A New Franchise Industry Code for South Africa

As you may recall, the Consumer Protection Act, no. 68 of 2008 (“CPA”), introduced franchise legislation into the franchise industry in South Africa, on or about 1 April 2011. By way of example, Regulation 2 thereof sets out 50 or more points which need to be dealt with and included in a compliant franchise agreement. Regulation 3 introduced the provision of a disclosure document, to be furnished to a prospective franchisee, at least 14 days prior to signing a franchise agreement. This sets out what information and documentation should be provided to the prospective franchisee, to place the franchisee in a position where they are reasonably able to assess the franchise business opportunity offered by the franchisor.

Section 82 of the CPA provides for the introduction of industry codes within an industry, which would regulate the interaction between or among persons conducting business within that industry,including providing for alternative dispute resolution.

FASA identified the need in the South African Franchise Industry for an effective, alternative dispute resolution process, the intention being to provide both franchisors and franchisees with an opportunity to resolve disputes between them in a consistent, effective and efficient manner.

A group of committed FASA members combined to develop a world class alternative dispute resolution process, some time ago, which became the basis for the dispute resolution process, forming part of the Industry Code (“Code”). The draft Code was accepted by the Consumer Protection Commission and was subsequently published for comment in the Government Gazette. Numerous comments were received, followed by a process of working through all the comments, making certain updates to the Code and submitting a full report to the Consumer Protection Commission, together with an updated version.

The Consumer Protection Commission subsequently indicated that they were happy with the draft Code document, butindicated that they would prefer for FASA’s Code of Ethics and Business Practice Guidelines to, in some way, also be incorporated into the Code.

One of the main objectives of FASA is to develop and support ethical franchising. As a result, FASA were only too happy to oblige. What followed was a process of updating, developing and refining the new Code by adding to, what was essentially a robust mediation process, additional provisions aimed at imposing on franchisees and franchisors a code of conduct aimed at regulating behaviour within the Franchise Industry and providing for certain matters not dealt with by the CPA.

As a result, the Code, as it stands now, consists of two main areas, being:-

  • An alternative dispute resolution mechanism for disputes amongst franchisees and franchisors; and
  • A code of conduct aimed at regulating behaviour within the Franchise Industry and providing for certain matters not dealt with by the CPA.

Part B of the Code Deals With the Board of the Franchise Industry Ombud (FIO) and the Ombud

The FIO is a non-profit company and must exercise the powers and discharge the functions assigned to it in terms of the Code. The FIO will be governed by the Board in accordance with the provisions of the Code and the Memorandum of Incorporation. The objective of the FIO is to create the infrastructure and administrative capacity for and to facilitate and administer the resolution of disputes as provided for in the Code.

The board of the FIO will consist of between 4 – 8 persons, including 2 persons appointed by FASA, 3 appointed by franchisors and 3 appointed by franchisees.

Only franchisors and franchisees who have paid to the FIO all levies owed to it, may attend a General Meeting of the FIO and vote, and participate in the nomination and appointment of directors of the FIO board.
The powers, duties and functions of the board will include determining the Ombud’s remuneration and terms of employment. It will also determine the level of any contribution which is to be levied upon franchisors and franchisees, in terms of the Code, so as to ensure that the FIO is sufficiently resourced to perform the functions required in terms of this Code.

In determining the contribution by franchisors and franchisees, the board may consider the following:-

  • The number of franchisees and franchisors in the market;
  • The relative market share of franchisees and franchisors;
  • The nature of any franchisee and franchisor, including of the sector;
  • Annual turnover of franchisees and franchisors;
  • Length of time for which the franchisee or franchisor has conducted business under the franchise system;
  • Number of complaints anticipated in the forthcoming year;
  • The anticipated operational cost of the FIO; and
  • Any other factor.

Functions of the FIO include that it must carry out its functions and act independently, openly and honestly. Further, it must exercise its functions in a cost-efficient and effective manner in accordance with the values and principles as set out in the Constitution. Further, it must adopt and implement a system for receiving, tracking, processing and reporting on complaints in accordance with the Code.

The FIO will primarily be financed from contributions levied on franchisees and franchisors. Any contributions levied on franchisees and franchisors:

  • shall be determined by the Board, in consultation with any franchise industry bodies;
  • may be expressed as a formula, which may differ between different Franchisees and Franchisors; and
  • must be published on the FIO website at least two months in advance of the date on which such contribution will be payable.

