Dispute sees 78 ‘Cash Crusaders’ turn heel and cancel their franchise agreements

A dispute between Cash Crusaders Franchising and its franchisees has resulted in 78 of its 150 non-corporate-owned franchisees, representing about a third of its franchise footprint, cancelling their franchise agreements and commencing trading independently under the Cash Xchange brand.

The dispute was highlighted in a judgment handed down on Friday in the Western Cape High Court to an application lodged by Cash Crusaders against its former franchisees.

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It was triggered by a decision by Cash Crusaders to change its suspensive security buy (SSB) transactions system, commonly known as pawn transactions, which are regulated by the National Credit Act (NCA).

These transactions are one of the three main income streams of the franchisees.

The others are the sale of new goods procured and provided exclusively to franchisees by Cash Crusaders Corporate and the purchase and sale of pre-owned products from and to members of the general public.

At the end of the 30-day SSB transaction period, consumers often sought to extend their loan with the franchisee, with the extension regarded as a new rather than an extended loan, which entitled the franchisee to charge a further initiation fee on each loan extension.

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Cash Crusaders, after seeking legal advice, now requires its franchisees to charge only a single initiation fee as opposed to multiple initiation fees on extensions of these ‘pawn’ transactions.

What does the law say?

Unhappy with the change in the system, the franchisees in September 2022 applied to the Western Cape High Court for declaratory relief regarding the interpretation of the NCA and whether it permitted repetitive charges of initiation fees for extended SSB transactions.

Cash Crusaders opposed the application, claiming the franchisees had not complied with the dispute resolution mechanism contained in the franchise agreement.

The franchisees responded by claiming that Cash Crusaders breached the franchise agreement when it introduced the changes to the SSB transactions.

They further claimed these changes had caused them to suffer substantial financial losses and put Cash Crusaders on terms, demanding that the various breaches of the franchise agreement, particularly the change of the SSB transactions, be remedied within 10 days.

Cash Crusaders’ legal representatives denied on 19 September 2023 any breach of the franchise agreement and proposed the referral of the dispute to arbitration.

The franchisees did not accept this proposal and restated their stance that Cash Crusaders was in breach of the agreement and threatened that they would cancel the franchise agreements if Cash Crusaders failed to remedy the breach.

This led to Cash Crusaders launching an urgent application on 28 September 2023, seeking an interim interdict restraining these franchisees from cancelling their franchise agreements and compelling them to comply with the obligations under the agreement because it regarded the threatened cancellation of their franchise agreements as unlawful.

The horses bolt – early

This application was pending before the court and the 10 days stipulated by the franchisees in their letter of 18 September 2023 had not yet expired when the franchisees cancelled their respective franchise agreement with Cash Crusaders on 26 September 2023.

The franchisees further claimed that by cancelling their contracts “the horse had bolted, and the interdict application had become moot”.

Cash Crusaders amended the relief sought at the hearing of the interdict application by seeking to hold the franchisees to the terms of the franchise agreements, despite their cancellation, pending a determination by an arbitrator on their entitlement to cancel the franchise agreement on the basis they had.

The interdict application was heard on 28 September 2023 and the court on 3 October 2023 granted the interdict against the franchisees pending an arbitrator or the court’s final determination of the dispute between the parties.

The court interdicted the franchisees from cancelling the franchise agreements and further directed them to abide by and comply with their obligations under the respective franchise agreements.

‘Court impermissibly exercised jurisdiction over us’

The franchisees applied for leave to appeal this court order on 4 October 2023, claiming among other things that the court impermissibly exercised jurisdiction over the franchisees, thereby making the order final in effect.

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This appeal was dismissed with costs on 25 October 2023, with Cash Crusaders on the same day addressing a letter to the legal representatives of the franchisees to seek an undertaking that there would be compliance with the interim interdict.

The franchisees on 26 October 2023 launched an application for leave to appeal to the Supreme Court of Appeal and declined the request from Cash Crusaders for such an undertaking because the interim order, in their view, was final and remained suspended pending their application for leave to appeal.

Application and counter-application

Cash Crusaders subsequently applied to enforce compliance with an interim interdict granted on an urgent basis on 3 October 2023 because of the non-compliance by the franchisees with the interim order, pending their application for leave to appeal to the Supreme Court of Appeal.

It was also seeking a declaratory order confirming that the interdict granted on 3 October 2023 is interim in nature and not suspended pending an application for leave to appeal or any further appeals.

In addition and alternatively, Cash Crusaders was seeking an order directing that the 3 October 2023 court order shall operate pending any application for leave to appeal or further appeals.

The franchisees filed a counter-application stating that in the event that the court finds that the interdict order of 3 October 2023 is interlocutory and does not have the effect of a final judgment, its operation be suspended in terms of the Superior Courts Act pending finalisation of the appeal process, including any application for leave to appeal to the Supreme Court of Appeal or an application for leave to appeal to the Constitutional Court.

Cash Crusaders application dismissed

Judge James Lekhuleni on Friday dismissed the Cash Crusaders application with costs because in his view the 78 franchisees would suffer overwhelming harm if the application was granted.

Lekhuleni further ruled that the interim interdict is appealable and said Cash Crusaders had not discharged the onus of showing that the franchisees would not suffer irreparable harm if the execution order is granted.

The judge said the harm that Cash Crusaders will suffer is lessened by the fact that this matter will be heard in due course before the arbitrator and also mitigated by the fact the franchisees have committed to buying stock from Cash Crusaders.

However, he said it has been established in the papers that the franchisees will suffer irreparable harm if the order is executed and the franchisees have claimed it would detrimentally affect third parties.

De-identification process already underway

The franchisees said they have already placed orders with third-party suppliers as part of the de-identification process and this stock is already in the shops or is in the process of being delivered.

Judge Lekhuleni said the franchisees are liable for the payment of that stock and will not be able to spend additional capital in purchasing stock from Cash Crusaders, which will be required in terms of the franchise agreement if it is executed.

The franchisees would also not be able to sell the stock to customers if the order is executed because the stock from third-party suppliers does not conform to Cash Crusader’s requirements, he said.

Lekhuleni said the stock will then simply sit in the warehouse or a store – once again to the detriment of the franchisees because they would be stuck with stock from third-party suppliers, which they have already paid for or need to pay for, but cannot sell because they do not meet the requirements of the franchise agreement.

The cumulative effect is that there will be no funds to purchase stock from Cash Crusaders and the franchisees will be in breach of the franchise agreement, he said.

Source: moneyweb.co.za