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Primi World (Pty) Ltd v National Consumer Commission (NCT/4740/2012/101(1)(P)CPA) [2013] ZANCT 42 (23 October 2013)

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IN THE NATIONAL CONSUMER TRIBUNAL


HELD IN CENTURION



Case number: NCT/4740/2012/101(1)(P)CPA


DATE: 23 0CTOBER 2013


In the matter between:


PRIMI WORLD (PTY) LTD …........................................................................................APPLICANT


And


THE NATIONAL CONSUMER COMMISSION....................................................RESPONDENT


Coram


Prof B C Dumisa – Presiding member


Adv F Manamela – Member


Mr F Sibanda – Member


Date of Hearing: 26 March 2013


JUDGMENT AND REASONS


THE PARTIES


1. The Applicant in this matter is Primi World (Pty) Ltd, a private company duly registeredin terms of the Companies Act, 61 of 1973 (hereinafter referred to as “the Applicant”).


2. The Applicant operates restaurant franchises nationally. It enters into franchise agreements with people / businesses who wish to operate restaurants under its name “Primi Piatti”, in return for royalties.


3. The Applicant’s Founding Affidavit was deposed to by Peter Ernest Castle (“Castle”), who is the Applicant’s managing director.


4. The Applicant was represented, at the hearing, by Advocate Donovan Baguley, briefed by Davout Wolhuter of Davout Wolhuter and Associates.


RESPONDENT


5. The Respondent is the National Consumer Commission, an organ of state within the public administration established in terms of Section 85 of the Consumer Protection Act, 68 of 2008 (hereinafter referred to as “the CPA”) (hereinafter referred to as “the Respondent”).


There was no appearance by or on behalf of the Respondent at the hearing.


COMPLAINANT(S)


6. The complaint was lodged with the Respondent against the Applicant, on 24 August 2011, by Mr. Xolani Trevor Khoba and Mr Sakhephi Mhlongo (hereinafter jointly referred to as “the Complainants”). The complainants are the members of a close corporation, Fine Style Dining CC, who entered into a franchise agreement (“the agreement”) with the Applicant.


7. The complaint relates to the payment by Fine Style Dining CC, to the Applicant, of an initial franchise fee in the sum of R570 000,00 (ie. R500 000 plus VAT), paid in terms of the franchise agreement. The Complainants are of the view that they are entitled to a refund of this amount as their delay in complying with the provisions of the agreement was due to Mr Khoba falling ill and upon his recovery an endeavour to comply with the agreement was dismissed by the Applicant. The complainants subsequently lodged the complaint with the Respondent, requesting a refund of the franchise fee to the Complainants.


APPLICATION TYPE AND JURISDICTION


8. This is an application in terms of section 101 of the CPA for the review of a compliance notice, dated 30 March 2012, issued by the Respondent to the Applicant. The compliance notice was issued in terms of section 100 of the CPA, in respect of alleged contraventions of schedule 2 Item 8(1) and sections 20(1) and (2); 54(1) and (2), and 56(2) and (3) of the CPA.

9. Section 101 of the CPA empowers the Tribunal to confirm, modify or cancel all or part of a compliance notice.


10. This Tribunal, therefore, has jurisdiction to hear this matter.


BACKGROUND


11.The complaint relates to the payment, by Fine Style Dining CC to the Applicant, of an initial franchise fee in the amount of R 570 000.00 (R500 000 plus VAT).


13.The initial franchise fee was paid in October 2008, pursuant to the agreement entered into between the Applicant and Fine Style Dining CC on 16 February 2009.

12. The franchise agreement regulated the opening and operating of a Primi Piatti Restaurant. In terms of clause 9.1 read with clause 2.7 of the agreement, an initial franchise fee of R 500 000.00 plus VAT was payable upon signature of the agreement.


13. Clause 7.5 of the franchise agreement contains a resolutive condition requiring Fine Style Dining CC, to conclude a lease for the location of its restaurant within 12 months of the date of signature of the agreement. The clause provides the Applicant with the right to cancel the agreement by written notice should Fine Style Dining CC fail to adhere to this condition. Furthermore, clause 7.5 provides that the Applicant may, in the event of such cancellation, retain the initial franchise fee as pre-estimated damages.


