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Franchisee accuses online retail giant Takealot of corp...

Business Maverick

BUSINESS MAVERICK

Franchisee accuses online retail giant Takealot of corporate bullying

(Photo: Gallo Images / Papi Morake)

An unfolding court battle over unfair contractual terms will prove to be a test case for disputes between franchisors and franchisees, as their relationship is governed by the provisions of the Consumer Protection Act (CPA), which is aimed at promoting fair business practices and protecting consumers – including franchisees – against unfair trade practices.

Takealot has been accused of corporate bullying tactics by a Pretoria franchisee who had to take it to court on an urgent basis, pending the finalisation of proceedings before the Western Cape High Court, to bar the online retail giant from “expropriating” their business.

The online retailer relies on a network of about 55 franchisees, who are mostly family entrepreneurs, to deliver on its promise of same-day delivery in 100 areas countrywide.

On 26 May 2021, the franchisee obtained an interdict preventing Takealot from exercising its rights under the franchise agreement by invoking a clause allowing it to cancel the contract after “an event” that apparently affected service levels, and to restore the applicant’s business to the position it was in before Takealot had exercised its rights on 30 April 2021. The retailer had afforded the franchisee just 10 days’ notice, which the franchisee alleges is unfair, unreasonable and unjust. 

Takealot is now applying for leave to appeal the interdict, which application is expected to be heard in October, and has informed the franchisee it will not be renewing the franchise agreement in November, putting the franchisee’s substantial investment and the livelihoods of about 1,400 permanent staff and independent contractors on the line.

The court battle to stop Takealot from blocking the franchisee from the delivery system was first initiated in late 2020, when drivers contracted to the franchisee went on strike. Takealot accused the franchisee of mishandling the action as well as bringing its name in disrepute. The online retailer then attempted to force the franchisee to sell the most profitable hub, Hatfield, which would cause the franchisee’s “inevitable demise” and winding up.

Losses from Hatfield alone would exceed R5.8-million, as the lease agreement for the premises, costing R160,000 a month, only expires in 2024. Fifty-one full-time employees and 700 drivers in that hub will be affected.

The unfolding court battle will prove to be a test case for disputes between franchisors and franchisees, as their relationship is governed by the provisions of the Consumer Protection Act (CPA), which is aimed at promoting fair business practices and to protect consumers – including franchisees – against unfair trade practices. 

Usually, wranglings between franchisors and franchisees are addressed confidentially, either in mediation or arbitration, and not ventilated in court.

Franchising accounts for 15.7% of South Africa’s GDP, with an annual turnover of over R721-billion. There are more than 41,000 franchisees in the country, across more than 850 brands. Court cases relating to this battle will set a binding precedent and determine how relationships between such parties are managed in the future.

Background

DriveConsortium (DriveCo) owners Charl-Andre and Anneke Cilliers bought the Takealot Delivery Team Pretoria franchise in October 2018, anticipating exponential growth in online shopping. At the time, it was a small, underperforming franchise serving the Takealot group, comprising two hubs – Pretoria West and Hatfield – averaging about 650 Mr D food deliveries in four areas, and one Takealot pick-up point.

Charl-Andre Cilliers says they poured their family savings into buying the hubs. “Since then, we have expanded the business to extraordinary levels, by growing into the north and west, including Mamelodi.

“For eight years prior to us purchasing the business, there was virtually no growth in those areas; nothing was really happening, and nobody saw the potential. We put our hearts and souls – and a lot of hard work – into it. We’ve also invested all our capital into it.” 

By February 2019, the teams exceeded 1,000 Mr D food deliveries in one day for the first time. They opened a second Takealot pick-up point in Faerie Glen, established a first-of-its-kind control room to support driver needs as well as a driver recruitment entity, through their own investment. 

In March, Takealot informed DriveCo that it would not support its first right of refusal to purchase the rights for Centurion, which had formed part of the initial business proposal, and which Takealot had approved. This was a massive blow to the business, the Cilliers say, as it hurt their projected cash flow. 

By June, Takealot issued DriveCo with the first of its breach notices, for the Hatfield and Menlyn branches after they submitted authenticated driver audits late (less than 24 hours), even though DriveCo had contested the breach because it was given only 48 hours to audit and submit hundreds of driver files. It was also not a breach in terms of the franchise agreement.  

In July, Takealot issued the Menlyn branch with a breach notice for not removing a senior driver from duty who had previously served time in prison. They were forced to terminate his employment, despite many years of loyal service.

With a further capital investment, DriveCo grew small underperforming “satellite” areas north of Pretoria, by opening the Montana hub and creating two new Mr D food areas plus an additional Takealot pick-up point. It also started operating on two circular routes servicing the N1 highway to Mookgophong and the N4 highway to Bronkhorstspruit. 

