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Disclosure in the franchise industry is compulsory

Franchisors who fail to adhere to the CPA requirements regarding disclosure place their company at a substantial risk and may even find themselves facing stiff fines and/or imprisonment.

Despite the fact that the Consumer Protection Act (“CPA”) came into operation on or about 1 April 2011, there are still numerous franchisors who have not prepared Disclosure Documents, or who are not furnishing their prospective franchisees with a compliant Disclosure Document.  This clearly places the franchisor at substantial risk.

Regulation 3(1) of the CPA stipulates that every franchisor must provide prospective franchisees with a Disclosure Document, dated and signed by an authorized officer of the franchisor, at least 14 days prior to the signing of the Franchise Agreement.  The Disclosure Document should, at a minimum, contain the following:

• The number of franchised outlets,
• The growth in the franchisor’s turnover, net profit and number of franchised outlets,
• A statement confirming that there have been no significant or material changes in the franchisor’s financial position since the last accounting certificate, or that the franchisor is able to pay its debts as and when they fall due, and
• Written projections of potential sales, income, gross or net profits and other financial projections.

The Disclosure Document must be accompanied by a certificate from an accounting officer or auditor certifying that:

• The franchisor is a going concern,
• To the best of his/her knowledge, the franchisor is able to meet its current and contingent liabilities,
• The franchisor is capable of meeting all its financial commitments in the ordinary course of business as they fall due, and
• The franchisor’s audited financial statements for the previous year have been drawn up:
• In accordance with South African generally accepted accounting standards,
• On the basis of accounting policies consistent with previous years, unless otherwise stated,
• In accordance with the Companies Act and other applicable laws, and
• To fairly reflect the financial position, affairs, operations and results of the franchisor.  

The Disclosure Document must also be accompanied by:

• A list of current franchisees and any franchisor-owned outlets including:
• The name of the franchisee,
• The name of its representative,
• Its physical address, and
• Contact details including email and telephone number and a clear statement that the applicant is entitled to contact any such franchisees.
• An organogram depicting the support system in place for franchisees.

Members of the Franchise Association of South Africa (FASA), however, are required to adhere to additional requirements which can be found at www.fasa.co.za.

Part C of the CPA deals with offences and penalties. Section 111 states that any person convicted of an offence in terms of the CPA may be liable:

• For a fine or imprisonment for a period not exceeding ten years, or a fine and imprisonment in the case of a contravention of section 107(1) which deals with breach of confidence. It is an offence to disclose any personal or confidential information concerning the affairs of any person obtained in carrying out any function in terms of this Act, or as a result of initiating or participating in any proceedings in terms of this Act; or
• In any other case, for a fine and/or imprisonment for a period not exceeding 12 months.

Section 112, which deals with administrative fines, states, inter alia, that the Consumer Commission Tribunal may impose an administrative fine in respect of prohibited or required conduct. The administrative fine imposed in terms of the CPA may not exceed the greater of R1-million or ten percent of the franchisor’s annual turnover for the preceding financial year.

When determining an appropriate administrative fine, the Tribunal must consider the following:

• The nature, duration, gravity and extent of the contravention,
• Any loss or damage suffered as a result of the contravention,
• The behaviour of the respondent,
• The market circumstances in which the contravention occurred,
• The level of profit derived from the contravention,
• The degree to which the respondent has cooperated with the Commission and the Tribunal, and
• Whether the respondent has previously been found in contravention of the CPA.

Very importantly, section 113 of the CPA provides for vicarious liability. This means that, in terms of the CPA, an employer or principal is jointly and severally liable with their employee or agent for any acts or omissions committed in the course of their employment or activities on behalf of the employer/principal.
As a result a franchisor is liable for any/all acts or omissions committed by an employee while carrying out the business of the franchisor.

The aforesaid penalties, fines and sanctions are of course in addition to the rights of a court, tribunal or similar forum to cancel a Franchise Agreement or amend the terms thereof, which may lead to substantial losses for the franchisor. In addition to the fines, penalties and sanctions in terms of the CPA, the franchisor may find itself at the receiving end of claims for damages as well as losses and additional obligations, or termination of Franchise Agreements. It is certainly also not in the franchisor’s best interests to place itself at risk of having its Franchise Agreements cancelled or terminated as a result of the Franchisor’s non-compliance with the disclosure requirements as stipulated by the CPA.

Written by Eugene Honey, partner Adams & Adams

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Gary Watkins

Gary Watkins

Managing Director


C: +27 (0)82 416 7712

T: +27 (0)10 035 4185 (Office)

F: +27 (0)86 689 7862

Website: www.workinfo.com
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