FRANCHISING UPDATEEugene Honey

Local Developments

1. Consumer Protection Act and Regulations (“CPA”) came into operation on 1 April 2011

2. Regulation 2: Contents of Franchise Agreement – sets out approximately 50 points which must be included or dealt with in a Franchise Agreement

3. Regulation 3: Contents of a Disclosure Document – sets out what must be included in a Disclosure Document, which must be furnished to a Franchisee in advance of signature of the Agreement

Definition of Franchise Agreement “Franchise agreement” means an agreement between two parties, being the franchisor and franchisee, respectively – a) in which, for consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business within all or a specific part of the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor;b) under which the operation of the business of the franchisee will be substantially or materially associated with advertising schemes or programmes or one or more trade marks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor; andc) that governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor.”

Definition of a Franchise Agreement1. The Definition is broad and includes agreements and

arrangements in the nature of a franchise, license, distribution, agency and any similar agreement.

2. Includes: Full business concept franchises, broad enough to include:

- Hotel- Motor vehicle dealer- Car Rental - Product Distribution - Agency Arrangements - similar arrangements

Consumer Commission 1. Insufficient funding 2. Under staffed3. If a complaint is filed, it is not clear when a response would be received.4. There are difficulties with the Act and the Regulations: Regulation 2 : Inconsistencies, duplication

Eg: Termination, Renewal, Goodwill, certain requirements should be in the

Disclosure Document Regulation 3: Difficulties include SA generally accepted

accounting standards

Franchise Developments 1. Developing a Code for the Franchise Industry in South Africa

- Enforce provisions of CPA and good practice- Alternative Dispute Resolution Process

2. Developing a Pan Africa Franchise Federation:Initial member countries include:

South Africa, Egypt, Nigeria, Tanzania, Uganda, Kenya, Ethiopia, Ghana, Zambia and Mauritius

3. Training and establishment of local franchise associations in each country.

Opportunities and Challenges in Africa

1. Register, protect and Enforce IP - Keep the markets open for expansion - small cost to register in comparison with:the cost of litigating without protection

the potential income stream from that country review this regularly

2. Challenges: there are certainly challenges: - Where proper preparation has been done can be very profitable for Licensors, Distributors and Franchisors

Recent legal Developments SOUTH AFRICA

1. WOOLWORTHS (PTY) LTD VS DULA INVESTMENTS (PTY) LTDThe conditions for renewal included that the franchisee had not been in breach of the agreement

during the initial period. The franchisee had in fact breached the agreement on a number of occasions and was denied the right of renewal

2. TH RESTAURANTS (PTY) LTD vs RANA PAZZA (PTY) LTD The franchisor had failed to carry out certain obligations including to supply marketing materials, assist with the marketing plan, update the manual, provide product and pricing information and do regular visits. In view of the franchisor’s breaches, the franchisee withheld the payment of royalties. The court held that the obligations of the Parties were reciprocal and that termination by the franchisor on the basis of non payment of royalties was not valid, due to the non performance of the franchisor.

Recent legal Developments INTERNATIONAL

1. SOUTH KOREA: AMENDMENT TO FAIR TRANSACTIONS IN FRANCHISE BUSINESS ACTThe amendments include:

Franchisor must bear up to 40% of store remodelling cost Franchisee must have a protected TerritoryDisclosure requirements include provisions of projected sales revenue and the method of

calculation. Reasonable business hours restrictions: if not profitable a franchisee need not be open for

extended hours, such as at night.

2. DUNKIN DONUTS, INC. vs PRIYA ENTERPRISES, INC.The Franchisor was successful in a matter to enforce compliance with system standards and clear obligations in the agreement. Where provisions are vague or insufficiently clear the franchisor may be unsuccessful

Recent legal Developments INTERNATIONAL - contd

3. CURVES INTERNATIONAL, INC vs ST PAUL UNGEVITTER, INC.The franchisor was successful with a restraint of trade. Curves would incur irreparable harm if the franchisee continued with their own business, using Curves’ equipment and Curves’ customers, as well as the phone number associated with the Curves franchise. The franchisee also failed to return the Operations Manual.

4. AUTORAMA LIMITED vs AUDI OF AMERICA, INC.Audi entered into a dealer agreement in relation to premises in close proximity to existing dealers. It was alleged by the Dealer that Audi had breached its fiduciary obligations to the Dealers. A court found that there was a conventional business relationship and without anything further this was insufficient to create a fiduciary relationship.

This must be compared to the Woolworths matter in South Africa, which had a “good faith: clause.

5. ALASKA RENT – A – CAR, INC vs AVIS BUDGET GROUP, INCAvis’s purchase of Budget Rent A Car out of bankruptcy breached an exclusive Territory arrangement and reduced the profits. Avis liable for damages

Be very careful around any exclusive rights provisions

THANK YOU