The draft Industry Code for the Franchise Industry (Code) was published for public comment on 29 January 2016. It provides the proposed framework for an ambitious dispute resolution mechanism for franchisees and franchisors that includes the establishment of a “Franchise Industry Ombud” (Ombud).

The Ombud is intended to facilitate the efficient and cost-effective resolution of disputes arising in the franchise industry in South Africa, and which concern the rights and obligations set out in the Consumer Protection Act, No 68 of 2008 (CPA). The clear purpose of the Code is to provide a means for parties in a franchise relationship to resolve disputes without the need for costly High Court litigation or private arbitrations.

The Code and Ombud

In terms of s82(2) of the CPA the Minister of the Department of Trade and Industry may prescribe an industry code regulating the interaction between or among persons conducting business within an industry, or between an industry and consumers. To date, only two industries have issued codes of conduct in terms of this provision. The first is the automotive industry (South African Automotive Industry Code of Conduct) and the second is the goods and services industry (Goods and Services Industry Code).

Like the South African Automotive Industry Code and the Consumer Goods and Services Industry Code, the Code is premised on a self-funding model of regulation in terms of which the Ombud shall be financed from, among other things, contributions levied on franchisees and franchisors.

As noted above, the Code and the Ombud have been established to create the infrastructure and administrative capacity to facilitate and administer the resolution of disputes between franchisees and franchisors. It operates in addition to the CPA, rather than as an alternative. The Code applies to all franchisors, franchisees and to prospective franchisees.

In terms of the Code, the Ombud is empowered to consider and determine disputes between franchisees and franchisors in an informal and expedient manner. It contemplates parties submitting written representations and documentary evidence to the Ombud for consideration and adjudication. Importantly, the Code does not detract from any other rights and remedies that the parties may have in law, and does not oust the jurisdiction of the courts. Thus, unless the parties agree otherwise, a decision of the Ombud is not final or binding on the parties before it.

Practical considerations

In order for the objectives of the Code to succeed it will be necessary for industry players and other stakeholders to become involved, and for a culture of participation to develop. The Code seeks to facilitate this involvement at board level (being the board of the Ombud) by granting franchisors as a group the right to nominate and appoint one person to serve on the board. Similarly, franchisees as a group, excluding prospective parties to franchise agreements, may nominate and appoint one person to serve on the board.

If properly utilised, the Ombud will hopefully assist in filtering complaints and alleviating the burden on the National Consumer Commission, and indeed on the courts. To this end, s69 of the CPA provides that the remedies set out in s69(a) to s69(c) of the CPA must first be exhausted before approaching a court for redress under s69(d). A person must therefore first refer the matter directly to the National Consumer Tribunal, to the applicable ombud with jurisdiction (in this case the Ombud to be established under the Code), provincial consumer court or file a complaint with the National Consumer Commission, before approaching a court. The provisions of s69 of the CPA are thus designed to ensure that parties make use of the dispute resolution framework established under the CPA before turning to the courts.

The Ombud has jurisdiction over any dispute relating to an alleged breach of the CPA by a franchisor or a franchisee. Significantly, it is also proposed that the Ombud will have a wider jurisdiction to determine disputes arising from:

  • a franchise agreement or disclosure document, including disputes relating to the interpretation, breach, cancellation and termination of a franchise agreement;
  • 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 service in terms of a franchise agreement; or
  • any solicitation of any offer to enter into a franchise agreement.

The Code not only delineates the powers of the Ombud but also prescribes a complaint process. Briefly, once a complainant submits a complaint to the Ombud, including all supporting documentation, it will carry out the necessary investigation and make a recommendation, which includes the potential for the matter to be referred to mediation. Neither the complainant nor the participant shall be bound to accept the recommendation. If the matter is resolved as a result of both parties accepting the recommendation, the Ombud may submit such finding to be made an order of court, to add a layer of legal enforceability to the resolution. The Ombud is also mandated to keep comprehensive records of all complaints, and to compile an annual report including information on complaint types and businesses being complained about. This will hopefully assist in identifying systemic and recurring problems, which participants need to address.

Where a signed franchise agreement contains a dispute resolution clause which provides for dispute resolution other than in terms of the Code, that clause shall govern the resolution of any dispute falling within the terms of such a provided that the clause complies with and gives effect to the CPA; and the applicability of the CPA is not excluded from the resolution of the dispute. It remains to be seen whether or not this will mean that parties are obliged to approach the Ombud in circumstances where their agreement contemplates a private arbitration.

The Code contains some key actions the Ombud must take. These include, among others, the following:

  • producing an annual report summarising its activities, including the number of complaints received and resolved, a summary of the disputes and the numbers of each kind of dispute; and the number and types of contraventions of the CPA determined to have taken place;
  • liaising with any consumer protection authority, franchise industry association or regulatory authority on matters of common interest; and
  • promoting awareness of the Code and of the Franchise Industry Ombud and its functions.

In terms of s82(7) of the CPA, the National Consumer Commission still has an obligation to monitor the effectiveness of any industry code. This oversight mechanism is key in order to ensure that it functions effectively, and can be amended progressively as issues are identified that require attention.

Conclusion

Franchisees and franchisors will determine the success of the Code and Ombud by how they make use of it, and how it is administered. Central to this is fostering an awareness of its functions and how it may assist businesses.

In this regard, the Code requires franchisors to include, in all disclosure documents and franchise agreements, a notice stating that they are bound by the provisions of the Code and undertaking to comply with the provisions of the Code. All disclosure documents and franchise agreements should also include a notice advising franchisees that they are entitled to refer any dispute to the Ombud, and providing the franchisee with the contact details of the franchise industry Ombud. Franchisors are also obliged to ensure that a copy of the Code is made available on request to any potential franchisee from whom an offer to enter into a franchise agreement is being solicited and to any franchisee with whom a franchise agreement has been concluded.

If successfully implemented, the establishment of the Code and Franchise Industry Ombud will provide welcome relief to the already over-burdened National Consumer Commission.