Fran­chise dis­pute res­o­lu­tion

A pro­posal for the es­tab­lish­ment of an in­dus­try om­buds­man is on the ta­ble

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - REG­GIE DLAMINI

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

Pic­ture: iSTOCK

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