Franchising in South Africa: overview
A Q&A guide to franchising in South Africa.
The Q&A provides an overview of the main practical issues concerning local and international franchising, including: current market activity; franchising regulatory framework; contractual issues relating to franchising agreements (analysing pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.
This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.
A number of prominent international food and beverage franchises have entered the local market. Fashion and apparel franchises also remain interested in South Africa. However, due to economic challenges and a weak exchange rate, some foreign franchisors encounter difficulties with their local franchisees.
Direct franchising is the most popular form of franchising in South Africa, although some franchisors choose to follow the multi-unit franchise approach. Local franchisors probably prefer the direct franchising route because it allows them to have direct control over the development of their franchise system.
Most foreign franchisors prefer to enter the South African market by way of master franchise agreements or, in some cases, area development franchises. Some franchisors also enter into joint ventures with local parties due to the imperatives of complying with black economic empowerment legislation. This is particularly relevant in the case of organisations that wish to do business with the South African Government.
Some franchisors have had success in using franchising to expand their brands to other countries. Neighbouring countries and other parts of the African continent are popular jurisdictions for this, but some franchisors have also managed to branch their franchise networks out to Europe and elsewhere. In some instances, strict regulation or differences in legal systems create challenges for franchisors, but some local brands have proved popular enough for franchisors to push through and overcome these hurdles.
Some franchisors incorporate separate entities in South Africa to limit their potential liability. However, most foreign franchisors do this if compliance with black economic empowerment legislation requires the local franchisor or master franchisee to have a minimum level of ownership by black individuals.
Regulation of franchising
A franchise is defined in the Consumer Protection Act 2008 (CPA) as an agreement between two parties (franchisor and franchisee) which meets the following criteria:
For consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business within all or a specific part of South Africa under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor.
The operation of the business of the franchisee is substantially or materially associated with advertising schemes or programmes or one or more trade marks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices, that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor.
The agreement governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor.
Although there is no specific statute regulating franchising, the Consumer Protection Act 2008 (CPA) regulates a number of franchise-related matters and guarantees some consumer rights that are also applicable to franchisees. The CPA also requires that agreements must be fair, reasonable and just, and prescribes certain formalities for entering into a franchise agreement (see Questions 13 and 15). Generally, under the CPA, franchisees are regarded as consumers and can therefore rely on the same type of protection provided to consumers.
The CPA also deals with pyramid schemes and prohibits any person from directly or indirectly promoting, or knowingly joining, entering or participating in such schemes. If a franchisor's business system is based on multi-level marketing, it must ensure that the system does not breach the CPA's provisions relating to pyramid schemes.
The National Consumer Commission, in conjunction with the National Consumer Tribunal, is responsible for ensuring compliance with the Consumer Protection Act 2008 (CPA) (which regulates franchising in South Africa).
Self-regulation also plays a role in franchising in South Africa. The Franchise Association of South Africa (FASA) is a non-profit company responsible for promoting ethical franchising in South Africa. FASA membership is not compulsory for franchisors. The FASA Code of Ethics, which is binding on its members, aims to protect the interests of franchisees and franchisors.
Additionally, the Franchise Industry Ombudsman (FIO) is in the process of being accredited under the CPA. Once this process has been finalised, the FIO will oversee disputes between franchisees and franchisors.
There is no statutory registration requirement. The Consumer Protection Act 2008 contains requirements that must be met before a franchisor can offer franchises, but there are no requirements for franchisors to be registered with any IP registry or other body before setting up a franchise. However, it is prudent for a franchisor to register the particular IP used in the franchise to guard against infringement and unauthorised use.
Franchisors may wish to become members of the Franchise Association of South Africa in view of potential reputational benefits, such as networking and support.
The Consumer Protections Act 2008 (CPA) regulates franchising and provides for the protection of consumers in the regulation of franchise agreements. In addition, a franchisee can cancel a franchise agreement, without cost or penalty, within ten business days of signing the agreement by giving written notice to the franchisor. This must be clearly set out at the top of the first page of the franchise agreement.
