Franchise dispute resolution
A proposal for the establishment of an industry ombudsman is on the table
ON January 29 the National Consumer Commission published for comment an application by the Franchise Association of SA (Fasa) for accreditation in terms of section 82 of the Consumer Protection Act 68 of 2008 to establish a franchise industry ombudsman to provide a mechanism of alternate dispute resolution between franchisors and franchisees. Thirty days were allowed for public comment.
The proposal is that the ombudsman will operate as a nonprofit company in terms of the Companies Act 71 of 2008. The primary objective will be to create the infrastructure and administrative capacity to facilitate and administer the resolution of franchise disputes.
The business and affairs of the ombudsman would be managed by or under the direction of its board, which it is proposed will consist of four persons. Two board members would be appointed by Fasa and one each by franchisors and franchisees acting respectively as a group.
The person to occupy the position of ombudsman will be appointed by the franchise industry ombudsman board for a renewable five-year term. He or she may be removed from office only in the event of incapacity, gross incompetence or gross misconduct, which shall have been established in terms of a fair administrative process conducted by a person appointed by the trade and industry minister. The ombudsman will exercise final responsibility for the resolution of complaints and the formulation and approval of the ombudsman dispute resolution procedures.
It is proposed that the ombudsman will have jurisdiction over any dispute relating to an alleged breach of the Consumer Protection Act by a franchisor or franchisee arising from a franchise agreement or a disclosure document. Its jurisdiction will include disputes relating to the interpretation, breach, cancellation and termination of a franchise agreement or to payments alleged to be owing in terms of a franchise agreement.
The ombudsman may also adjudicate disputes involving the supply of goods or services or failure to supply goods or services in terms of a franchise agreement or any solicitation of an offer to enter into a franchise agreement. If the parties to a dispute agree, the jurisdiction of the ombudsman will extend to any dispute which would otherwise have been outside the province of the ombudsman.
Sometimes one finds in practice that a party intending to enter into a franchise agreement has in fact been misled into signing a different type of agreement such as a sale of business. Since such an agreement does not meet the formal requirements for a franchise agreement it should be helpful if a wide enough interpretation of the ombudsman’s jurisdiction is adopted to include different types of agreements signed under the pretext that the parties would conclude a franchise agreement.
A simple dispute resolution procedure is proposed. Complaints will be submitted on a prescribed form containing the identities of the parties and the relief sought. A summary of the facts giving rise to the dispute must be included, as well as a statement by the complainant that the respondent has been notified of the dispute but there was no resolution within a period of 10 days. The ombudsman will thereafter provide a copy of the complaint to the respondent and allow a period of 15 days within which to submit a response.
Oral evidence will be allowed if it is necessary in the opinion of the ombudsman. In such cases the parties and their legal representatives will be required to attend a hearing on at least 10 days’ notice. The more common rule is that oral evidence is required whenever there is a material dispute of fact. It is not clear why Fasa has chosen to depart from this rule or not even to specify that the main consideration guiding the ombudsman’s opinion should be whether there is a material dispute of fact.
It is also surprising that the only remedies expressly provided in the draft Franchise Industry Code are that complainants may seek an award for damages or they may elect to reserve a request for an award of damages for another forum. Given the extent of its proposed jurisdiction it is unlikely that there is any intention to limit the powers of the ombudsman to considerations of damages.
If a signed franchise agreement contains a dispute resolution clause which provides for dispute resolution other than in terms of the code, that clause would prevail. The only condition is that such a dispute resolution clause must comply with, and give effect to, the Consumer Protection Act; it must not exclude the applicability of the Consumer Protection Act from resolution of the dispute.
Since a dispute resolution clause that complies with these conditions would supersede the ombudsman procedure it seems incongruous that the code makes it compulsory for franchisors to include a notice in all disclosure documents and franchise agreements advising franchisees that they “are entitled” to refer any dispute to the ombudsman. In the long run it would be testament to the confidence or otherwise in the ombudsman whether franchisors opt for alternative dispute resolution instruments.
The code proposes the ombudsman will be financed from contributions levied on franchisees and franchisors or from fees payable.
Fasa proposes that the ombudsman may make recommendations to the commission regarding amendments to its memorandum of incorporation. Such excessive subservience to a state organ does not inspire confidence. The history of the commission, and specifically the acrimonious exiting of a previous commissioner, looms ominous.
If it is necessary to involve the commission in the management of the ombudsman it could, for example, be given the right to appoint one independent nonexecutive board member. In my view, the idea that the commission should be able to amend the ombudsman’s memorandum of incorporation must be abandoned.
The proposed ombudsman is to be welcomed. Notwithstanding the fact that the Consumer Protection Act has been in force since 2011 too many people still find themselves caught up in questionable franchise schemes. Often the cost of high court litigation is just a bridge too far.
The business and affairs of the ombudsman would be managed by or under the direction of its board