A franchise agreement may be cancelled after the ten day cooling off period has expired, if:
- the agreement itself is invalid, or
- where one of the parties has been induced to enter into it by a misrepresentation by the other, or
- where one of the parties has committed a material breach of the agreement.
If a franchise agreement contravenes, or does not comply with, the requirements of the CPA or the regulations, including the stipulations of the regulations in respect of deposits and initial payments, the agreement will be invalid, either in total or to the extent of the contravention. In addition, the provisions of sections 48(1), 51(1) and 65(2), dealt with above, will apply in the same way as where no agreement is concluded, or where the agreement is cancelled during the cooling off period. In other words, a franchise agreement may not provide, without qualification, for payment of a non-refundable deposit.
FASA appreciates that neither party wants to be committed to a franchise relationship before doing its homework, and assessing the viability of the prospective business. The franchisor is entitled to require a deposit in anticipation of these expenses, both in connection with the initial investigations and in assisting the franchisee in setting up his business. On the other hand, the franchisee should not be expected to forfeit a large sum of money in anticipation of services he may never receive.
FASA recommends, in order for both parties protect themselves against these risks, that:
- the contractual documents (both the franchise agreement and any preliminary ancillary agreements) are drafted so as clearly to set out the intentions and expectations of both parties. Importantly, the agreements should set out clearly for what purposes any deposits or initial fees are to be used.
- Ideally, the agreement should be signed, and the “cooling off period” should be allowed to expire, before the franchisor incurs any expenses for which he expects to be reimbursed.
- Where this is not practically possible the agreement should be made conditional upon the completion of the preliminary research and formalities and the obtaining of necessary finance, or a “pre-franchise agreement” can be concluded. The franchise or pre-franchise agreement should stipulate:
- That a deposit will be paid and the amount to be paid;
- The processes that will be undertaken by the franchisor and the matters in regard to which the franchisor will have to satisfy itself before the franchise agreement becomes unconditional, or before a franchise agreement is signed;
- The costs that the franchisor will incur in this process, or at least how they will be calculated; and
- An acknowledgement by the franchisee that, if the agreement is not concluded or if it is cancelled by the franchisee during the cooling off period, the agreed amount of the expenses incurred by the franchisor will be deducted from the deposit when it is refunded.
For further information contact Ian Jacobsberg, Partner at Hogal Lovells (South Africa) Ltd – Tel: 011 286 6900 or email firstname.lastname@example.org