Can franchisees avoid arbitration?
According to Charl Groenewald of Macrobert Incorporated, one of FASA’s legal service providers that specialise in franchising, in certain instances, the answer is a resounding ‘yes’“I have found that a number of franchisees do not properly understand what is meant by ‘arbitration’, and what it comprises of. Most seem to labour under the impression that arbitration entails some sort of informal settlement negotiation. Nothing can be further from the truth.”
‘Arbitration’ is in essence ‘litigation’ but conducted in private. Thus, unlike ‘litigation’ where a plaintiff issues a summons to commence litigation against a defendant and the parties later attend a trial at a court – i.e. in a court building in front of a judge or a magistrate – ‘arbitration’ is where a claimant issues a statement of claim calling upon the defendant to arbitrate the matter in private in front of an arbitrator. The arbitrator is usually a retired judge or senior advocate, who adjudicates the dispute at a private venue. Just like in court proceedings, both parties are represented by their respective attorneys and advocates, witnesses may be sworn in, and a stenographer records the proceedings and provides transcriptions as and when necessary. In most instances, the arbitration process follows the Uniform Rules of the High Court. In short, an arbitration is very similar to court litigation save for the fact that it is a private affair.
In South Africa, all arbitrations are subject to and regulated by the Arbitration Act 1965. However, not all disputes can be resolved by means of arbitration. For example, divorces, liquidations, criminal matters or any other matters which pertain to a person’s status.
Parties cannot engage in arbitration unless there is a written agreement signed by both the claimant and the defendant, in terms of which they submit their dispute to arbitration. Almost all franchise agreements contain an arbitration clause which provides that in the event of any dispute which the parties are unable to resolve between themselves, the parties will not be entitled to litigate such dispute in open court, but rather that the dispute must be referred to arbitration. The inclusion of this clause in a franchise agreement holds considerable advantages for a franchisor and does not benefit a franchisee, due to the following characteristics of arbitration:
Inherent to all arbitrations is confidentiality – the parties are not permitted to disclose any of the information or facts revealed during the arbitration. Even though the arbitration award must be made an order of court to become enforceable, it is only the actual award that is finally published and not the contents of testimony or other salient information. Thus, unlike court in proceedings, the franchisor is able to control its exposure to publicity and exclude the involvement of other parties, including other franchisees with similar disputes.
While it is a well-known fact that litigation is very expensive, one can easily incur three times those costs during arbitration. It must be borne in mind that the parties need to pay for the facility that hosts the arbitration, the costs of the recording, as well as other miscellaneous expenses. Additionally, unlike in a court, the parties also need to pay the costs of the arbitrator. In the case of a senior advocate or retired judge, the arbitrator’s costs alone will seldom be less than R40000 (Forty Thousand Rand) a day. One can only imagine the costs if a franchisee needs to engage with a franchisor in a sophisticated dispute where the duration of the arbitration hearing exceeds five days.
Arbitration is also a considerably faster process than litigation and whatever costs are to be incurred will usually be incurred within a very short period of time a franchisee the ability to stagger any payments.
Unlike litigation, a franchisee will also not be able to involve the participation of the National Consumer Commission (‘NCC’) who, in terms of the Consumer Protection Act, 2008 (‘CPA’) acts as the CPA’s watchdog. Franchisors are often concerned that the NCC will take cognisance of a franchisor’s unconscionable or unfair conduct when these matters are aired in open court, so the franchisor will instead choose, through arbitration, to effectively exclude the involvement of the NCC.
Simply put, a franchisee is not on an even playing field when it enters into an arbitration with a franchisor, and franchisees need to avoid this at all costs. Unfortunately, once parties have agreed to arbitrate disputes (and in particular in a manner as provided for in most franchise agreements), the Arbitration Act compels those parties to so engage in arbitration. Despite the courts’ inherent jurisdiction over all arbitration proceedings, it is quite difficult for a party that has agreed to arbitration to escape it by means of a court interdict.
However, the recent judgment of Driveconsortium (Pty) Ltd v. Takealot Online (RF) (Pty) Ltd changes this position. We successfully argued that the provisions of Section 52 of the CPA, in particular in as far as it pertains to the conduct of a franchisor, as provided for in Sections 40, 41, and 48, cannot be determined on arbitration but must be referred to a court of law.
In the judgment for the application for leave to appeal, addressing the provision made in the agreement for disputes between the parties to be dealt with by means of arbitration, Henney J states:
“…in terms of the provisions of section 52 of the CPA…only a court of law can deal with the issues raised regarding unfair, unreasonable or unjust contract terms in terms of section 48 of the CPA. An arbitrator, the Commission or Tribunal, is not empowered in terms of the act to deal with these kinds of matters.”
This brings considerable relief to franchisees who are bullied into arbitration and deprived of a more equitable and affordable forum in which to raise their disputes. The moment a franchisee is able to divert the legal battlefield from the private arbitration boardroom and redirect it into a court of law and away, not only does the playing field change, but also its level.
Charl Groenewald is an expert franchise lawyer and skilled litigator who is well renowned for his skills pertaining to franchise litigation and resolving franchise disputes. Having been a franchisor himself, Charl understands both the business of a franchise as well as the challenges faced by franchisees.
Franchise Law
Corporate & Commercial Law
Intellectual Property Law