14. It is common cause that Fine Style Dining CC failed to comply with the aforesaid provision. The Applicant accordingly exercised its right to cancel the agreement on 12 April 2010.


15. The reasons for Fine Style Dining CC’s failure to conclude a lease agreement is set out by the Respondent in the compliance notice. For purposes of completeness the allegations contained therein will be summarised, but it is important to note that the application was not opposed and as such there is no version from the Respondent before the Tribunal:


15.1 The Respondent alleges that Castle, managing director of the Applicant, “promised” Fine Style Dining CC space to rent in Sandton City. The franchise fee was accordingly paid in November 2008.


15.2 In November 2009 the First Complainant, Mr. Khoba, fell ill and was hospitalised. He was only discharged in May 2010. While the First Complainant was in hospital, the Second Complainant, Mr. Mhlongo, tried to engage with the Applicant with the intention of cancelling the agreement and obtaining a refund of the franchise fee. The Second Complainant alleged that due to the First Complainant’s illness, he alone could not manage the franchise as he was not trained to do so. Furthermore, the Complainants alleged that there was no location in Sandton City as anticipated by them and they could therefore not commence operations.


15.3 The First Complainant recovered from his illness and also approached Castle in the hope that they could proceed with the transaction. The Respondent alleges that a location in Sandton City became available, that Castle had to take part in the negotiations but that Castle refused to do so.


16. The Respondent forwarded the complaint to the Applicant on 18 October 2011. The Applicant responded on 01 December 2011 (outside of the 7 day period allowed for such response) and the matter was set down for conciliation on 08 December 2011.


17. At the conciliation meeting the Applicant contended that the agreement was fairly and lawfully terminated and that the complainants were not entitled to a refund. The complainants maintained that they require a full refund of the franchise fee of R 500 000.00 plus VAT.


18. The compliance notice was subsequently issued by the Respondent on 30 March 2012 and allegedly only received by the Applicant on 17 May 2012. . Based on the undisputed fact that the Applicant only received the notice on 17 May 2012, an application for condonation is not required. The 15 day time frame for the lodging of an application in terms of Section 101 runs from the date of receiving the notice and the Applicant therefore complied with this requirement.


APPLICABLE SECTIONS OF THE CPA


19. The compliance notice sets out the following sections that have allegedly been contravened by the Applicant:


20. Section 40(a), (c) and (d)


40 Unconscionable conduct

(1) A supplier or an agent of the supplier must not use physical force against a consumer, coercion, undue influence, pressure, duress or harassment, unfair tactics or any other similar conduct, in connection with any –

(a) Marketing of any goods or services ;

(b) …

(c) Negotiation, conclusion, execution or enforcement of an agreement to supply any goods or services to a consumer ;

(d) Demand for, or collection of, payment of goods or services by a consumer; or

(e) …”

21. Section 51(1)(b)(i),(ii),(iii), (iv) (aa) and (bb)


51 Prohibited transactions, agreements, terms or conditions

(1) A supplier must not make a transaction or agreement subject to any term or condition if –

(a)..

(b) it directly or indirectly purports to –

(i) waive or deprive a consumer of a right in terms of this Act ;

(ii) avoid a supplier’s obligation or duty in terms of this Act ;

(iii) set aside or override the effect of any provision of this Act; or

(iv) authorise the supplier to –

(aa) do anything that is unlawful in terms of this Act ; or

(bb) fail to do anything that is required in terms of this Act…”


22. In the summary the Respondent alleges that the Applicant contravened Section 65(1)(a),(b) and (c) but the Respondent then sets out the provisions of Section 65(2).

Section 65 (1)(a), (b) and (c)

65 Supplier to hold an account for consumer’s property

(1) Subsection (2) does not apply to a supplier that is –

(a) A bank, as defined in the Banks Act, 1990 (Act 94 of 1990) ;

(b) A mutual bank, as defined in the Mutual Banks Act, 1993 (Act 124 of 1993); or

(c) Any other financial institution that is similarly licensed and authorised to conduct

business and take deposits from the public in terms of any national legislation.

