International Franchise Handbook – 2nd Edition

Global View Local Expertise

South Africa: Smit & Van Wyk
Esmari Jonker, page 134

Publisher – DWF Germany Rechtsanwaltsgesellschaft mbH
Franchising in SOUTH AFRICA

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Franchising is governed in South Africa by means of common law and statute. Parties are free to enter into a franchise agreement and to structure their business relationship as they prefer, provided that it complies with the minimum statutory and common law requirements. The South African legal system provides for adequate protection and enforcement of intellectual property rights. A franchisor’s intellectual property rights can be protected by means of statute and common law. Franchising is a one of the preferred options to establish and expand a business in South Africa. A franchise agreement is viewed in South African law as an ordinary commercial agreement governed by the law of contract. Since 1 April 2011, all franchise agreements in South Africa are also subject to the statutory provisions of the Consumer Protection Act 68 of 2008 (“CPA”). The CPA defines a franchise agreement as an agreement in terms of which (a) a consideration is paid whereby the franchisor grants the franchisee the right to carry on business under a system or marketing plan substantially determined or controlled by the franchisor; (b) under which the business will be substantially or materially associated with advertising, marketing, trademarks or any branding of franchisor; and (c) that governs the business relationship between the parties, including the providing of goods or services. Different entity options are available to conduct business within South Africa, including a sole proprietor, partnership, trust, a South African company or an external company. A South African company would usually be the preferred choice. The South African Companies Act 71 of 2008 distinguishes between 2 types of profit companies, namely a private company and a public company (both which are subject to limited liability). There are generally no restrictions on foreign shareholding in South African companies or foreign franchise investments.

  • The CPA promotes an economic environment that supports consumer rights and responsibilities with reasonable standards regarding consumer goods and services. A franchisee has been included in the definition of a “consumer” and the following fundamental rights are available to consumers as well as franchisees:
  • Equality (no discrimination);
  • Privacy;
  • Disclosure and information;
  • Fair and responsible marketing;
  • Honesty and fair dealing;
  • Fair, just and reasonable terms and conditions;
  • Fair value, good quality and safety; and
  • Right of choice (including supplier selection). A franchisee’s right of choice regarding suppliers may be limited in the event where the goods and services are reasonably related to the branded products of the franchisor.

The Competition Act 89 of 1998 aims to prevent anti-competitive practices and refers to horizontal and vertical restrictive practices, both of which may apply to the franchise industry in respect of the following:

  1. Territorial restrictions, exclusive dealings and exclusive territories;
  2. Contractual obligations to source products and services only from a specific supplier and the tying of products; and
  3. Price fixing, minimum price maintenance and minimum discounts.

In the context of franchising, the above exclusionary acts by a franchisor may be regarded as anti-competitive, unless the franchisor can demonstrate that there is a technological, efficiency or procompetitive gain which outweigh such an effect. Both franchisors and franchisees will be required to adhere to South African tax regulations regarding income tax, value-added tax (VAT), employees tax, capital gains tax and withholding taxes (in the case of foreign transactions), all of which will depend upon the specific business structures and entities involved. Protection is afforded to intellectual property rights in South Africa by means of statute (trademarks, copyright, patents, designs and plant breeders’ rights) as well as common law rights (i.e. know-how, trade secrets, goodwill, reputation and confidential information). Trademarks, patents and designs may be registered with the South African Companies and Intellectual Property Commission (CIPC). Copyright is not registered (except for copyright in cinematograph films). The CPA requires the franchisor to identify and specify all its intellectual property rights in a franchise agreement, as well as conditions regarding the use thereof.

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