Subway franchise. Picture: REUTERS/NOOR KHAMIS
Subway franchise. Picture: REUTERS/NOOR KHAMIS

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ON JANUARY 29, the commissioner of the Consumer Commission published the long-awaited draft franchise industry code under Section 82 of the Consumer Protection Act for comment.

It provides for the establishment of a specialised franchise industry ombud, and the appointment of an ombudsman to receive complaints arising from franchise agreements.

The code will help resolve franchise disputes, based on recommendations by the ombudsman, and thus avoid costly litigation. It will provide for an alternative mechanism of dispute resolution and, although the process will be prescribed and structured, the ombudsman will be more of a mediator than an arbitrator.

The ombudsman will have no power to make binding awards, but will instead make recommendations, with a view to brokering a consensual settlement.

The code will provide for a procedure to initiate franchise-related complaints, and for a procedure to ventilate the issues between the parties.

Complaints that do not meet the requirements laid down by the code will be rejected.

To create awareness of the code and the dispute-resolution mechanisms available, Section 28 of the Consumer Protection Act will require all franchise agreements and disclosure documents to include a notice that the parties are bound by the provisions of the code and undertake to comply with it.

This will make the code contractually applicable to franchisor-franchisee relationships.

The franchise agreement and disclosure document will be required to contain a notice informing franchisees that they will be entitled to refer any franchise-related disputes to the franchise industry ombud.

The process will be voluntary.

An important financial feature of the code is the proposal that the ombud will be funded through contributions levied on franchisees and franchisors.

This will be determined by the franchise industry ombud board, in consultation with a franchise industry body, representing five or more franchisors and franchisees of five or more franchises.

Stakeholders in the industry should participate in the process for determining the levies.

The code proposes that the ombudsman must be a legally qualified person with at least 10 years’ dispute-resolution experience.

The franchise industry ombud will have jurisdiction over a wide variety of disputes, ranging from breaches of the Consumer Protection Act to contractual disputes flowing from franchise agreements and disclosure documents. The ombudsman will have jurisdiction to entertain questions concerning the interpretation of franchise agreements, breaches and claims for payment of monies, such as royalties, marketing fund contributions, and franchise fees.

He or she will also be empowered to receive and entertain complaints concerning the supply of goods under the franchise agreement, as well as disputes relating to solicitation to enter into franchise agreements.

To better understand the issues between the parties, the ombudsman will be able to request the parties to attend a hearing, during which they will be entitled to be represented by any person of their choice, including a legal representative, and to make submissions and cross-examine witnesses. Cross-examination is a feature of an adversarial system of binding dispute resolution (such as litigation or arbitration) and may create unnecessary conflict, which may hamper the consensual resolution of disputes.

It is proposed that, instead of a hearing, provision should rather be made for a roundtable meeting between the ombudsman and the parties, to promote a spirit of co-operation conducive for consensual dispute resolution.

A mediator brokering a settlement between parties to a dispute will be far more fitting to the consensual dispute-resolution objective of the code.

The ombudsman will be entitled to provide the parties with his views on the dispute, and recommend a basis on which he or she proposes the dispute be resolved.

If the parties accept the recommendation, it will be recorded in writing, which will then be binding and enforceable. If the ombudsman’s recommendations are not accepted by the parties, the dispute-resolution process will fail and the ombudsman will be entitled to close the complaint.

A curious feature of the draft code is that it provides for a party to a dispute to seek an award for damages against the other party, with the rider that the party seeking the damages award may reserve the right to request an award for damages in another forum, such as an arbitration tribunal or a high court. Considering that the ombudsman can only make recommendations, he or she will have no authority to make an award for damages, without both parties’ consent. It would, accordingly, be more appropriate for the code to state that the ombudsman can confirm an agreement between the parties about the liability and amount of damages to be paid.

The word "award" will cause confusion and should be avoided.

Where parties have agreed on another form of dispute resolution, such as arbitration, the dispute-resolution clause in their franchise agreement will take precedence over the mechanism provided for in the code, unless the mechanism is inconsistent with the Consumer Protection Act or excludes its application. Although there are some minor drafting aspects to be looked at in the code, it is a welcome development for the franchise industry, where good relationships between franchisors and franchisees are key to the growth of any franchised business and the franchise industry.

It is to be hoped that the non-confrontational dispute-resolution style proposed by the code will result in efficient dispute resolution, so that franchisors and franchisees stay out of court and get on with business.

• Rhoodie is director and Terblanche a senior associate at Cliffe Dekker Hofmeyr’s dispute resolution practice