(2) When a supplier has possession of any prepayment, deposit, membership fee, or other money, or any other property belonging to or ordinarily under the control of a consumer, the supplier –

(a) must not treat that property as being the property of the supplier ;

(b) in the handling, safeguarding and utilisation of that property, must exercise the degree of care, diligence and skill that can reasonably be expected of a person responsible for managing any property belonging to another person; and

(c) is liable to the owner of the property for any loss resulting from a failure to comply with paragraph (a) or (b).


  1. Section 48 (1)(a)(i), (ii), (c)(i), (ii) and (iii)

48 Unfair, unreasonable and unjust contract terms

(1) A supplier must not –

(a) Offer to supply, supply, or enter into an agreement to supply, any goods or services –

(i) At a price that is unfair, unreasonable or unjust ;

(ii) On terms that are unfair, unreasonable or unjust ;

(b) …

(c) Require a consumer, or other person to whom any goods or services are supplied at the direction of the consumer –

(i) To waive any rights ;

(ii) Assume any obligation ;

(iii) Waive any liability of the supplier ;

On terms that are unfair, unreasonable or unjust, or impose any such terms as a condition of entering into a transaction.


ISSUES TO BE DECIDED


Preliminary matters


24. There were two administrative (technical) hurdles that had to be addressed before dealing with the main application. The first issue related to the condonation for late filing. It has been determined by the Tribunal that it is not necessary for the Applicant to apply for such condonation and this issue will need no further consideration. (refer to para 20 above);


25. Secondly, the Tribunal had to determine whether this matter can be heard on a default judgment basis, as the Respondent did not attend the Tribunal hearing (refer to para 6 above). The Applicant served the Respondent with the main application on 04 June 2012; and, in terms of the provisions of Rule 13 of the Tribunal Rules, the Respondent was supposed to file its response by 29 June 2012. The Respondent failed to do so.


Rule 25(2) (3) provides as follows:


(2) An applicant may make application by way of form T.I r25 (2) for purpose of obtaining a default order, if no response to the application was filed within the time stated in the application


(3) The Tribunal may make a default order-

(a) After it has considered or heard any necessary evidence and


(b) If it is satisfied that the application documents were adequately served. “


26. The Tribunal is satisfied that Rule 25(2) and (3) has been complied with and therefore that this matter may be dealt with on a default basis.


The main application


27. The Tribunal then had to determine whether the Respondent had jurisdiction to issue a compliance notice with regards to an incident that occurred prior to the commencement of the Act by considering the retrospective application of the legislation. The Tribunal had to decide whether the specific sections of the Act that are alleged to have been contravened by the Applicant (as set out in the compliance notice) can be applied retrospectively to the transaction.


28. The Tribunal then had to determine whether the Complainants had the necessary locus standi to complain to the Respondent in their personal capacities; and whether the Respondent was entitled to order repayment of the franchise fee to the Complainants as they themselves did not make payment of the franchise fee – it was paid by Fine Style Dining CC on 31 October 2008.


29. The Tribunal had to determine whether the retention of the franchise fee is in contravention of the CPA.



APPLICANT’S SUBMISSIONS: GROUNDS FOR CHALLENGING THE COMPLIANCE NOTICE


30. The Applicant’s submission was that the compliance notice ought to be set aside in whole for the following reasons:

Agreement entered into before general effective date


31. The Applicant’s submission was that the franchise fee was paid in October 2008, and the franchise agreement was entered into between the parties in February 2009; both dates being more than two years prior to the general effective date of the CPA, which was 31 March 2011. Accordingly, the Applicant argued that the present matter is not subject to the provisions of the Act.


32. The Applicant referred to Schedule 3, Item 2 of the CPA and submits that certain sections of the Act apply retrospectively to agreements entered into before the general effective date. The Applicant lists these sections to be sections 14, 18 – 21, 22, 25, 26, 31, 44, 53 – 58, 64 and 65.


