Cancellation after the cooling off period

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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.

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Deposits – Where a Franchise Agreement has been signed

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The CPA requires that a franchise agreement must be in writing and signed by or on behalf of the franchisee and must include any “prescribed information”. In regard to deposits the regulations stipulate that a franchise agreement must contain:

  • “confirmation that any deposits paid by the prospective franchisee will be deposited into a separate bank account and a description of how these deposits will be dealt with”.
  • full particulars of any initial fee payable to the franchisor on the signing of the franchise agreement, and the purpose for which it is to be applied.

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Deposits – Where No Franchise Agreement has been signed

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Where No Franchise Agreement has been signed

FASA’s Code of Ethics provides for deposits paid in anticipation of the conclusion of a franchise agreement in the following terms:

Where a Franchisor Member receives any monies from any prospective franchisee in contemplation of the conclusion of a Franchise Agreement…and, whether at the instance of the Franchisor Member or the prospective Franchisee, negotiations in connection with such contemplated agreement are terminated without an agreement being concluded: –

 

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Dealing with deposits in terms of Franchise Agreements

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It is common practice, during the course of discussions between a franchisor and a prospective franchisee, with a view to concluding a franchise agreement, for the franchisor to require the franchisee to make payment of a deposit. In such cases, the franchise agreement, or another document that the franchisor requires the franchisee to sign, in anticipation of the conclusion of a franchise agreement, often states that the deposit is “non‑refundable” in the event that a franchise agreement is not signed, or, having been signed, is cancelled shortly thereafter. There remains a significant amount of misunderstanding around the question as to whether, and when, money paid by a franchisee as a deposit may be retained by the franchisor.

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Termination of Franchise Agreement Best Practices

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Franchise Agreement – FASA Practice Note – Section 197 of the Labour Relations Act

The termination of a franchise agreement by the franchisor does not in itself constitute a transfer of a business as a going concern, even if the franchisor thereafter appoints another franchisee in the same area, and serving the same customers, as the previous franchisee.  Therefore, the new franchisee is not obliged to take over the rights and obligations of the previous franchisee towards its employees, as is required in terms of section 197 of the Labour Relations Act on the transfer of a business as a going concern.

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