All franchise agreements must contain provisions that prevent the following (regulation 2(b), Consumer Protection Act Regulations (CPA Regulations)):
Unreasonable or overvaluation of fees, prices or other amounts.
Conduct that is unnecessary or unreasonable in relation to risks to be incurred by one party.
Conduct that is not reasonably necessary for the protection of the legitimate business interests of the franchisor, franchisee or franchise system.
A franchise agreement must also contain a clause informing a franchisor that it is not entitled to any undisclosed direct or indirect benefit or compensation from suppliers to its franchisees or the franchise system, unless this is disclosed in writing with an explanation of how it will be applied (regulation 2(c), CPA Regulation).
If the franchisor is not a South African resident, the parties will need to comply with the South African exchange control regulations. All payments by South African residents to non-residents are subject to exchange control regulations, which are enforced by the South African Reserve Bank. See Question 40.
Pre-contract disclosure requirements
Every franchisor must provide a disclosure document to a potential franchisee (regulation 3, Consumer Protection Act (CPA) Regulations). The document must be:
Dated and signed by an authorised officer of the franchisor.
Provided at least 14 days before signing of the franchise agreement.
The disclosure document must, at a minimum, contain the following information:
Number of individual franchised outlets.
Growth of the franchisor's turnover, net profit and number of individual new franchised outlets for the immediate preceding year.
A statement confirming that the franchisor has reasonable grounds to believe it will be able to pay its debts as and when they fall due.
Written projections regarding potential sales, income, gross or net profits of the franchised business, and particulars of the assumptions on which these representations are made.
A statement prepared by an accounting officer or auditor's statement must accompany the disclosure document and confirm that:
The business of the franchisor is a going concern.
The franchisor is able to meet its current and contingent liabilities and financial commitments.
The franchisor's annual financial statements have been prepared in accordance with generally accepted accounting principles.
In addition, the disclosure document must be accompanied by both:
A list of current franchisees, stating for each franchisee its formal name, the name of its representatives, its physical address and contact details. There must also be a clear statement that the prospective franchisee can contact any of the franchisees listed or visit any outlet operated by a current franchisee, to assess the information disclosed by the franchisor and the franchise opportunity offered by it.
An organogram depicting the support system in place for franchisees.
There are no exemptions from compliance with the disclosure requirements. Further, there are no exceptions for sophisticated or large franchisees. All franchisees are regarded as consumers under the CPA.
Failure to comply with the CPA constitutes prohibited conduct. There are substantial penalties for those that engage in prohibited conduct. An aggrieved franchisee can lodge a complaint with the National Consumer Commission, which can refer the matter to the National Consumer Tribunal if the National Consumer Commission issues a compliance notice and the franchisor fails to adhere to it.
There is no requirement in the legislation for an overseas franchisor to participate in the local disclosure process. However, the overseas franchisor should ensure that the local master franchisee complies with the relevant requirements. The master franchisee should also disclose to potential franchisees that it has obtained the franchising rights from the franchisor.
Apart from the facts required in the disclosure agreement (see Question 11), the franchisee must rely on its own due diligence. The franchisor should avoid any fraudulent or negligent misrepresentations, which can lead to claims for damages by the franchisee.
A franchise agreement must (Consumer Protection Act (CPA)):
Be in writing and signed by or on behalf of the franchisee.
Contain information required under the CPA.
Be in plain language.
However, there are no notarisation or registration requirements for franchise agreements. Additionally, the law does not prescribe that the franchise agreement must be in any particular language.
Parties' rights and obligations
Obligations of the franchisee
The law does not specify any ongoing obligations, but requires that the franchisee's obligations must be recorded in the franchise agreement. The relevant provisions must not be unfair, unjust or unreasonable.
Obligations of the franchisor
The law does not specify any ongoing obligations, but requires that the franchisor's obligations must be recorded in the franchise agreement.
