The South African Consumer Protection Act sets out detailed requirements for franchise agreements, but courts have stopped short of saying that failing to meet those requirements necessarily makes an agreement void. In the case of Steynberg v Tammy Taylor Nails Franchising, the court noted that the franchisee had raised the argument that the franchise agreement was null and void due to non-compliance with the act, but did not rule on the point.
In another recent judgment, The Lemon Tree & Others v Shift Espresso Bar Holdings, the Western Cape High Court was asked to deal with an argument that the franchise agreement was "unenforceable for noncompliance with the Consumer Protection Act and thus void or voidable". The court referred to an earlier 2008 judgment involving a contract that did not comply with regulations under the Petroleum Products Act.
The principle from the 2008 judgment is that simply because an agreement does not comply with a legal requirement, it does not automatically mean the entire agreement is invalid. For that to be the case, the legislation would generally need to make this consequence clear, or invalidity would need to be necessary to achieve the purpose of the law.
The court in The Lemon Tree case turned to common law principles about misrepresentation, stating that a person may be entitled to cancel a contract if they were persuaded to enter into it because the other party misrepresented or failed to disclose an important fact. The missing information would need to be significant and influence the affected party's decision to enter into the agreement.
The judgment suggests that an omission alone may not be enough to invalidate a franchise agreement. Rather, the missing information would need to be significant and influence the affected party's decision to enter into the agreement in the first place. Not every failure to comply with the act will thus necessarily undo a franchise agreement.
For franchisors, the judgment should not be seen as a reason to take Consumer Protection Act compliance any less seriously. Franchise agreements should still be carefully drafted to include all prescribed information and meet the requirements of the act. Prospective franchisees should also understand the agreement fully before signing and raise any missing or unclear information upfront.
The broader lesson is that while a technical omission may not automatically invalidate an agreement, significant nondisclosure that influences a person's decision to enter into a franchise could have far more serious consequences than one might initially imagine.
Key points
- Omission alone may not automatically invalidate a franchise agreement.
- Significant nondisclosure can have serious consequences for franchise agreements.
- Franchise agreements should still be carefully drafted to include all prescribed information and meet the requirements of the Consumer Protection Act.
