A new franchising industry code for South Africa

new franchising code

As you may recall, the Consumer Protection Act, no. 68 of 2008 (“CPA”), introduced franchise legislation into the franchise industry in South Africa, on or about 1 April 2011. By way of example, Regulation 2 thereof sets out 50 or more points that need to be dealt with and included in a compliant franchise agreement. Regulation 3 introduced the provision of a disclosure document, to be furnished to a prospective franchisee, at least 14 days prior to signing a franchise agreement. This sets out what information and documentation should be provided to the prospective franchisee, to place the franchisee in a position where they are reasonably able to assess the franchise business opportunity offered by the franchisor.

Section 82 of the CPA provides for the introduction of industry codes within an industry, which would regulate the interaction between or among persons conducting business within that industry, including providing for alternative dispute resolution.

FASA identified the need in the South African Franchise Industry for an effective, alternative dispute resolution process, the intention is 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 (“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.

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 was 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. More on this aspect to follow.

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 trademarks;
  • 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 the termination of the franchise agreement;
  • Devote their best endeavors 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.

As mentioned, the Code includes a robust mediation process, a code of conduct and other aspects not dealt with in the CPA. Further articles on the Code will follow.

In the interim, we confirm that the draft Code has been submitted to the Consumer Protection Commission for consideration. We will keep you advised of developments.

Adams & Adams for more information please email Eugene Honey

Eugene Honey
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