The FIO must provide franchisees and franchisors with an effective opportunity to comment on and make representations in regard to any contribution which the Board intends imposing.

The Ombud will be appointed for a term not exceeding five years and may be removed from office only in the event of incapacity, gross incompetence or gross misconduct or in terms of a fair administrative process conducted by a person appointed by the Minister of Trade and Industry for that purpose.

Every Ombud appointed by the Board must:

  • be a fit and proper person;
  • be a South African citizen;
  • have at least ten years of experience in dispute resolution;
  • be legally qualified;
  • not hold any direct or indirect interest, after the date of her or his appointment, in any franchise business.

With regard to cooperation with the FIO, parties must provide the FIO with any relevant information within their possession which is requested by the FIO and which is reasonably required by the FIO for the purposes of resolving a dispute. Further, no person may influence, interfere obstruct or in any way hamper the FIO in the exercise and discharge of its functions.

Part C – Jurisdiction and Complaint Process

The jurisdiction of the FIO includes disputes between a franchisor and franchisee in relation to franchise agreements, disclosure documents, breaches, terminations, payments of money and also the supply of any goods and services in terms of a franchise agreement.

With regard to the complaints process, the FIO and the Ombud must make every reasonable effort to resolve all complaints informally, cost-effectively and expeditiously.
The FIO and the Ombud may, at any stage, consult with or take advice from any person they reasonably consider to be suitably qualified to assist it in resolving the dispute.
All information provided by the Parties pursuant to the complaints process, as well as settlement offers, will be provided on a confidential and without prejudice basis and may not be disclosed to any person or party outside of a dispute.

Any Franchisor or Franchisee who has any dispute concerning a matter falling in the jurisdiction of the FIO, may file a complaint with the FIO. Complaints must be submitted using the prescribed form.

Every Complaint must:

  • Provide details of the parties;
  • Set out the relief sought by the Complainant;
  • Set out the basis for any urgency;
  • contain a summary of the facts and the reasons why the relief sought is appropriate in the circumstances;
  • include copies of all documents which are to be relied upon, the franchise agreement or disclosure document;
  • must contain any other information which the complainant considers necessary for a proper resolution of the Complaint.

Following the lodging of the complaint, the FIO shall acknowledge receipt and allocate a number or code assigned to the complaint.

A Respondent may also contend that the complaint has prescribed, object to the jurisdiction of the FIO, or contend that the dispute has been determined by another forum or is pending before another forum.

If, in the light of the Response, the Ombud is of the view that the Complaint should be dismissed on any ground, including that the Complainant does not appear to be entitled to the relief sought, because a proper case has not been set out or on any other ground, the FIO must advise the Parties of the Ombud’s view and the reasons for that view and must further advise the Complainant that unless he / she or it is able to provide further information within ten days or such further period as the Ombud may allow to counter the view taken by the Ombud, the complaint will be closed.

With regard to the resolution of disputes, the Ombud may request from any party any document, information or record which he or she reasonably considers would be of assistance in resolving the dispute.

If oral evidence is, in the opinion of the Ombud, necessary, the FIO shall request the parties to attend a hearing on not less than 10 days prior notice and any party shall, with the permission of the Ombud, be entitled to be represented, including a legal representative, and to make submissions and cross examine the witnesses at the hearing.
The Ombud may at any stage provide the parties with his or her view on the dispute and recommend a basis on which he or she proposes the dispute be resolved.

If the parties accept the recommendation of the Ombud, that recommendation will be recorded in writing by the Ombud and the parties will be required to implement the terms as recorded. If the parties are unwilling to accept the recommendation of the Ombud, the Ombud may close the complaint or take any other step provided for in the Code.

The Ombud may at any time close a complaint if:

  • the Ombud reasonably believes that the complaint is being pursued in an unreasonable, frivolous, vexatious, offensive, threatening or abusive manner;
  • the Complainant fails to co-operate with the FIO or the Ombud;
  • the complaint does not allege any facts which, if true, would constitute grounds for the relief sought;
  • the complaint lacks substantive merit;
  • the complaint is in substance the same as a complaint previously resolved and/or terminated by the Ombud; or
  • the Complaint is referred to any court or any other forum or tribunal or dispute resolution process.

The parties are obliged to inform the FIO if a complaint has been resolved, within 5 days. A Complainant may withdraw a complaint at any stage, on written notice to the other parties and the FIO.

