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Franchise law

i Legislation

The Consumer Protection Act 2008 (CPA), together with the regulations promulgated under it, regulate franchising in South Africa. The regulations require a franchisor to provide a prospective franchisee with both a franchise agreement and a disclosure document. The CPA and regulations set out requirements and terms that must be adhered to for a franchise agreement to be valid.

ii Pre-contractual disclosure

Pursuant to Regulation 3 of the CPA, a franchisor must provide a prospective franchisee with a disclosure document, dated and signed by an authorised officer of the franchisor, at least 14 days before signature of the agreement. The purpose of the disclosure document is to ensure that the prospective franchisee is not misled as to any material aspect of the franchise business in which they are investing. There is no obligation of ongoing disclosure on the franchisor.

Regulation 3 sets out information that a disclosure document must contain.

The document must be accompanied by an accounting officer's or auditor's certificate, certifying, among other things, that the franchisor's business is a going concern, is able to meet its current and contingent liabilities and financial commitments, and its annual financial statements have been prepared in accordance with generally accepted accounting principles.

If the required information is not included in the document, or is not, at the date of the document, factually correct, the franchisor may be subject to allegations of misrepresentation and non-disclosure. This might entitle the franchisee to cancel the agreement and claim damages.

iii Registration

Registration of franchises is not required. However, if the franchisor or franchisee is an incorporated entity, it must be registered pursuant to the Companies Act. Franchisors and franchisees carrying on business in South Africa may also be required to be registered with the tax authorities for the purpose of paying income tax, employees' tax and value added tax. The franchisor may also be required to register with a regulator that has jurisdiction in the sector into which the franchise falls; for example, real estate, life sciences or financial services.

iv Mandatory clauses

Regulation 2 of the CPA prescribes that certain information must be contained in a franchise agreement, including:

  1. the exact text of Section 7(2) of the CPA, which provides that a franchisee may, by written notice to the franchisor, cancel a franchise agreement without cost or penalty within 10 business days of signing it;
  2. provisions preventing unreasonable fees, prices or other considerations; conduct that is unreasonable or unnecessary in relation to the risks to be incurred by a party; and conduct that is not reasonably necessary to protect the legitimate business interest of the franchisor, franchisee or franchise system;
  3. the franchisor's legal name, trading name, registered office and franchise business office, street, postal and email addresses, telephone number and fax number;
  4. a description of the types of goods or services that the franchisee is entitled to provide and of the franchise business system;
  5. the obligations of the franchisor and franchisee;
  6. a clause requiring the franchisor to disclose any benefit or compensation it receives from suppliers to its franchisees or the franchise system;
  7. full details of the financial obligations of the franchisee in terms of the agreement or otherwise related to the franchised business;
  8. restrictions imposed on the franchisee;
  9. terms and conditions relating to termination, renewal, goodwill and assignment of the franchise;
  10. effect of the termination or expiration; and
  11. the extension or renewal terms, if any.
v Guarantees and protection

Where the franchisee is a company, the franchisor often requires the directors or shareholders of the franchisee to provide it with some type of security for the contractual obligations of the franchisee. For most types of security undertaking to be valid, they must be in writing.

There is no statutory protection for trade secrets and confidential information and franchisors must rely on the common law. In this regard, franchisors often include restraint of trade and confidentiality provisions in the franchise agreement. A restraint of trade will be enforceable if it is not contrary to public policy and is necessary to protect the legitimate interests of the franchisor.