Cracking The Code

Healthy franchises both create and spring from healthy franchisor-franchisee relationships. But inevitably, where there are business partnerships, there will be disputes. Franchising in South Africa has long been governed by the Consumer Protection Act (CPA), into which franchising regulations were introduced in 2011.

The Franchise Association of South Africa (FASA), however, felt the industry needed a system that regulated industry behaviour and also provided for an alternative dispute-resolution process, and so formulated an Industry Code.

Eugene Honey of Adams & Adams, FASA’s legal advisor, says one of the most significant aspects of the consultation process was the incorporation of FASA’s Code of Ethics and Business Practice Guidelines – a move that was requested by the National Consumer Commission (NCC). “One of FASA’s main goals is the promotion of ethical franchising. So, with the NCC’s blessing, we embarked on a process of refining the code, arriving at one comprised of two key provisions: a mechanism for resolving disputes between franchisors and franchisees; and a code of conduct that regulates matters not necessarily addressed by the CPA.”

The code provides for the establishment of a Franchise Industry Ombud to mediate disputes. Honey says first prize for the ombud will be to resolve disputes “informally, cost-effectively and expeditiously”. The code also explicitly sets out the obligations of franchisor and franchisee, including those pertaining to legislation, advertising, discrimination and dignity.

POPIA and franchising

Franchisors and franchisees have until July 2021 to become compliant with the Protection of Personal Information Act (POPIA), so it’s imperative to make clear their respective data responsibilities to avoid breaches and reputational damage. The act governs how data can be collected, shared and used, with the aim of preventing data subjects from discrimination and theft.

While the act doesn’t preclude you from marketing to customers or potential customers, it does stipulate how you may do so. “The biggest change under POPIA is that you can only market directly to potential customers electronically, for example, by SMS and email, if you have their consent,” explains Jesse Wrench of corporate law firm Michalsons.

The buck shops here

Key for the franchise model is establishing who is responsible for what. “A franchisee and franchisor will probably be jointly responsible parties under POPIA,” says Wrench. “It is very important that the franchise agreement clearly sets out who owns the data and databases, and who is responsible for managing these. This is especially true if data is at the heart of the business. Often it will be the franchisor but not always; this depends on the business model. The franchisor should do most of the work for franchisees; this is much more effective than letting each franchisee figure it out,” explains Wrench.

If a franchisee is found to have flouted the law and is the responsible party, they will be fined or sued for damages. “If the franchisor is held liable for the acts of the franchisee, the franchise agreement normally states the franchisee indemnifies the franchisor and the franchisor can recover the damages from the franchisee,” says Wrench. Of course, the reputational damage of such a breach will negatively affect everyone.

New franchise agreements should explicitly define each party’s data responsibilities, particularly if the parties are jointly responsible. “We should review all existing franchise agreements – especially the confidentiality, data and IP clauses – and, if necessary, amend the agreement,” concludes Wrench.