AUTHOR: RISHAL BIPRAJ
Franchising allows individuals an alternative to starting from scratch, by buying into an established brand, operating system, and customer base. It offers a fast-track to business ownership subject to strict compliance with the business model and the systems of the franchisor. A franchise agreement will have severe legal and financial consequences for breach in order to protect the brand and system of the franchisor.
In the appeal matter of Lemon Tree (Pty) Ltd and others (“Franchisee”) v Shift Espresso Bar Holdings Pty Ltd (“Franchisor”), the Franchisee had entered into a written franchise agreement with the Franchisor. The Franchisee was granted the right to conduct business under the ‘Shift Espresso Bar’ brand in Sunningdale, Western Cape.
The Franchisee and its related parties, after a breakdown of the relationship with the Franchisor, commenced conducting a similar competing business from the premises and rebranded as “Gaea Café”. The Franchisor demanded inter alia that the Franchisee comply with their obligations under the franchise agreement, stop unlawfully competing with it, and sought to recover the fees and payments entitled to it under the franchise agreement by virtue of its know-how, trade connections, skills, training, and operational knowledge given to the franchisee. The Franchisees were inter alia appealing the above including an interdict issued against them for breaching the franchise agreement and operating the Gaea Café.
The Franchisee tried to argue that the Franchisor failed to comply with specific statutory regulations in not providing them with certain supporting documents to the franchise agreement and that the Franchisee had an entitlement to resile from the whole agreement because it was either void or voidable for non-compliance with the Consumer Protection Act (“CPA”).
The court considered Regulation 2 (2) (e) under the CPA that any provision in a franchise agreement which conflicts with the regulations is only void to the extent of such a conflict. There was nothing in the CPA providing for the unilateral voiding of the entire franchise agreement by the Franchisee.
The court considered further that the Franchisee could not cancel the agreement by claiming there had been a material misrepresentation by the Franchisor which caused them to enter into the franchise agreement, as this was not supported by the facts. Actually, the Franchisee had complied with the franchise agreement until they sought to escape it for their own commercial purposes. The Franchisee’s appeal was therefore dismissed.
Success as a franchisee requires a delicate balance between a Franchisee’s own entrepreneurial skill and ability and strict adherence to pre-established Franchisor rules. A prospective Franchisee can safeguard itself by conducting its own due diligence and seeking professional advice on receiving the Franchisor’s disclosure document and Franchise Agreement. As a last safeguard, after signature, the Franchisee has a 10-day cooling off period in which it can cancel a franchise agreement if it has any concerns.
Tel: +27 31 570 5371
Email: rishal.bipraj@gb.co.za