In terms of regulation 3 of the Consumer Protection Act, 2008 (‘CPA’) a franchisor must provide a prospective franchisee with a ‘Disclosure Document’ prior to the signing of a franchise agreement. This must be done at least 14 (fourteen) days prior to the signing of a franchise agreement and this Disclosure Document must contain a number of financial projections, among other, regarding the franchisee’s future business.
The question then arises as to what the position is should a franchisor fail to provide a prospective franchisee with such Disclosure Document, alternatively if the franchisor provides a Disclosure Document that is significantly incorrect.
It is clear that the legislator intended for the franchisor to make certain representations of its franchise business prior to the sale thereof to a franchisee. In fact, sub-paragraph (d) of regulation 3(1) expressly qualifies these projections as being ‘representations’. Section 3(1) reads that the Disclosure Document must as a minimum contain:
“Written projections in respect of levels of potential sales, income, gross or net profits or other financial projections … with particulars of the assumptions upon which these representations are made.”
Clearly then these disclosures are deemed to be obligatory pre-sale representations regarding the nature of the franchise agreement and as such, excludes any voetstoots sale.
If a representation is incorrect or false, it constitutes a misrepresentation. Varying degrees of misrepresentation will have different consequences on the contract. Common law determines that if a seller makes a misrepresentation as to the subject of a sale and such misrepresentation induced a purchaser to enter into a sale agreement, the purchaser acquires a number of remedies which may, in certain instances, provide that such sale agreement is either void, or voidable at the purchaser’s election. In the case of fraudulent misrepresentation an agreement of sale is void, whereas a negligent misrepresentation may render the agreement voidable and innocent misrepresentation may allow for a claim for a diminished purchase price.
But in the absence of a Disclosure Document the question is whether the failure or omission to make a representation constitutes, in itself, a misrepresentation. The general rule in South African Law is that there is no inherent duty on a contracting party to disclose any information concerning the contractual terms that he/she has within his/her exclusive knowledge. However, it is also accepted that a non-disclosure would be actionable when the circumstances are such that frank disclosure is clearly called for – or as it has frequently been said, when there is a duty to disclose. There is case law (in particular Gollach and Gomperts v Universal Mills and Produce Co (Pty) Ltd and Meskin v Anglo-American Corporation of SA Ltd) that indicates that where there is a legal duty to make a certain disclosure of information, then the failure to disclose, constitutes fraudulent non-disclosure. Having established a duty on the defendant to disclose, a plaintiff must prove the further elements for an actionable misrepresentation, that is, that the representation was material and induced the plaintiff to enter into the contract. (There is also the case of Absa Bank Ltd v Fouche that determines that where parties are expected to disclose information that falls within their exclusive knowledge and where the information is of such a material nature that it may be construed that there is a duty on the parties to disclose the information, then silence thereto can be deemed as misrepresentation. But this may be irrelevant as the duty to disclose – i.e. to provide a Disclosure Document – is already obliged by the CPA.
The case of Umso Construction (Pty) Limited v Member of the Executive Council of the Government of the Province of the Eastern Cape Responsible for Roads and Transport and others [2016] JOL 36065 (SCA) seems to put a final nail in the coffin in as far as it confirms that where there is a duty to make a representation, then failure to make such representation constitutes a misrepresentation.
As such my view is that the failure by a franchisor to provide a Disclosure Document in the manner provided for in the CPA, certainly constitutes a misrepresentation. However, whether or not that misrepresentation is sufficient for a franchisee to void a franchise agreement, will depend on whether or not it was material and otherwise induced the franchisee to enter into the agreement. Thus, had the franchisor duly disclosed all material information, the franchisee would not have entered into the franchise agreement.
- Charl Groenewald
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