Deposits - Where No Franchise Agreement has been signed - Franchise Association South Africa

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: –

The Franchisor Member shall refund the amount it has received forthwith, and not later than 30 (thirty) days after having received a written request from the prospective Franchisee; and

The Franchisor may not retain any part of the amount it has received, save to cover reasonable out-of pocket expenses that it has incurred in contemplation of the conclusion of a franchise agreement…“

The CPA contains various provisions relating to payment of deposits.

None of these expressly prohibits a franchisor from retaining a deposit paid in anticipation of entering into a franchise agreement. However:

Section 65(2) prohibits the franchisor from merging a deposit with his own funds and obliges him to treat it as a separate fund that is not his;
A provision that entitles the franchisor to retain a deposit would be prohibited In terms of section 51(1), except to the extent that the CPA permits it.
Section 48(1) prohibits a supplier (including a franchisor) must not offer or enter into an agreement to supply any goods or services on terms that are “unfair, unreasonable or unjust”, and may not require a consumer (including a franchisee) to waive any right, assume any obligation, or waive any liability of the supplier, on terms that are unfair, unreasonable or unjust. Section 48(2) of the CPA provides that, a transaction or term of a transaction is unfair, unreasonable or unjust if it is excessively one‑sided in favour of any person other than the consumer or so adverse to the consumer as to be inequitable. According to the regulations in terms of the CPA, a term in a “consumer agreement” (which includes a franchise agreement) is presumed to be unfair (and is therefore prohibited in terms of sections 48(1) and 48(2)) if it allows the supplier/franchisor to retain a payment by the consumer/franchisee where the consumer/franchisee fails to conclude or perform the agreement, without giving the consumer/franchisee the right to be compensated in the same amount if the supplier/franchisor fails to conclude or perform the agreement.

Having regard to all of these provisions, a term in an agreement that a deposit paid by a prospective franchisee is non‑refundable, would seem to fall within the purview of this regulation. It is, therefore, presumed to be unfair and, in terms of section 48(2), may not be included in a consumer agreement, unless it is at least related to some services rendered by the franchisor and represents a fair charge for the services concerned. Details of the services and the way in which the charge is calculated, should be clearly stipulated, to minimise the likelihood of disputes in this regard.