Part D – Reviews of the Code, Industry Awareness and Reporting to the Commission

The FIO is obliged to review the Code and its implementation for with a view of ensuring that it is achieving its identified objectives and is operating effectively and as intended.
The first review should take place not less than three years after the Code takes effect and thereafter, not later than three years after any prior review. Any such review shall include notification to the Commission, to FASA and any franchise industry association and shall invite written representations regarding any review or proposed amendments. Following the receipt of representations, the FIO shall compile a report of its representations and the proposed amendments.

Under the heading of franchise awareness, franchisors are required to include in all disclosure documents and franchise agreements a notice stating that they are bound by the provisions of the Code, further that any dispute between the parties may be referred to the FIO, by either party.

With regard to the procurement of goods and supplies, subject to the provisions of section 13(1) of the CPA, a Franchisee may procure goods or services from any other supplier provided that the Franchisee proves to the reasonable satisfaction of the Franchisor that:

  • The goods or services are available at the same price as or at a lower price;
  • The goods or services are of equal quality and specification; and
  • procuring the goods or services from such supplier will not prejudice the Franchisor or any other Franchisee.

Where a Franchisor requires any Franchisee to acquire or purchase any products or services from a particular supplier or suppliers, the Franchisor shall use its best endeavours to ensure that the price is not greater than the market-related price, having regard to the nature, quality and quantity of the specific products.

Regarding prospective franchise agreements, all amounts received by a Franchisor in contemplation of the conclusion of a franchise agreement must be refunded to the person who made the payment, within five days of a written request for a refund less any reasonable out-of-pocket expenses incurred by the Franchisor together with a notice from the Franchisor including the relevant details and documentary proof of all out of pocket expenses deducted by the Franchisor.

There are also requirements regarding the use of marks, names and slogans. These include that no person may intentionally use a trade mark which is confusingly similar to that of another. Further, no person may use a mark which is reasonably likely to deceive any consumer as to the origin, nature, quality, ownership or affiliation of any goods or services or the user of the mark.

With regard to disclosure documents, every Franchisor shall comply with the provisions of regulation 3 of the CPA before accepting any payment from any prospective Franchisee. Further, a Franchisor may require a prospective or existing Franchisee to sign a confidentiality agreement. The Franchisor is also required to publish or forward to any prospective Franchisee a disclosure document which is materially correct.

Part E – Code of Conduct

The Code also provides that the general standards of conduct of Franchisors and Franchisees must include the following:-

  • Be compliant with franchise legislation;
  • Giving effect to the Constitutional values of dignity and equality;
  • Refrain from all forms of unfair discrimination in terms of the Constitution;
  • The parties must deal with each other in good faith;
  • The parties must respond to each other within a reasonable time; and
  • Compliance with the Code of Advertising Practice of the Advertising Regulatory Board in respect of all marketing, promotions and advertisements.

In addition, Franchisors must:

  • Throughout the life of a franchise agreement, provide the franchisees with training, supervision and assistance in the operation and conduct of the franchise business;
  • Deposit all monies in contemplation of the conclusion of a franchise agreement into a separate bank account;
  • Be the owner or authorised licensee of any intellectual property used in the franchise business, including copyright and trade marks;
  • Select and accept only franchisees who appear to have the skills and resources sufficient to carry on the franchise business;
  • Notify Franchisees in writing of any alleged breach of a franchise agreement and, afford the franchisee a reasonable time within which to remedy any such breach, except where the franchisor is entitled to summarily terminate a franchise agreement; and
  • Timeously pay to the FIO all levies arising in terms of the Code.

Franchisees must:

  • Only make authorised use of the franchisor’s intellectual property, and comply with the franchisor’s operations manual and business system;
  • Not disclose any of the Franchisor’s intellectual property to third parties, neither during nor after termination of the franchise agreement;
  • Devote their best endeavours to the maintenance and growth of the franchise business;
  • Supply the Franchisor with verifiable operating data and allow the Franchisor access to the premises;
  • Not compete with the franchise system without the written consent of the franchisor, and not appropriate or divertany of the Franchisor’s intellectual property, including their confidential information and trade secrets;
  • Timeously pay to the FIO all levies arising in terms of the Code.

As mentioned, the Code includes a robust mediation process, a code of conduct and other aspects not dealt with in the CPA. Further articles on the Code will follow.

Progress of the Code

In the interim, we confirm that the draft Code has been submitted to the Consumer Protection Commission for consideration. We will keep you advised of developments.

Eugene Honey
Eugene Honey
Partner | Attorney
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