33. Referring to paragraphs 1.4 and 3 of the compliance notice; the Applicant’s submission was that the only one of these sections that the Respondent relied on was section 65. The Applicant submits that said section 65 however only applies to money paid to the supplier after the general effective date and that it cannot have application in this matter.


34. The Applicant concludes that the Respondent had no jurisdiction to investigate this complaint nor to issue a compliance notice in respect thereof; and that the compliance notice accordingly falls to be set aside wholly on this basis.


The complainants did not pay the franchise fee


35. The Applicant’s submission was that the Complainants did not pay the initial franchise fee; as it was paid by Fine Style Dining CC on 31 October 2008. The Applicant attached the relevant deposit slip indicating such payment to the founding affidavit.


36. The Applicant submits that it is therefore only Fine Style Dining CC who can claim repayment of the franchise fee. The close corporation has however been deregistered, as per the printout from the CIPC Offices, attached to the Applicant’s founding affidavit, that indicates its status as “Deregistration Final”.


37. The Applicant submits that the Complainants cannot claim a franchise fee that they did not pay and that Fine Style Dining CC in turn cannot claim the fee as it no longer exists.


38. The Applicant submits that for these reasons the compliance notice must be set aside as a whole.


The merits of the matter: Is the retention of the franchise fee fair?


39. The Applicant’s submission, on the merits of the case, as it appears from the compliance notice, suggests that the levying of a non-refundable franchise fee contravenes a number of sections in the Act on the basis that:

39.17 It amounts to unfair tactics or similar conduct (section 40)

39.18 It is an unfair, unreasonable and unjust provision (section 48)

39.19 It purports to deprive a consumer of a right in terms of the Act

39.20 It purports to avoid a supplier’s duty in terms of the Act

39.21 It purports to set aside or override the effect of provisions of the Act

39.22 It purports to authorise a supplier to do something which is unlawful in terms of the Act or fail to do something required by the Act (section 51)

39.23 It results in money under the control of the supplier being treated as property of the supplier and not being taken care of with care, diligence and skill (section 65)


40. The Applicant argued that each one of these criticisms is unfounded and that the question is whether the retention of a franchise fee in circumstances like the present is unfair, unreasonable or unjust towards the consumer.


41. The Applicant referred to the provisions of the forfeiture provisions (clause 7.2) in the franchise agreement and submits that the reason for this provision is that the franchisor collects royalties from the operation of the franchised restaurants – in their standard franchise agreement the Applicant charges a monthly royalty of 10% of gross earnings.


42. The Applicant further argued that it has an interest in the franchise coming into operation as soon as possible so that it can earn its royalties as soon as possible. It submits that new franchises find appropriate premises within 4 – 8 months of the signature of the franchise agreement (which amounts to an average of 6 months). The Applicant explains that if it has to wait more than 12 months for the franchisee to find premises it can lose up to six months’ royalties. The Applicant submits that the purpose of the forfeiture provision is to indemnify the Applicant against such loss.


43. The Applicant supplied the Tribunal with a list of 8 Primi restaurants that were opened in Gauteng from March 2009 to February 2010 and submits that the average gross earnings of these restaurants were R 751 287.99 per month, including VAT. The Applicant accordingly received, on average, R 75 128.80 including VAT, from each franchise in the Sandton area every month. The Applicant therefore submits that it has suffered damages in the total sum of R 450 772.80, VAT inclusive.


44. The Applicant’s conclusion, on the merits of the case, was that the forfeiture of a franchise fee of R 500 000.00 is not unfair, unreasonable or unjust: it is to compensate the Applicant – almost exactly – for the damages suffered by it as a result of Fine Style Dining CC’s failure to conclude a lease within the prescribed time. The Applicant referred to case law on this aspect as set out in paragraph 29 of the founding affidavit in which the High Court found as follows:


In regard to the question of whether a penalty stipulation was out of proportion to the prejudice suffered by the defendant as a result of the plaintiff’s default I am satisfied that the evidence of Mr. Castle established that the defendant suffered considerable prejudice as a result of the default by the plaintiff. The loss of royalties alone would be proportionate to the penalties sustained by the plaintiff”


45. The Applicant’s submission was that in this matter, similarly, there is no basis at all for finding that the penalty stipulation in the present matter is unfair, unreasonable or unjust.


