The Competition Commission of South Africa will be conducting a market inquiry into the franchise sector of South Africa on the basis that the Competition Commission has reason to believe that there are market features that may impede, distort or restrict competition in the South African franchised business market.
The Competition Commission recently published a notice announcing the establishment of the Franchise Market Inquiry (“the Inquiry”) and provided its draft Terms of Reference (“ToR”) and has invited the public to comment on the draft ToR.
By way of background, a franchise is a business whereby the owner (“franchisor”) licences its operations, along with its products, branding and knowledge to business owners (“the franchisees”) in exchange for payment, known as a franchise fee. The commercial document that governs the franchisor-franchisee relationship is a franchise agreement which sets out the rights and obligations of the franchisor and the franchisee and must be compliant with the Consumer Protection Act No. 68 of 2008 (“the CPA”). Franchise agreements are governed by the CPA read together with its Regulations.
The purpose of the Inquiry is to assess whether there are any market features that (i) impede, distort or restrict competition in the franchise sector; (ii) hinder the entry, growth and meaningful participation of Small and Medium Enterprises (“SMEs”) in owning and operating franchised businesses; and (iii) negatively affect the increased ownership of franchised businesses by historically disadvantaged persons (“HDPs”).
The Inquiry will focus on three broad themes, namely:
- Finance, funding terms and conditions and to promote inclusiveness in franchised business ownership: The Inquiry will assess the requirements set by creditors and/or franchisors for SMEs and HDPs to access franchise finance;
- Franchise agreement’s terms and conditions and practices: The Inquiry will assess how franchise agreements and related practices may influence the franchisor-franchisee relationship and their potential effects on the ability of SME and HDP franchised businesses to compete, participate and expand their respective markets; and
- Exportation of information asymmetries: The Inquiry will assess the extent to which franchisors may be distorting the true value of their franchise outlets and the potential impact on SME and HDP franchised business owners. The assessment will also include a determination of whether measures can be implemented to enhance transparency and support informed decision-making by franchisees.
Regarding the second broad theme of Inquiry, it appears that the Competition Commission has received numerous complaints from franchisees regarding some franchisors, examples of which are: franchisors failing to pass supplier discounts and rebated to franchisees, franchisors insisting on non-negotiable pricing, franchisors give some (but not all) of their franchisees exemptions or reduced rates; and where franchisors give their prospective franchisees misleading information and overstated projections.
The present position is that if a franchisor conducts any practices that are in contravention of the CPA, and many (if not all) of the above examples would fall into this category, the franchisee would have redress by either lodging a complaint to the National Competition Commission or to institute legal action against the franchisor. If a franchisee chooses the legal route, litigation is costly and time-consuming, and it may take several years before a matter is heard in court. Many franchisees do not have the financial means to institute legal proceedings against their franchisor, and if they do have the means, then the finances are quickly consumed by legal fees.
Section 82 of the CPA permits the Minister to prescribe an industry code on the recommendation of the National Consumer Commission. An industry code means a code that regulates the interaction between or among persons conducting business within an industry or regulating the interaction or providing for alternative dispute resolution.
This raises the question of why, more than 15 years after the CPA came into effect in 2011, a franchise-specific industry code has still not been finalised.
It is recommended that instead of the Competition Commission doing an inquiry on the second broad theme, alternatively, in addition to this inquiry, to proceed to finalise the establishment of an industry code in accordance with section 82 of the CPA. Such industry code is to be exclusive to franchise dispute matters and resolved by way of an alternative dispute resolution. This could be a solution in reducing the burden of franchise dispute matters on the courts and such matters would be dealt with in a forum that understands franchising and processes in accordance with the CPA.
For advice on franchise agreements, disputes or the possible implications of the Franchise Market Inquiry, please contact Maria D’Amico at Thomson Wilks.
