”

Numerous items of specific information are required, such as the obligations of each party, the duration of terms and renewal, and the particulars of the initial training and assistance to be provided the franchisee, among many others.

The disclosure document must contain the number of outlets franchised by the franchisor; the growth of the franchisor’s turnover, net profit, and the number of outlets franchised in the prior year; a statement on the franchisor’s financial position; and written projections of potential sales, income, or profits.

The regulations appear at CCH Business Franchise Guide ¶7246.

Focus on Franchising

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

News and notes on franchising and distribution topics:

□ Manitoba has proposed a franchise disclosure and relationship statute that would require franchisors to make presale disclosures to prospective franchisees, prohibit presale misrepresentations, and impose a duty of good faith and fair dealing on parties to franchise agreements. The proposal would also guarantee franchisees the right to associate and a right of rescission. As with franchise legislation enacted by Prince Edward Island and New Brunswick within the past five years, the Manitoba bill is based on the Uniform Franchises Act (CCH Business Franchise Guide ¶7021), a model law that was adopted by the Uniform Law Conference of Canada. Text of the Manitoba proposal appears at CCH Business Franchise Guide ¶14,378.


□ The ABA Forum on Franchising has announced the program for its 33rd annual Forum, to be held October 13-15, 2010 at the Hotel Del Coronado, San Diego, Calfornia. “Franchising: Some Like It Hot” will feature two half-day intensive workshops on Wednesday, October 13, followed by the two-day regular program, consisting of two plenary sessions and 24 workshops. The plenary sessions are “Strategic and Tactical Decision- Making: What Do Your Peers Think of Your Decisions” (presented by Kerry L. Bundy, Dr. Melissa M. Gomez, Harris J. Chernow, and Joesph Schumacher) and the Annual Franchise and Distribution Law Developments program (presented by Bethany L. Appleby and William K. Whitner). Co-Chairs of the meeting are Deb Coldwell and Kathy Kotel. Further information—and the meeting brochure—appear here at the Forum on Franchising website.

□ Provisions of South Africa’s Consumer Protection Act (Act No. 68 of 2008) that apply to franchise agreements came into effect on April 24, 2010. The Act requires franchise agreements to be in writing and signed by or on behalf of the franchisee. The agreement must include any prescribed information and comply with the Act’s plain language requirements. Regulations detailing franchise disclosure requirements are expected to be promulgated in the near future, but are not in the Act itself. The Act authorizes franchisees to cancel a franchise agreement without cost or penalty within ten business days after the agreement’s execution by the provision of written notice to the franchisor. Full text of the Consumer Protection Act appears at CCH Business Franchise Guide ¶7245. According to an alert posted by DLA Piper, “there has been some confusion about the scope of South Africa’s Consumer Protection Act (whether the whole Act or only parts of the Act would apply to franchising) . . . It is important to keep in mind that the Act, while imposing some consumer protection-type requirements in franchise transactions in some places (e.g., the right to be treated equally), specifically excludes franchise transactions from other provisions that apply to consumer transactions (e.g., the right with respect to the goods or services supplied).” Alert authors Philip F. Zeidman and Tao Xu advise franchisors to “carefully examine the Act and consult with counsel to determine which provisions are applicable to a franchise transaction.”

Focus on Franchising

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

News and notes on franchising and distribution topics:

□ A provision of the recently-enacted health care reform legislation, the Patient Protection and Affordable Care Act, requires restaurants that are part of a chain with 20 or more locations doing business under the same name to disclose nutritional information. The new law requires restaurants to display the number of calories contained in standard menu items (1) on the menu listing the item for sale, (2) in a written form available on the premises upon consumer request, and (3) on menu boards. Establishments will be required to display a succinct statement concerning suggested daily caloric intake, as specified by the Secretary of Health and Human Services by regulation, to enable the public to understand the significance of the provided nutrition information. Compliance with the law’s restaurant labeling provisions, which are reported at CCH Business Franchise Guide ¶14,357, will be required upon completion of implementing regulations by the Food and Drug Administration (FDA). The FDA is required to publish proposed regulations within one year of the law’s enactment.

□ On April 20, the European Commission (EC) approved a revised Block Exemption Regulation and Guidelines on supply and distribution agreements, including franchise and other types of vertical agreements. Block exemptions create safe harbors for categories of agreements, relieving the contracting parties from having to individually analyze the legality of those agreements under the general EC rules regarding vertical agreements. As revised, manufacturers remained free to decide how to distribute their products. But in order to benefit from the block exemption, they can not have a market share in excess of 30% and their distribution or supply agreements must not contain any hardcore restrictions of competition, such as fixing the resale price or re-creating barriers to the European Union's single market. The new rules, which come into force in June, also specifically addresses the question of online sales. Once a distributor is authrorized, it must be fee to sell on a website as well as in their traditional shops and physical points of sales. Further details about the new block exemption can be found here on the Europa website of the European Commission. Text of the block exemption appears here.

□ South Africa has adopted a new franchise law as part of its Consumer Protection Act 68 of 2008, according to Field Fisher Waterhouse LLP. Key features of the initial provisions of the Act, which became effective on April 24, are (1) a mandatory 10-day “cooling off” period after the signing of a franchise agreement—during which time a franchisee may withdraw without incurring any liability and (2) a requirement that all franchise agreements be in writing and signed by franchisees. The definition of “franchise agreement” is broad and includes master franchise agreements and other arrangements (such as reseller agreements) that normally are not considered franchises. The main sections of the Act—which reportedly will extend fundamental consumer rights to franchisees—is expected to become effective on October 24, 2010. An article on the new law appears here on the Field Fisher Waterhouse website.