46. The Applicant concluded that, for this reason too, the compliance notice falls to be set aside.


RESPONDENT’S SUBMISSIONS


47. The Respondent failed to oppose the application and the Applicant subsequently filed its application for default judgment on 13 March 2013. The application will therefore have to be dealt with on the basis of an application for default judgment as provided for in Rule 25(3) of the Rules;


THE LEGAL QUESTIONS TO BE ANSWERED


48 The legal questions that have been identified as requiring serious consideration, for us to arrive at an appropriate decision are:


48.1 Is the Act and more specifically the sections relied on by the Respondent in the compliance notice applicable to this specific matter?

48.2 Is the retention of the franchise fee in the circumstances provided unlawful?

48.3 Is the Respondent mandated to order a refund of the franchise fee to the Applicants or another entity?


ANALYSIS OF THE LEGAL PROVISIONS AND FACTS


49 The questions as posed above will be answered consecutively below:


Is the Act and more specifically the sections relied on by the Respondent in the compliance notice applicable to this specific matter?


50 The Applicant’s submission was that the franchise fee was paid in October 2008, and the franchise agreement was entered into between the parties in February 2009; both dates being more than 2 years prior to the general effective date of the CPA. Accordingly, that the present matter is not subject to the provisions of the Act. The Applicant further referred to Schedule 3, Item 2 of the CPA and argued that while certain sections of the Act do apply retrospectively to agreements entered into before the general effective date; that is not the case here.


51 The transaction and events that occurred and the sections relied upon are not retrospective as set out in Item 3(2) that provides for instances where specific provisions of the Act may have a retrospective effect. The retrospective application of the sections relied on by the Respondent in the compliance notice can be summarised as follows:


a. Section 40:

Section 40 is not listed as one of the provisions that may be applied retrospectively as set out in Schedule 3, Item 2 and is therefore nor applicable to this matter.


b. Section 48:

Section 48 is not listed as one of the provisions that may be applied retrospectively as set out in Schedule 3, Item 2 and is therefore not applicable to this matter.


c. Section 51:

Section 51 is not listed as one of the provisions that may be applied retrospectively as set out in Schedule 3, Item 2 and is therefore not applicable to this matter.


d. Section 65:

Applies only with respect to an amount paid or payable by the consumer, or to property that comes into the possession of the supplier, on or after the general effective date. The franchise fee in the amount of R570 000 was paid in October 2008, which was more than two years before the CPA effective date of 31 March 2011.


52 In light of the aforesaid, the Applicant’s submission was that the Act, and more specifically the provisions relied on by the Respondent in the compliance notice, are not applicable to this specific transaction. The Applicant’s conclusion was that the compliance notice is therefore fatally flawed and should be set aside.


Is the retention of the franchise fee in the circumstances provided unlawful?

53 Clause 7.5 of the franchise agreement provides as follows:


Notwithstanding anything to the contrary contained in this Agreement, if the franchisee has not concluded a lease for the location within 12 (twelve) months of the date of signature of this agreement, the Franchisor may, by written notice to such effect, cancel this Agreement and retain the Initial Franchise Fee as pre-estimated damages.”


54 The Applicant’s submission was that the reason for this provision is that the franchisor collects royalties from the operation of the franchised restaurants – in their standard franchise agreement the Applicant charges a monthly royalty of 10% of gross earnings. The Applicant provided figures to support its allegation that the Applicant has suffered damages in an amount almost equal to the initial franchise fee that it retained.