Usually, an overseas franchisor will not be liable for the failures of the local sub-franchisor. However, a consumer can proceed against any party in the supply chain in the event of harm caused by a product (Consumer Protection Act 2008). In such a case, an overseas franchisor may face liability. To mitigate this risk, indemnities should be inserted in the master franchise agreement and the franchisor should ensure that proper processes are in place to avoid product liability claims from arising.
The following clauses must be included in all franchise agreements (regulation 2, Consumer Protection Act Regulations):
All obligations of both franchisor and franchisee.
All direct and indirect consideration payable by the franchisee to the franchisor.
Any territorial rights granted to the franchisee.
The name and description of the types of goods or services which the franchisee is entitled to provide, produce or sell.
The conditions under which the franchisee or its estate can transfer or assign the rights and obligations under the franchise.
Particulars of the initial training and assistance provided by the franchisor, together with any ongoing training that is provided for the duration of the franchise agreement, and a statement that the particulars of the training will be provided to the franchisee as and when necessary.
Duration and terms of renewal.
If the franchisee is required to contribute towards an advertising, marketing or similar fund, additional provisions regarding this must be inserted in the franchise agreement.
Full details of the franchisor's directors and officers.
Confirmation that all deposits from the franchisee will be paid into a separate account with a description of how the deposits will be dealt with.
A description of any trade marks and intellectual property owned by the franchisor or licensed to the franchisor, which is or will be used in the franchise, and the conditions under which they can be used.
Particulars of any restrictions imposed on the franchisee.
The full particulars of the financial obligations of the franchisee under the franchise agreement, including:
initial fee payable on signature;
funds required to establish the business;
initial working capital;
total investment required;
a clear statement setting out what costs are included in the purchase price;
amount of funding available from the franchisor (if any) and any minimum amounts that the franchisee must contribute towards the fund before being entitled to borrow from it;
royalties (specifically detailing how they are calculated and paid); and
other amounts payable.
Exclusion clauses and entire agreement clauses are typical and enforceable in South Africa. Generally, they are effective to protect a foreign franchisor against claims that arise as a result of the master franchisee's actions or omissions. However, where the franchise system involves the sale of the franchisor's products, exclusion clauses may not protect the foreign franchisor against product liability claims. This is because the Consumer Protection Act 2008 provides for strict product liability on a supply chain basis.
Restrictions on purchasing and product tying
A supplier must not require a consumer (including a franchisee) to (section 13, Consumer Protection Act 2008 (CPA)):
Purchase any other particular goods or services from that supplier.
Enter into an additional agreement or transaction with the same supplier or a designated third party.
Agree to purchase any particular goods or services from a designated third party.
However, the supplier can do so if any of the following applies:
It can show that the convenience to the consumer in having those goods or services bundled outweighs the limitation of the consumer's right to choose.
It can show that the bundling of those goods or services results in economic benefit for consumers.
It offers bundled goods or services separately and at individual prices.
Under the CPA, the franchisor can also require the franchisee to purchase goods or service from, or at the direction of, the franchisor if the goods or services are reasonably related to the branded products or services that are the subject of the franchise agreement.
Non-compete obligations and transfer restrictions
There are no limitations on the franchisor's ability to impose non-compete obligations during the term of the agreement (although limitations apply in respect of post-termination restraints (see Question 22).
Additionally, there are no legal restrictions on the ability of the franchisor to require its prior consent to transfers of the franchised business and/or transfers of interests in the entity owning the business. However, these matters must be dealt with in the franchise agreement.
Fees and payments
Typically, a franchisee must pay an upfront lump sum franchise fee, recurring royalties and the cost of setting up the franchised business.
Usually, royalty payments are paid monthly, quarterly or annually. In most cases, the amounts are based on a percentage of the franchisee's turnover. These fees are payable in consideration of the franchisee's use of the franchisor's intellectual property.
