Franchise Industry Code Under Consideration By Government

In the midst of all this disruption, government’s Department of Trade & Competition (dtic) called for comments on the discussion document relating to the publication of the Franchise Association of South Africa (FASA) Industry Code “the Code”.

 FASA has welcomed the move, especially in these trying Covid-19 times as the stability, protection and recovery of the franchise industry will be crucial to the survival of the sector and its future growth.

For many years, 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. 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.

According to Eugene Honey of Adams & Adams, FASA’s legal advisor and heading the team responsible for lobbying government, the Consumer Protection Commission subsequently indicated that they were happy with the draft Code document, but indicated 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.

A Franchise Industry Ombud (“FIO”) non-profit company has already been established. The FIO company will need to, in due course, appoint a board consisting of 4 – 8 persons, including 2 persons appointed by FASA, 3 appointed by franchisors and 3 appointed by franchisees.

The Board will in turn appoint an Ombud, who will be a fit and proper person, a South African citizen, have at least ten years of experience in dispute resolution, be legally qualified and not hold any direct or indirect interest, after the date of her or his appointment, in any franchise business.

The jurisdiction of the FIO includes franchise related matters, essentially as set out in the CPA. The intention shall be that every reasonable effort shall be made to resolve all complaints informally, cost-effectively and expeditiously. All information furnished will be provided on a confidential and without prejudice basis and may not be disclosed to any person or party outside of the dispute. The dispute resolution process will essentially be a robust mediation process.

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 divert any 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.