When the Consumer Protection Act (CPA) was being introduced in 2011, the intention of the legislature was that all franchisors were to be given a six month window period to bring all existing franchises into line with the CPA. After a public outcry this requirement was dropped to the satisfaction of franchisors.
What is the catch?
Most franchise agreements are subject to renewal after a certain period of time. The CPA deems that the renewal of a franchise is “a new franchise agreement” and thus falls into the ambit of the CPA. Any renewal of the agreement must therefore comply with the CPA.
As franchises were largely unregulated up to the introduction of the CPA, this is a blow for them. Franchisees get considerable protection in the CPA. Agreements are to be transparent with strong disclosure provisions and must be written in simple understandable language.
More significantly the agreement must start with the following “cooling off period” wording:
“A franchisee may cancel a franchise agreement without cost or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor”, and a reference to the CPA.
What it means
If the above wording is not included, then the agreement seemingly becomes void in terms of the CPA. The courts still need to rule definitely on this when a “cooling off period” case comes before them. This will remove uncertainty surrounding whether or not the agreement becomes void – until then, the risk to franchisors is a real one. Obviously this can have adverse consequences for any party trying to enforce its rights through the franchise agreement.
Until the courts decide, franchisors would be wise to ensure that renewed contracts comply with the CPA, particularly the “cooling off period” clause.