The franchisee can also be expected to contribute a fixed amount or a percentage of its turnover on a regular basis towards the marketing and promotion of the franchise operation. These monies must be paid into an independent fund, which must be audited (Consumer Protection Act 2008 (CPA)).
There are no restrictions on the parties' freedom to set the fees. However, the CPA prohibits pricing that is excessively unfair, unjust or unreasonable.
Interest can be charged on overdue payments, provided that it does not exceed the maximum rate set by the National Credit Act. If payments are due to a non-resident franchisor, the relevant royalty rates must:
Comply with the South African Reserve Bank's policies.
Not exceed the rates determined by the Reserve Bank from time to time.
Term of agreement and renewal
Franchisors have no legal obligation to grant the franchisee a right of renewal. However, it is customary to include a clause in the contract that grants the franchisee the right to renew the agreement for a similar period once the initial term has expired, subject to certain conditions. In some cases, agreements require the payment of a renewal fee, although this is not the norm.
The franchisor must specifically state in the franchise agreement whether the contract is renewable (regulation 2, Consumer Protection Act (CPA) Regulations). If the contract is renewable, the franchisor must state the duration and terms of the renewal as well as the terms and conditions that will apply, but these provisions cannot be inconsistent with the purpose and policy of the CPA.
There is no limitation on a franchisor's right to terminate the franchise agreement, however the franchisor's right should be provided for in the franchise agreement.
Typically, the franchise agreement will allow for termination in circumstances of breach. The law does not require the franchisor to make a payment to the franchisee on termination or expiry of the franchise agreement, but a franchisee may be able to sue for damages in the event of repudiation or unlawful termination of the franchise agreement.
The agreement can provide for contractual penalties or liquidated damages, but it is not possible to claim penalties in addition to damages, and an election must be made.
In South Africa, franchise agreements typically contain restraint of trade clauses. Generally, these clauses are enforceable, but a franchisor will need to prove that it has a protectable interest before it can enforce the restraint.
Additionally, restraints are only enforceable if they are limited to:
The area in which the business is conducted by the franchisee.
A reasonable period (for example, 12 to 24 months).
Choice of law and jurisdiction
Most contracts tend to be subject to South African law, but there is generally no bar to a choice of foreign law, provided that there is some connection between the chosen law and the relevant contract. Accordingly, parties are free to regulate their relationship, but must ensure that the provisions of the Consumer Protection Act 2008 are complied with.
The Operations Manual contains information on how the franchised business should operate. It also provides detailed guidelines for the profitable operation of the franchisee's business. The manual addresses all eventualities, ranging from corporate identity issues to operating instructions and maintenance guidelines for production equipment used in the business. The Operations Manual should offer a solution to all queries that arise during routine operations of the franchise. The franchise agreement usually requires the franchisee to comply with all provisions of the Operations Manual.
There are no formal legal requirements to be met when drafting the Operations Manual. However, the franchisor cannot make misrepresentations in the manual, as it can otherwise become liable for damages claims based on misrepresentation.
The Consumer Protection Act 2008 (CPA) guarantees a franchisee's right to fair and honest dealings. The CPA also prohibits the inclusion of unfair contract terms in agreements, and empowers the court to intervene if terms are unfair, unreasonable and unjust. The franchisor cannot conduct certain deceptive or fraudulent selling practices, which are listed in section 41 of the CPA.
In the event of deceptive or fraudulent selling practices, the court can make a just order under the circumstances, including (CPA):
Restoring any money or property to franchisees.
Compensating franchisees for any losses incurred relating to the franchise agreement.
In the event of breach, the common law also entitles aggrieved parties to elect either to:
Terminate the contract and claim damages.
Require specific performance of the contract.
Typically, the franchise agreement will contain an indemnity provision under which the franchisee must indemnify the franchisor against claims incurred by the franchisor as a result of the franchisee's business operations. However, all indemnities must be brought to the franchisee's attention in a conspicuous manner and the franchisee must be offered an opportunity to consider all indemnities before agreeing to them (Consumer Protection Act 2008).
