The Franchise Industry Code of Conduct: An Overview

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The draft Franchise Industry Code of Conduct of South Africa (Code) was published for public comment on 29 January 2016, in terms of the Consumer Protection Act. The Code seeks to introduce an alternative dispute resolution (ADR) mechanism for disputes between franchisors and franchisees, which will be implemented by the Franchise Industry Ombud (FIO), once established.

ADR is considered to be an excellent alternative to traditional litigation in the franchising industry for a number reasons, including that it is time and cost effective; it allows parties to a dispute to adopt practical and satisfactory solutions; it provides a neutral forum in which disputes can be resolved; and it allows parties to choose a mediator, arbitrator or expert with legal and technical expertise in franchising and dispute resolution.
As the Code will impact on the resolution of franchise disputes when it comes into effect, franchisors and franchisees should be aware of its potential implications.

Franchise Industry Ombud
The Franchise Association of South Africa (FASA) has applied for the Code to be recognized as an industry Code in terms of the Consumer Protection Act. FASA will be instrumental in the establishment of the FIO, including its incorporation as a non-profit company and initial funding. Subsequent funding for the FIO will originate from a number of sources, including levies on franchisors and franchisees, and investment income. FASA , franchisors and franchisees will be entitled to nominate members to the FIO board, whose duties will include the appointment of an ombudsman in terms of the Code (Ombudsman).
The FIO will have jurisdiction over disputes relating to an alleged breach of the Consumer Protection Act by a franchisor or franchisee; the applicability or interpretation of the Code; the jurisdiction of the FIO; and where parties agree to submit a dispute to the FIO that would normally fall outside its jurisdiction. However, the FIO will not consider disputes where the complaint has prescribed; disputes that are outside of its jurisdiction; and disputes that are pending before another forum.

ADR Outcomes
The Ombudsman will make recommendations on how a dispute is to be resolved. If the parties to a dispute accept the recommendations, these will be recorded in writing (much like a settlement agreement) and the parties will be required to implement them. If the parties do not accept the recommendations, the Ombudsman will be entitled to close the complaint in accordance with the Consumer Protection Act.

Complainants will be entitled to seek compensation for loss or injury under the Code. They will also be entitled to reserve a request for compensation for another forum, such as a court, whose decisions are binding. This is welcome, as the Ombudsman will not have the power to make any binding decisions under the Code.

Franchise Agreements and Disclosure Documents
In all franchise agreements and disclosure documents, Franchisors will be required to include a notice indicating that they are bound by the provisions of the Code and undertaking to comply with its provisions; advising franchisees that they are entitled to refer any dispute to the FIO; and providing the franchisee with the contact details of the FIO. Franchisors will also be required to make the Code available to franchisees on request, where there is a potential or existing franchise agreement.

Other Dispute Resolution Processes
Franchisors and franchisees will be entitled to refer disputes that fall under the jurisdiction of the FIO to a court, dispute resolution process, tribunal or forum other than the FIO. In an effort to protect the parties to the dispute, the Code will allow any party to the dispute to notify the FIO of the dispute and providing details such as a summary of the dispute; the names and contact details of the parties to the dispute; and the details of the forum to which the dispute has been referred. However, it is not clear from the Code how the FIO will have oversight of such a dispute if none of the parties notify the FIO of the dispute.
Where a franchise agreement contains a clause that provides for dispute resolution other than in terms of the Code, the clause will govern the resolution of any dispute that falls within its terms, as long as the clause complies with and gives effect to the Consumer Protection Act and the application of the Consumer Protection Act is not excluded from the dispute. The parties will be required to, on request, provide the FIO with the name and contact details of the dispute resolution agent to whom the dispute has been referred, copies of all pleadings relating to the dispute and a copy of any award given in resolution of the dispute. Presumably, if the dispute resolution clause does not apply, the dispute will have to be referred to the FIO in terms of the Code. This appears to be at odds with the provision of the Code that entitles any party to refer a dispute to another forum. Further clarity is required on this aspect.

The Code will apply to franchisors and franchisees irrespective of whether or not they are members of FASA. However, it should be noted that the Ombudsman will only have the power to make recommendations, not binding decisions, on how to resolve a dispute. The parties to a dispute will only be required to implement the recommendations if they accept them. If the parties fail to accept the recommendations, the Ombudsman will have the right to close the dispute. Accordingly, franchisors and franchisees should take note of the changing landscape and consider the need to revise their existing franchise agreements and disclosure documents.

Twaambo Muleza

Twaambo has a BA LLB LLM and was admitted as an attorney in 2010 after having completed her articles at Bowman Gilfillan. At Bowmans, she rose to the level of senior associate in both the public and regulatory law team and the mergers and acquisitions team, where she was seconded to the commercial law team at Anglo Operations Ltd. Twaambo then took up a position as senior associate at Baker & McKenzie in their mergers and acquisitions team before joining Caveat Legal in 2015.