Legal interpretation of the advertising/marketing fund administration
A franchisor asked FASA’s Help Line to explain the CPA’s stipulation that the marketing fund must be a separate account and how that can be practically interpreted.
Question from a franchisor:
From a practical perspective our marketing contributions are in a separate accounting account/cost centre, but not in a separate bank account. The reasons are purely practical and an effort to save banking fees and also to make the life of franchisees easier in paying everything into one bank account, although they are invoiced separately.
Answer: from Ian Jacobsberg, Director at Tabacks Attorneys:
The Regulations to the CPA provide that “the franchise agreement must contain clauses informing the franchisee … [that] any contribution to [an advertising, marketing or similar fund] will be deposited into a separate bank account and only used for purposes of the fund”. Thus, on a strict reading, the Regulations do not say directly that the franchisees’ contributions must be paid into a separate bank account; they only say that the franchisor must include in the franchise agreement an undertaking to do so.
Of course, if the franchisor does include this undertaking, as required by the CPA, and the money is not paid into a separate account, the franchisor will be in breach of the agreement. This might entitle a franchisee that becomes aware of the breach to cancel the agreement. If the franchisor does not include the undertaking, the agreement will not comply with the CPA and a franchisee might be able to argue that the agreement is invalid on that basis.
While the franchisor’s intention may be to assist its franchisees, it is doubtful that it could avoid the strict legal requirements for that reason. Regarding the second concern (“make the life of franchisees easier in paying everything into one bank account, although they are invoiced separately”), the Regulations do not say that the franchisees must pay the contributions into a separate account, but only that the contributions must be paid into a separate account; if the franchisees’ convenience is the primary concern, the franchisor may receive all the franchisees’ payments into one account but then transfer the marketing contributions into another dedicated account. It is not clear whether this will have an effect on the bank charges; this will depend on how and on what types of transactions the charges are levied.
As a matter of practical reality, franchisees may not object to the marketing fund contribution being retained in the same account as their other payments if they are given full and transparent insight into the marketing fund and its accounts, as required by the Regulations, but it would not strictly be legally compliant.
Ian is a practicing attorney with over thirty years’ post-admission experience in the areas of competition, consumer and commercial regulatory law as well as corporate, commercial and other business-related law. His expertise and experience includes data protection and processing, mergers, acquisitions and sales of business, competition law, economic regulation (including international trade, data protection, life sciences, food and beverage and consumer law), commercial exploitation of intellectual property, franchising and licensing. He is recognised as one of the leading practitioners in South Africa in the field of franchise law, and has served as an executive committee member of the franchise association of South Africa for several years, and as its chairman in 2014/15. Ian enjoys working with entrepreneurs and innovators and finds the problem-solving aspects of legal practice especially fulfilling.