The franchisee can bring indemnity claims against the franchisor if the franchise agreement provides for this. It is also arguable that the franchisee could have a claim against the franchisor in the event of product liability claims.
The franchise agreement should contain a clause providing that the franchisor and the franchisee are independent from one another. In its business operations, the franchisee should also be required to make clear that it is independent of the franchisor.
When entering into a franchise agreement, the franchisor will license its IPRs to the franchisee.
IP licences give the franchisee the right to use the franchisor's copyright, patents, trade marks, designs, technology, technical know-how or specific marketing skills for its benefit. The franchisee can use the franchisor's IP as defined in the franchise agreement, within the given territory and specific time period agreed in the franchise agreement.
Franchisors can protect trade secrets and know-how by ensuring that:
Access to information is properly controlled.
Franchisees are aware that such information is confidential.
Franchisees sign confidentiality agreements.
Restraints of trade are included in the franchise agreement.
There is no requirement to register licences over IPRs in South Africa. However, the law allows the registration of licences over certain types of IPRs, although registration tends to favour the licensee. Therefore, franchisors do not typically require that licences be registered. It is not necessary to use a separate licence agreement, but franchisors often choose to use short form licence agreements to avoid filing the full franchise agreement at the public registry, as it would otherwise become publicly available.
This will depend on each individual landlord, although generally landlords do not agree to the transfer of leases. Instead, a landlord that approves of a new party will consider granting a new lease agreement to that party.
Subleasing is normally not allowed, although some landlords will consider granting a franchisor consent to sublease to a franchisee.
If the franchisor is the landlord, it will normally stipulate that the lease is coterminous with the franchise agreement.
If the franchisor is not the landlord of the premises, the agreement can contain a restraint of trade clause that prohibits the franchisee from continuing to trade from the premises.
The franchise agreement can provide the franchisor with an option to acquire the franchisee's premises or business at the end of the franchise relationship. The franchisor will need to pay market-related consideration. To be effective, the franchisor's option to purchase must be recorded at the deeds registry.
The Competition Act 1998 applies to all economic activity within or having an effect within South Africa. It aims to promote and maintain competition in South Africa through provisions relating to merger control, restrictive practices and abuse of dominance. The basic competition rules of the Competition Act aim to prevent:
Anti-competitive horizontal conduct.
Anti-competitive vertical conduct.
Abuse of a dominant position.
The prohibitions in the Competition Act are absolute unless an exemption is obtained. The following practices are prohibited:
Vertical and horizontal price-fixing agreements.
Agreements under which competitors divide markets by allocating customers, suppliers, territories or specific types of goods or services.
Collusion between competitors.
In a franchising context, parties cannot fix prices and minimum resale price maintenance is prohibited. The allocation of territories may also be regarded as anti-competitive, unless it can be shown that any pro-competitive gains outweigh the anti-competitive effect.
There are no exemptions from the Competition Act's absolute prohibitions (such as prohibitions against price fixing and collusion between competitors), unless an exemption was granted in respect of a particular industry. For other prohibitions, the parties will need to show that the pro-competitive gains outweigh the anti-competitive effect of the relevant practice.
Generally, a franchisor can prohibit a franchisee from doing business online, provided that the franchisor does not abuse a dominant position.
Alternative forms of dispute resolution, such as arbitration, have become increasingly popular in franchising disputes. Arbitration is governed by the Arbitration Act 1965. Professional bodies specialising in arbitration services and alternative dispute resolution (ADR) have been formed and are used extensively. The Franchise Association of South Africa provides a mediation service, primarily to its members, and is also in the process of developing an ADR system that will include negotiations, mediation and arbitration.
The advantages of arbitration in franchising disputes are that, if properly managed:
Arbitration is quicker than court litigation.
Parties can select an arbitrator who is a specialist in the area to preside over the arbitration.
