The International Comparative Legal Guide to:
Franchise 2018 4th Edition
A practical cross-border insight into franchise law. Published by Global Legal Group, with contributions from: Anderson Mori & Tomotsune, Badertscher Attorneys at Law, Cuatrecasas, Daniel Legal & IP Strategy, Dickinson Wright LLP, DLA Piper
Faegre Baker Daniels, FLINN, Gardere Wynne Sewell LLP, Gorodissky & Partners (Ukraine), GRATA International, GUNER | legal, Hoffmann Liebs Fritsch & Partner, Rechtsanwälte mbB, Horten Advokatpartnerselskab, Jones & Co., Kanga & Co, Marsh & Maher Lawyers, Persia Associates, Rechtsanwaltskanzlei Dr. Amelie Pohl, RUBIN MEYER DORU & TRANDAFIR, Smit & Van Wyk and The Richard L. Rosen Law Firm, PLLC. Smit & Van Wyk: Relevant Legislation and Rules Governing Franchise Transactions
1.1 What is the legal definition of a franchise?
The Franchise Association of South Africa (FASA) refers to a “franchise” where one party grants to another party the right to operate a business or licence under specific conditions. The Consumer Protection Act No. 68 of 2008 defines a “franchise agreement’’ as an agreement between two parties, being the franchisor and franchisee, respectively:
(a) in which, 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 the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor;
(b) under which the operation of the business of the franchisee will be 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; and
(c) that 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.
1.2 What laws regulate the offer and sale of franchises?
The contractual relationship between a franchisor and a franchisee is subject to the law of contract and regulated by means of the common law. Since 1 April 2011, franchise agreements in South Africa are also subject to the statutory provisions of the Consumer Protection Act, which states that a franchise agreement must:
(a) be in writing and signed by or on behalf of the franchisee;
(b) include any prescribed information, or address any prescribed categories of information; and
(c) comply with the general requirement to be in plain and understandable language.
All franchise agreements are subject to a statutory cooling-off period in terms of which a franchisee may cancel a franchise agreement with written notice to the franchisor, without costs or penalty within 10 business days after signing of the agreement. The Regulations of the Consumer Protection Act impose specific contractual and disclosure obligations on a franchisor.
1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a “franchisee” for the purposes of any franchise disclosure or registration laws?
Every transaction which will fall within the ambit of the statutory definition of a “franchise agreement” as specified in terms of the Consumer Protection Act (regardless of the number of franchisees or licensees), would be subject to the statutory franchise disclosure and contractual provisions.
1.4 Are there any registration requirements relating to the franchise system?
No, franchise agreements are not registered in South Africa as there is no official franchise registry.
1.5 Are there mandatory pre-sale disclosure obligations?
Yes. The Consumer Protection Act states that:
(1) Every franchisor must provide a prospective franchisee with a disclosure document, dated and signed by an authorised officer of the franchisor, at least 14 days prior to the signing of a franchise agreement, which as a minimum must contain:
(a) the number of individual outlets franchised by the franchisor;
(b) the growth of the franchisor’s turnover, net profit and the number of individual outlets, if any, franchised by the franchisor for the financial year prior to the date on which the prospective franchisee receives a copy of the disclosure document;
(c) a statement confirming that there have been no significant or material changes in the company’s or franchisor’s financial position since the date of the last accounting officer’s, or auditor’s certificate or certificate by a similar reviewer of the company or franchisor, that the company or franchisor has reasonable grounds to believe that it will be able to pay its debts as and when they fall due; and
(d) written projections in respect of levels of potential sales, income, gross or net profits or other financial projections for the franchised business or franchises of a similar nature with particulars of the assumptions upon which these representations are made. The disclosure document must also be accompanied by a certificate on an official letterhead from an accounting officer or the auditor, certifying that:
the business of the franchisor is a going concern;
to the best of his or her knowledge the franchisor is able to meet its current and contingent liabilities;
the franchisor is capable of meeting all of its financial commitments in the ordinary course of business as they fall due; and\
the franchisor’s audited annual financial statements for the most recently expired financial year have been drawn up:
in accordance with South African generally accepted accounting standards;
except to the extent stated therein, on the basis on accounting policies consistent with prior years; in accordance with the provisions of the South African Companies Act and all other applicable laws; and fairly reflecting the financial position, affairs, operations and results of the franchisor as at that date and for the period to which they relate.
The disclosure document should also include: (a) a list and specific details of current franchisees and of outlets owned by the franchisor; and (b) an organogram depicting the support system in place for franchisees.
1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?
The Consumer Protection Act makes it clear that every franchisor should provide a prospective franchisee with a disclosure document (containing the minimum prescribed information), at least 14 days prior to the signing of a franchise agreement. The Consumer Protection Act also states that if a franchise agreement is related to a master franchise, the master franchisor’s identity should be disclosed. The definition of a “franchise agreement” in terms of the Consumer Protection Act would include both a master franchise agreement as well as a sub-franchise agreement. In both instances, the party granting the rights to the other party would be required to provide a disclosure document.
1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?
Refer to the answer to question 1.5 above. Good business practice would dictate regular updates and revisions of the disclosure document, especially in view of the fact that all information should be accurate when provided to a prospective franchisee. There are no specific requirements regarding continuing disclosure obligations.