A brief discussion on the Franchise Association of South Africa Industry Code

Franchise arrangements are governed by the Consumer Protection Act, 2008 (CPA), which sets out certain requirements in respect of the agreements being entered into between franchisors and franchisees, and the process which should be followed when a franchise arrangement is entered into.

24 Jun 2020 6 min read Corporate & Commercial Alert Article

On 15 June 2020, the Department of Trade, Industry and Competition (DTIC) published a discussion document which includes the Franchise Association of South Africa (FASA) Industry Code as an annexure. The DTIC has indicated that the discussion document is intended to create an informal platform whereby the DTIC and the public may engage on possible areas for consideration in respect of the FASA Industry Code. The DTIC has requested that the public provide their written input by no later than 15 July 2020.

The FASA Industry Code serves to establish an Ombud scheme which the DTIC hopes will ease the application of the CPA on consumer disputes with regards to franchising services. In addition, the FASA Industry Code serves to regularise the interactions between various parties in the supply chain within the franchise industry and thereby ensure proactive compliance with the CPA.

This alert serves to provide a brief summary of some of the provisions of the FASA Industry Code and the potential impact on the manner in which disputes pertaining to franchise arrangements have been dealt with in the past.

FASA Industry Code

The FASA Industry Code provides for the establishment of the Franchise Industry Ombud (FIO), a non-profit company which shall comply with the provisions of the Companies Act, 2008 (Companies Act) as well as the King Code IV. The board of the FIO will consist of at least four and not more than eight persons appointed in accordance with the provisions of the memorandum of incorporation of the FIO as well as the Companies Act. FASA shall be entitled to appoint two persons to the board and franchisors and franchisees (as a group, excluding prospective franchisees) shall be entitled to nominate and appoint three persons each to the board.

The FASA Industry Code provides that the FIO shall determine the level of any contributions which are to be levied on franchisees and franchisors. The payment of these contributions will need to be addressed in franchise agreements in order to ensure that each party is aware that payment of these contributions needs to be made and that neither party is held liable for the contributions due by the other. No indication is provided in the current draft of the FASA Industry Code as to the implications if either the franchisor or franchisee fail to make payment of the contributions. However, as the FASA Industry Code is still subject to change, we anticipate that penalties for non-payment may be included within revised versions thereof.

The board of the FIO must, by way of majority vote, appoint a suitably qualified person to act as Ombud. The Ombud, once appointed, will serve a term not exceeding five years and any person who holds the office of Ombud may be reappointed as such at any time before or after the expiry of such person’s term as Ombud. The Ombud may only be removed from office in the event of incapacity, gross incompetence or gross misconduct and in terms of any fair administrative process conducted by a person appointed by the Minister of Trade and Industry for such purpose.

The Ombud bears final responsibility in respect of the resolution of all complaints indicated as being within the jurisdiction of the FASA Industry Code. These include the following:

  • any dispute by a franchisor or a franchisee and arising from:
  • a franchise agreement or disclosure document, including disputes relating to the interpretation, breach, cancellation and termination of a franchise agreement and payments of money which are alleged to be owing in terms of or arising from a franchise agreement;
  • the supply of any goods or services or failure to supply goods or services in terms of a franchise agreement; or
  • any solicitations of any offer to enter into a franchise agreement;
  • any dispute concerning the applicability or interpretation of the FASA Industry Code;
  • any dispute relating to the jurisdiction of the FIO; and
  • any dispute which would otherwise be outside of the jurisdiction of the FIO where the parties agree to submit a dispute to the FIO for resolution and the FIO agrees to take cognisance of the dispute.

From the above it is clear that the FIO (and thereby the Ombud) has a wide jurisdiction to not only attend to disputes arising from the franchise agreement concluded by a franchisor and a franchisee, but to also attend to any dispute which a franchisor and franchisee wish to refer to the FIO. This may be beneficial to the parties concerned as the dispute resolution process may be finalised quicker and be more cost effective.

The above does not mean that the dispute resolution provisions which may be incorporated in current franchise agreements are invalidated, as the FASA Industry Code specifically stipulates that this is not the case, provided that such dispute resolution clauses comply with and give effect to the CPA, and the applicability of the CPA is not excluded from the resolution of the dispute.

Although franchisors and franchisees are entitled to make use of other alternative dispute resolution mechanisms which may be currently contemplated in their franchise agreements, the FASA Industry Codes provides that the parties to such dispute are required, upon request, to provide the FIO with the name and contact details of the dispute resolution agent to whom the dispute has been referred as well as to provide the FIO with copies of all pleadings relating to the dispute and a copy of any award made by the dispute resolution agent.

Ombud Complaint Process

Where a complaint is referred to the Ombud, the Ombud is entitled to reject such complaint on the basis that, among other things, there is a lack of information provided by the parties or the dispute does not fall within the jurisdiction of the FIO as contemplated in the FASA Industry Code. Notwithstanding the rejection, the parties are afforded an opportunity to supplement the complaint or to make submissions directly to the Ombud in order to persuade him/her to accept the complaint.

If the Ombud decides not to reject the complaint, the FIO shall be required to notify the respondent of the complaint and provide the respondent with 15 days (or such longer period as the Ombud might afford) to submit its response.

After receipt of the response from the respondent, the Ombud may request any person who he/she reasonably considers to be in possession of information which may be of assistance in resolving the dispute, to provide such information either in writing or orally. Where oral evidence is required, the parties may be required to attend a hearing and, with the permission of the Ombud, may be entitled to be represented by any person of their choice, including legal representation.

The Ombud may, at any time, provide the parties to the dispute with his/her view and recommendations. If the parties accept such recommendations, it is recorded in writing by the Ombud and the parties are required to implement such recommendations. However, if the parties are unwilling to accept the recommendations provided by the Ombud, the Ombud may close the complaint or take any other step contemplated in the FASA Industry Code.

The Ombud may at any time close a complaint if, among other things, the Ombud reasonably believes that the complaint is being pursued in an unreasonable, frivolous, vexatious, offensive, threatening or abusive manner or the complaint is referred to any court or any other forum or tribunal or dispute resolution process.

The complainant is entitled to withdraw the complaint at any time provided that written notice of such withdrawal is provided to the other party to the dispute and the FIO. In addition, should the parties resolve the dispute on their own, after the complaint has been submitted to the Ombud, the complainant may withdraw such complaint within five days of resolution, provided that it notifies the FIO of such resolution.

It is clear from the provisions of the FASA Industry Code that it is intended to provide franchisors and franchisees with an alternative dispute resolution mechanism which is hopefully quicker and more cost effective than the traditional alternative dispute resolution mechanisms which are currently employed to attend to such matters. Whether the Ombud will actually manage to achieve this objective remains to be seen, but it does appear to be a move in the right direction.

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