The parties have more control over proceedings, including place and process to be followed.
Court proceedings are often less expensive when it comes to payment of outstanding amounts, as it is easier to obtain payment through court proceedings. In comparison, it is more expensive to arbitrate considering the additional expenses incurred in paying for an arbitrator who is a specialist in the field. In addition, arbitration can become difficult where the parties do not co-operate, which can lead to difficulties and delays.
The franchise agreement can be governed by a foreign law and disputes can be heard in foreign courts or arbitration forums.
A claimant that has obtained a foreign judgment for a monetary claim can request the Registrar of the High Court to issue a writ of execution to enforce the foreign judgment. The writ allows the claimant to instruct the sheriff in South Africa to attend at the defendant's premises and demand payment under the judgment.
Foreign arbitration awards can be enforced in South Africa if the following requirements are met (Recognition and Enforcement of Foreign Arbitral Awards Act):
The award must not be contrary to South African public policy.
The parties to the arbitration agreement must have had capacity to contract under the foreign law and the agreement must be valid under the foreign law.
The defendant must have received notice of the arbitrator's appointment or of the proceedings and must have been able to present his or her case.
The award must deal with disputes that fall within the reference to arbitration.
The constitution of the arbitration tribunal and the proceedings must comply with the relevant arbitration agreement or with the law of the country in which the arbitration took place.
The award must be binding on the parties and must not have been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.
Exchange control and withholding
A South African resident must obtain exchange control approval from the South African Reserve Bank to make payments to a non-resident franchisor offshore. A local franchisee will need to apply for exchange control approval for the franchise agreement before the agreement becomes effective. The application for exchange control approval must be made to the South African Reserve Bank through an authorised dealer (the franchisee's local bank).
In considering the application, the South African Reserve Bank will apply certain principles, including in respect of the royalties payable. Additionally, minimum guaranteed royalties are not allowed and royalties cannot exceed maximum permitted rates.
There is currently no proposal to reform the laws affecting franchising. The Franchise Industry Ombudsman is in the process of obtaining accreditation for itself and its Code of Conduct for Franchising (see Question 6) under the Consumer Protection Act 2008.
Danie Strachan, Partner
Adams & Adams
Professional qualifications. South Africa, Attorney and Notary Public
Areas of practice. General commercial and corporate law; consumer protection; franchising; commercialisation of intellectual property; information technology; entertainment law; advertising and promotions law.
Non-professional qualifications. LLB degree (cum laude), University of Pretoria
- Advising on the establishment of an enterprise in South Africa.
- Drafting and reviewing agreements needed by clients for their operations and to grow their businesses.
- Assisting client in mergers and acquisitions transactions.
- Advising clients regarding the commercialisation of intellectual property and franchising in particular; has advised numerous foreign franchisors in relation to their expansion into South Africa.
- Assisting clients with the drafting of franchise agreements and related documentation.
- Assisting clients in understanding the regulatory environment, in particular providing advice on consumer protection and data protection and privacy (a burgeoning practice area in South Africa).
- Frequently presents talks and workshops on consumer protection, data protection and other regulatory topics. Regularly writes press articles regarding these topics and has been interviewed on radio numerous times.
Professional associations/memberships. Law Society of the Northern Provinces; South African Institute of Intellectual Property Law (fellow).
André Visser, Partner
Adams & Adams
Professional qualifications. South Africa, Attorney, Conveyancer, Notary Public and Tax Practitioner
Areas of practice. General commercial law; corporate law; mergers and acquisitions; cross-border transactions and inward listings; information technology law; exchange control; tax law; estate planning and wills.
- Advising clients in relation to mergers and acquisitions, cross-border transactions and all legal aspects of investing into South Africa, as well as regarding information technology law, exchange control and tax law.
- Acting for a number of multinational entities in respect of their commercial legal affairs.
Professional associations/memberships. Law Society of the Northern Provinces; Licensing Executives Society of South Africa.