Their success was such that Takealot Delivery Team Pretoria was invited to speak at Takealot’s annual conference about their initiatives (which was declined) and in September, they were recognised by Takealot for having the group’s fastest growth and the best operational layout.

But in October, Takealot issued the Hatfield operation with a breach notification for defaulting on OTIF (On Time In Full) levels, resulting from the lack of drivers due to new stringent criteria implemented by the retailer. The Hatfield hub then lost its protected rights because it had been issued with three or more breaches within a 12-month period. 

By the end of 2019, DriveCo averaged 1,600 Mr D food deliveries and 2,100 Takealot, Superbalist and FNB deliveries, with 260 Takealot and Superbalist pick-ups a day. It had three hubs, six food areas, three Takealot pick-up points and two circular routes in Tshwane. The Cilliers’ had invested over R20-million in the business. 

By early 2021, the business was en route to becoming the biggest and most successful franchise in the country, holding protected rights to deliver for Takealot, Mr D, Superbalist and FNB in the city. 

The company still has 15 years left on its franchise agreement with Takealot.

However, it blames Takealot for taking “exception” to its success, and embarking on a lengthy corporate bullying campaign that forced it to seek recourse in the Western Cape High Court. Takealot is accused of unreasonably, unfairly and wrongfully issuing breach notices at frequent intervals, including seizing goods worth millions without a court order. It says Takealot has issued ultimatums to sell the business or face “catastrophic withdrawals” of access to key delivery areas. 

Takealot is accused of unlawfully expropriating the key Pretoria West operation, without issuing any lawful breach notices or offering compensation on 1 April 2021.

On 26 May 2021, Judge Robert Henney of the Western Cape High Court found in favour of the Cilliers, admonished Takealot for its conduct and awarded a costs order against the retailer. 

Judge Henney said another court may well conclude that the provisions of clause 5.2, which Takealot relied on, were unfair and overbroad, as it gives the franchisor the power to seize and reduce the areas of operation and the volume and size of a business operation, which “cannot be properly justified”. 

How the CPA has changed the franchise game

Prior to the commencement of the CPA, franchisors were empowered to dictate the terms of contracts entered into with franchisees on a “take it or leave it” basis, under the common law, affording the latter limited bargaining power as the format and complexity of such schemes can make their acquisition and operation risky for the franchisee. 

Both parties run a variety of risks due to the nature of the franchise relationship: the franchisor risks not being able to recoup their investment in establishing their business, and if the franchisee is unable to operate successfully, it threatens the former’s brand and goodwill. The franchisee, on the other hand, is at immense risk that the franchisor might have misrepresented their potential returns, that they failed to market the brand effectively – or that ongoing costs incurred, including royalties, may render the business unprofitable. 

Before 2011, all contracts were governed within the four corners of the agreement itself, so equity or fairness did not play a role in the interpretation or in the adjudication of disputes of any agreement. 

Since April 2011, however, all franchise agreements have been governed by the CPA, affording extensive protection to franchisees by introducing fairness, equity and reasonableness between the parties. The CPA is specific that contracts may not be unfair, unreasonable or be excessively one-sided, and that a supplier/franchise owner may not engage in unconscionable conduct.

Charl Groenewald, franchise expert at MacRobert Attorneys, the firm representing the Cilliers, explains this element of “fairness” has not been thoroughly tested in our courts. This is because franchise agreements commonly incorporate an arbitration clause which requires that parties litigate in private. The process is strictly confidential, does not create legal precedent and does not go into the record.

With court documents being publicly available, the Cilliers’ case sets a precedent for how franchisors must treat franchisees fairly, Groenwald says. “This case is of utmost importance for every franchisee, franchisor and other attorney that specialises in franchise law. The elements of this touch on almost all of the significant elements of the CPA, especially about excessively one-sided contracts.”

Takealot, through a spokesperson, said its franchisees are a significant part of its business. “We’re committed to treating all of them in a respectful, fair and consistent manner.

“As a vital part of our company, we expect our franchisees to uphold our core values, namely that of integrity, professionalism and treating employees and drivers with respect. These values are absolutely non-negotiable for us. We firmly believe they are the foundation of what drives our success to offer the best service to our customers and ensure that we grow sustainably, thereby providing more and more opportunities for employment, something that we have been relatively successful at doing to date.”

Enabling businesses is part of its business model, said Takealot, which includes the enablement of franchisees and drivers. “It is therefore not in our interests to go to court on matters that affect these relationships negatively and we will only do so in exceptional circumstances, this being one of those times. As this legal matter is ongoing, it would be inappropriate to comment or expand on the case at this time.”

Whatever the outcome of the court decision, Takealot said it will not affect any driver’s ability to service the areas in which they operate or affect their “employment opportunity”.

“We’re extremely proud of our impact on the local economy and our role in providing income opportunities to thousands of people across South Africa, many of whom were previously unemployed. We appreciate the critical role we play despite the tough economic climate.” BM/DM

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