55 Furthermore, the Applicant provided the Tribunal with a copy of a High Court judgment in the matter of Inye Amusements CC v Many Colour Restaurant (PTY) Ltd, attached to the founding affidavit. The facts in that matter relating to the Applicant’s election to exercise of its right to cancel the agreement due to non-compliance with the resolutive condition is identical to that in the present matter. The court considered whether the penalty stipulation was out of proportion to the prejudice suffered by the defendant in that matter and held as follows:


“…I am satisfied that the evidence of Mr Castle established that the defendant suffered considerable prejudice as a result of the default by the plaintiff. The loss of royalties alone would be proportionate to the penalties sustained by the plaintiff”.


56 The above High Court ruling, together with the fact that the Applicant did place as evidence before the Tribunal proof that it has suffered damages due to the complainants’ failure to secure lease premises; and that this loss of royalties amounts to almost the same amount as the initial franchise fee that was retained; all support the Applicant’s submission that the fee was not obtained unlawfully.


57. It therefore appears that the Applicant merely exercised its contractual right to cancel the agreement and retain the franchise fee. The Tribunal is however not mandated to adjudicate on contractual disputes . This is reserved for civil courts and will not be considered further.


Is the Respondent mandated to order a refund of the franchise fee to the Complainants or another entity?


58. The Respondent, in the compliance notice, ordered the Applicant to refund the initial franchise fee to the Complainants.


59. In the case of Volkswagen v The National Consumer Commission the Tribunal held as follows:


The enforcement functions of the Commission are set out in section 99 of the CPA. From a plain reading of the word and expansion of that the enforcement function entails it is clear to us that the enforcement function does not include a function to order parties to provide redress to complainants. This power has been reserved to the courts and the Tribunal, albeit in the latter instance to a limited extent.”


And


It is accordingly an untenable interpretation of the CPA to read into the powers and functions of the Respondent the power to impose a requirement in the compliance notice which in effect amounts to the imposition of an order for damages, refunds or return of goods. The route to achieve redress for consumer through a prosecution either for prohibited conduct or by agreement with the transgressor to pay compensation, either through the Tribunal or the Courts.


Furthermore, Section 150 of the National Credit Act, Act 34 of 2005 (“the NCA”) provides the Tribunal with a mandate to “requiring repayment to the consumer of any excess amount charged, together with interest at the rate set out in the agreement. No similar provision exists that gives the NCC the right to order repayment. It is evident that such a right should be specifically provided in terms of the Act (as it is awarded to the Tribunal) and therefore, that the Respondent, not being specifically mandated to do so, may not be allowed to order repayment.


It would therefore be beyond the powers of the Respondent to include a step in a Compliance Notice that in fact amounts to the award of damages to a Complainant. ”


60. When the aforesaid decision is taken into account it is clear that the Respondent does not have the mandate to order a refund as was done in this matter. The provisions of the Act are clear in this regard and there is no reason for this Tribunal to deviate from the position set out in the Volkswagen-matter.


61. As indicated above, this Tribunal has made a finding that the Respondent is not entitled to order a refund and therefore it is not necessary to consider whether a refund could have been ordered to the complainants in their personal capacities in circumstances where a separate entity (Fine Style Dining CC) effected the initial payment and entered into the agreement. Similarly it is not necessary to consider the effect, if any, of the deregistration of Fine Style Dining CC on this matter.


CONCLUSION


62. The Compliance Notice, as issued by the Respondent to the Applicant, is fatally flawed on many grounds, including the fact that the agreement concluded is dated prior to the effective date of the CPA.


63. Even if the Compliance Notice was not fatally flawed, as found above, the Respondent still would not have been able to order a refund of the franchise fee, on two grounds:


63.1 The High Court has already pronounced that there is nothing unlawful about the Applicant’s Cancellation Clause (Clause 7.5); and

63.2 The Respondent does not have any legislative powers to order refunds.


ORDER


64. Under the circumstances and for the reasons stated above, the Tribunal made the following order at the conclusion of the hearing:


64.1 The compliance notice is hereby cancelled.

64.2 There is no order as to costs.



DATED THIS 23th DAY OF OCTOBER 2013


[signed]


Prof B.C. Dumisa


Presiding Member


Adv F Manamela (Member) and Mr F K Sibanda (Member) concurring