South Africa | A New Franchising Code is Imminent

Seen as long overdue, the Consumer Protection Act (CPA) was introduced in 2011 and was expected to level the playing field, shifting power from franchisors to franchisees. However, the legislation has come under fire, being criticised by organisations as another barrier to doing business in South Africa.

First-off, entrepreneurs looking to become young budding franchisors should first understand the regulations governing the franchising industry, such as the CPA and FASA’s new code, to avoid incurring unnecessary costs and possible legal battles.

Not only must relationships with franchisees must comply with the CPA, but franchise agreements governing relationships need to contain prescribed clauses and information.

The CPA has ultimately changed the way franchises operate, with its various clauses and regulations leaving franchisors with little to no remedies to fall back on when things go wrong. As a result, many entrepreneurs are reassessing entering the franchise arena altogether.

The real game-changer? Franchisees are now considered consumers with a wide variety of consumer rights, placing even more responsibility on the shoulders of franchisors.

Franchise agreement

Traditionally, when awarding a new franchise, the franchisor incurs some capital cost expenditure prior to the new franchise opening.

Under S7 (2), the franchisee may exercise their rights to cancel a franchise agreement without cost or penalty within 10 business days after signing it, leaving the franchisor with no remedy in which to recover from the franchisee if any loss is suffered due to the agreement being terminated.

The CPA could have severe adverse effects on budding entrepreneurs looking to become franchisors and may result in them becoming more judicious in negotiating franchise agreement terms.

Suppliers

Another deterrent for franchisors is that franchisees have the right to select suppliers, as outlined in S13.

Franchisors can only dictate supply in relation to branded goods and those reasonably related to the franchise service or branded product. So, if the non-branded good can replace the branded item without detracting from the franchising company profile, the franchisee may not be forced into buying the branded product.

Unsolicited goods

Creating yet another hurdle for start-ups is S21 of the CPA, which prohibits the supply of unsolicited goods.

Franchisors may risk losing the ownership, and non-payment, for any goods that have been supplied or services performed that the franchisee has not explicitly asked for. Just imagine having a McDonalds with no Big Macs?

New franchising code

FASA identified the need for an effective, alternative dispute resolution process, one that provided both franchisors and franchisees with an opportunity to resolve disputed efficiently.

With the objective to develop and support ethical franchising, FASA established the Industry Code which was gazetted in 2017 after undergoing several revisions and simplifications.

Satisfied with the draft Code document, the Consumer Protection Commission requested FASA’s Code of Ethics and Business Practice guidelines be somewhat incorporated.

Adding new provisions that looked at imposing a code of conduct on franchisors and franchisees to regulate behaviour within the industry, FASA made provisions for certain matters not dealt with by the CPA.

Franchise Industry Ombud

As a result, a non-profit Franchise Industry Ombud (FIO) has been established and will need to appoint a board comprising four to eight individuals, two of which must be appointed by FASA, three by franchisors and three by franchisees. The board will in turn appoint an Ombud.

The jurisdiction of the FIO includes franchise related matters not covered by the CPA, with the intention that every reasonable effort shall be made to resolve all complaints informally, cost-effectively and expeditiously.  All information furnished will be deemed confidential and without prejudice basis.

The FIOs purpose is to create a platform where franchisors and franchisees can resolve disputes by making use of cost-effective processes. However, it will be funded by franchisors and franchisees, placing additional burden on businesses in the franchising industry.

The Code requires franchisors to:

  • Throughout the life of a franchise agreement, provide the franchisees with training, supervision and assistance in the operation and conduct of the franchise business;
  • Be the owner or authorised licensee of any intellectual property (IP) used in the franchise business, including copyright and trade marks;
  • Timeously pay to the FIO all levies arising in terms of the Code.

The Code requires franchisees to:

  • Only make authorised use of the franchisor’s IP, and comply with the franchisor’s operations manual and business system;
  • Not disclose any of the franchisor’s IP to third parties, neither during nor after termination of the franchise agreement;
  • Not compete with the franchise system without the written consent of the franchisor, and not appropriate or divert any of the franchisor’s IP, including their confidential information and trade secrets;
  • Timeously pay to the FIO all levies arising in terms of the Code.

Adams & Adams confirmed that the draft Code has been submitted to the Consumer Protection Commission for consideration.

To stay abreast of developments and for any franchising legal advice, contact our professionals.

Eugene Honey
Eugene Honey
Partner | Attorney
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