IAN JACOBSBERG: Franchise sector set to benefit from modernised approach to dispute resolution

It is not news that for several years businesses in SA have faced a series of setbacks, with load-shedding, increased fuel prices and interest rates, a weaker rand and Covid-19 all taking their toll.

Consumer-facing businesses such as restaurants and retail outlets have been hit particularly hard, especially as most businesses in these sectors are smaller and independently owned, often without significant resources to cushion against economic pressures that have become the order of the day.

The franchise sector has been no exception, though several characteristics of the sector make it less susceptible to economic turmoil. Franchisees have the advantage of using an established model backed by a record of success, and benefit from the brand recognition and customer loyalty developed by the franchiser and the existing network. 

In addition, franchisees count on support from their franchisers to help them navigate difficult economic times, including training, marketing and operational support. These advantages help franchisees reduce costs and improve profitability, even when independent entrepreneurs may struggle to manage poor business performance. 

In franchise relationships collaboration and a mutually supportive engagement between franchisee and franchiser is therefore vital. This is particularly important when, as they inevitably will, differences arise between them with regard to policies and practices that affect the operations and financial viability of their businesses.

In recent months several high-profile cases have arisen, involving substantial franchisers such as Pick n Pay, Shell and Cash Crusaders, that have served to illustrate this point. All of these matters have resulted in litigation. As is always the case, this litigation is adversarial and destructive of relationships, which is of benefit to no-one concerned.

The Consumer Protection Act (CPA) was the first — and is still the only — law in SA that expressly provides terms for the franchise relationship. To counter where it was perceived most malpractice in the franchise industry occurs, the CPA provides for extensive upfront disclosure by franchisers before a franchisee commits themselves to invest in a franchise.

However, it does not contain express provisions regulating the ongoing relationships between franchisers and franchisees. It also doesn’t promote the atmosphere of collaboration necessary for franchisers and franchisees to resolve disputes between them respectfully and for mutual benefit. 

Against this background, the Franchise Association of SA (Fasa) some years ago tabled an industry code for adoption in terms of section 82 of the CPA. The draft code has been under discussion for some years between Fasa and the department of trade, industry & competition. The code consists of two main areas — an alternative dispute resolution mechanism for disputes among franchisers and franchisees; and a code aimed at regulating conduct in the industry and providing for certain matters not dealt with by the CPA.    

The dispute resolution mechanism provides for the appointment of a franchise industry ombud, which will be a nonprofit company, the board of which will consist of representatives of Fasa, franchisers and franchisees. All franchisers and franchisees will be subject to the ombud’s jurisdiction. The ombud will elect one of its board members to act as the ombudsman for the industry. The ombudsman will have the power to hear representations from the parties to any dispute concerning or related to a franchise relationship, and make recommendations to resolve the dispute.   

The ombud process has certain distinct advantages over litigation through the courts. The ombudsman is required to have experience in both dispute resolution and the franchise industry. As such, that person will bring a different approach to the resolution of disputes, particularly a specific understanding of the issues that may arise and the business and legal interests of the parties. As opposed to the “all or nothing”, “winner and loser” outcomes of litigation, the ombudsman will be able to seek a resolution balancing the best interests of both parties.

In terms of the draft industry code, every franchiser will have to include a notice in all its disclosure documents and franchise agreements that they are bound by the code, and informing the franchisee that they are entitled to refer any dispute to the office of the ombud. They are also required to provide any franchisee with a copy of the code on request.

The code also sets out standards of conduct to be observed by franchisers and franchisees. These include complying with franchise legislation; observing the constitutional values of dignity and equality; refraining from unfair discrimination; dealing in good faith with each other; responding to each other in a reasonable time; complying with the code of the Advertising Regulatory Board in all marketing, promotions and advertising; and paying all levies arising in terms of the code to the ombud timeously. 

The code also lays out specific responsibilities for franchisers; including providing franchisees with training, supervision and assistance in operating the franchise business. They will also be required to deposit all monies paid by a franchisee in contemplation of the conclusion of a franchise agreement into a separate bank account; and to notify the franchisee in writing of any alleged breach of a franchise agreement.

In the event of a breach the franchiser must afford them reasonable time to remedy it, except where the franchiser is entitled to terminate the franchise agreement without notice. The code will specify that franchisers should only select and appoint franchisees if they appear to have sufficient skills and resources to carry on the franchise business.

Franchisers are also required to be the owner or authorised licensee of all copyright, trademarks and intellectual property (IP) used in the franchise business. For their part, the code will require franchisees to only use the franchiser’s IP as authorised, and not disclose any of the franchiser’s IP to third parties, either during the term of the franchise agreement or after it. The franchiser’s IP will be protected by a provision that forbids the franchisee from using their IP inappropriately, including their confidential information and trade secrets. 

They will also be required to comply with the franchiser’s operations manual and business system, supplying the franchiser with verifiable operating data and allowing the franchiser access to the premises. Franchisees will need to devote their best endeavours to the maintenance and growth of the franchise business and not compete with the franchise system without the written consent of the franchiser.

The code has been through a number of iterations. It is hoped that once accredited and gazetted it will not only enhance the culture of co-operation and mutual dependency between franchisers and franchisees, but also promote the resolution of disputes in a mutually beneficial manner, allowing the parties to continue an effective working relationship. It is our hope that this important reform will support the growth and development of franchising in SA, even as economic pressures put this important sector under almost unprecedented pressure.

Jacobsberg, a director at Fluxmans Attorneys, is director of the Franchise Association of SA.