Franchisees get legal protection

She says the new law will not restore her faith in franchises.
April 5, 2010

Franchisees get legal protection
Mpho Sibanjoni

Johannesburg - The franchise industry is set to undergo major changes that will see franchisees begin to enjoy more protection from the arm of law.

This was revealed in a study conducted by law firm Bowman Gilfillan on the impact the Consumer Protection Act will have on franchise systems.

The act is expected to come into effect on October 24 and will apply on franchise agreements that are renewed thereafter.

The act will give them the right to sue, if they have a reasonable belief that they are subjected to unfair treatment.

According to Bowman Gilfillan director Eugene Honey, who did the research, a franchisor will not be allowed to supply goods and services at manifestly unreasonable prices, or require a franchisee to waive any rights including terms that are unjust.

"The franchisor should draw the attention of the franchisee to any limitation of liability of the franchise," said Honey.

The act makes unlawful for a franchisor to employ misleading representation concerning a material fact or fail to correct an apparent misunderstanding.

The act will come as a relief for entrepreneurs like Ophelia Biyela, for instance, who felt the support she got from a franchisor was inadequate to make her business survive.

She used to used to run two Fontana Chicken outlets, a grilled fast food franchise eatery, in Soweto.

Biyela, who late last year closed down the units, is suing Fontana for R15m.

She alleges that the franchisor did not assist her to market the enterprises, despite having had promised her to publicise the outlets.

"The R15m is the money I lost when I bought the businesses and marketed them on my own," she said.

Biyela has since opened a butchery.

She says the new law will not restore her faith in franchises.

Honey added that the act will give franchisees more options.

"With regard to the right of choice, Section 13 of the act states that a franchisor must not compel an entrepreneur who wants to buy into a franchise business to enter into agreements as a condition of selling a franchise," said Honey.

"Franchisees will no longer be forced to purchase any other goods or services from that franchisor, or even enter into any additional agreements with the same or another supplier," said Honey.

Franchisors, however, could break these rules if they prove their goods or services will bring an economic benefit to their franchisees.

It will also be unlawful for a franchisor to force a franchisee to purchase any goods or services from a designated third party.

Honey projected that the act will have a devastating impact on poorly run franchise systems.

"The act will apply to all franchise agreements and is likely to pose significant challenges to many weaker franchisors, including those which do not abide by the best franchise practices or fail to provide reasonable value to their franchisees," said Honey.

"If franchisors do not take the opportunity to refine their franchise business models and become competent by providing quality products and services promptly at reasonable prices, and generally deal with franchisees in a fair, reasonable and equitable manner, difficulties are likely to arise," he said.

An analyst from Franchize Directions, Eric Parker, was upbeat about the act.

"I think the intentions of the act are not bad because franchisees will finally be recognised as customers who should be given good service by franchisors."

"This means franchisors are going to be forced to treat the franchisees in the right way and generally improve how the franchise business in South Africa is run."

Though some franchisors offered their franchisees reasonable amount support service to help them survive, some franchisors let their outlets operate only with little support.

"In SA there are lot of franchisors who do trade names instead of business format system," said Parker.

Business format system refers to a franchisor that fully supports its franchisees by providing services like training and marketing, while a trade name system offers minimal support.

- City Press

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