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What Impact Does the Decision of the LAC That Franchisors are Immune From Section 197 Have on Other Commercial Transactions?

06 March 2013

Routledge Modise

The LAC in the Sanders decision found that where a franchisor terminates a franchise agreement and immediately replaces this with a new agreement, with a new franchisee in the same location and conducting the same business in exactly the same manner, section 197 is not applicable.

The rationale for the decision of the LAC being that the nature of the business model is key to determining whether section 197 is attracted. Where the new franchisee did not acquire the business as a going concern from the previous franchisee, section 197 is not applicable.

The facts in the Sanders decision very briefly were as follows. Cell C terminated its franchise agreement with its franchisees that operated cell phone shops in Queenstown and King Williamstown. Cell C then entered into a new franchise agreement with PE Pack. PE Pack in turn would run the same shops, the next day in the same locations. Sanders, who worked for the franchisees, was to be retrenched. He objected, arguing that he was to transfer in terms of section 197 to PE Pack. The Labour Court agreed with his argument.

On appeal, the LAC did not agree. It held that the nature of the business model was the key. Two questions had to be answered: Did the transaction create rights and obligations that required one entity to transfer something in favour of/or for the benefit of another or to another? If the answer was in the affirmative, then the question was whether the obligation imposed within the transaction contemplated a transferor who had the obligation to effect a transfer or allow a transfer to happen and a transferee who received the transfer. If the answer to this question was in the affirmative, then the transaction constituted a transfer for the purposes of section 197. Looking at the true nature of a franchise agreement, upon Cell C terminating the franchise agreement with the franchisees, it was free to enter into a new franchise agreement. This it did with PE Pack. PE Pack was then placed in a situation where it had to follow the instructions stipulated in the franchise agreement with Cell C. PE Pack did not acquire the business as a going concern from the franchisees. It could not be said that there was a transfer of the business from the old franchisees to PE Pack.

When one deals regularly with outsource agreements and the effects of section 197 in such instances, the decision of the LAC, it seems (in distinguishing between second generation outsources and the termination of franchise agreements) is rather artificial. Be that as it may, until the SCA or the Constitutional Court rules otherwise, franchise terminations, in certain instances, are immune from section 197.

The team

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