Business overview

Types of vehicle

What forms of business entities are relevant to the typical franchisor?

A franchisor would typically operate via a public or private for-profit company incorporated in terms of the provisions of the Companies Act, No. 71 of 2008 (the Companies Act).

For foreign franchisors, an external or branch company could be established as a wholly-owned subsidiary of the foreign parent entity. Foreign franchisors may opt for a joint venture arrangement with a local South African entity as a means to more effectively establish a presence in South Africa. Alternatively, a foreign franchisor may choose to grant rights to a local party (a master franchisee) enabling them to adopt the role of franchisor in South Africa and extend franchise opportunities to sub- franchisees.

Regulation of business formation

What laws and agencies govern the formation of business entities?

As mentioned in question 1, the Companies Act governs the formation and functioning of companies in South Africa.

The Companies and Intellectual Property Commission (CIPC) is tasked with, among other functions, the registration of companies and the monitoring of compliance with the formalities required under the Companies Act.

Requirements for forming a business

Provide an overview of the requirements for forming and maintaining a business entity.

The Companies Act sought to significantly streamline and simplify the formal process of establishing a company in South Africa. New companies can be registered in South Africa relatively easily and cheaply.

At least one director is required for a new company, and that individual’s identity document or passport, together with a proof of his or her residential address must be provided.

A standard form memorandum of incorporation may be utilised to set up the company.

There are certain ongoing requirements for maintaining a business entity as prescribed by the Companies Act and the Regulations published thereunder, for example, the requirement that a company must lodge an annual return with the CIPC.

Restrictions on foreign investors

What restrictions apply to foreign business entities and foreign investment?

There are very few restrictions on foreign business entities and foreign investment in South Africa. Foreign individuals and entities may acquire property, including immovable property, in South Africa without restriction.

Certain circumstances, like the payment of royalties to a foreign entity, and the movement of capital, intellectual property and other significant assets out of South Africa, may trigger the requirement for Exchange Control approvals from the South African Reserve Bank. Otherwise foreigners may trade in South Africa without restrictions or additional requirements to what may be required of a South African.

Taxation

Briefly describe the aspects of the tax system relevant to franchisors. How are foreign businesses and individuals taxed?

The following tax rates apply in South Africa:

  • corporate tax rate: 28 per cent (not applicable to small businesses with less than 550,001 rand in annual taxable income);
  • foreign resident companies that earn income from a source in South Africa: 33 per cent;
  • individuals: taxed at varying rates between 18 per cent and 45 per cent depending on income; and
  • standard withholding tax on royalties payable out of South Africa: 15 per cent (in the absence of any taxation treaties).
Labour and employment

Are there any relevant labour and employment considerations for typical franchisors?

South African labour laws provide quite significant protections to employees via the Labour Relations Act No. 66 of 1995 and the Basic Conditions of Employment Act No. 75 of 1997.

Whether a franchisee could be deemed an employee of the franchisor would depend largely on the measure of control the franchisor exerts.

Under South African law, a distinction is drawn between employees and independent contractors, where, generally speaking, an employer would have more specific control over the day-to-day activities of an employee and how, when and where the employee’s tasks should be completed. An employer generally exerts more control over an employee in terms of how an employee executes required tasks.

To reduce the risk of a franchisee being considered an employee of the franchisor, or the employees of a franchisee being considered employees of the franchisor, provisions should be included in the franchise agreement where the parties confirm the nature of these relationships, and specifically that the franchise agreement does not create an employee-employer relationship. However, it is important to note that should the question of the nature of these relationships be considered, a court would, in addition to any contractual arrangements, consider the factual position surrounding the relationships. These positions would bolster an argument for the absence of an employee-employer relationship, but would not automatically confirm such a position.

Intellectual property

How are trademarks and know-how protected?

Registered and unregistered trademarks are protected in South Africa - the former in terms of the Trademarks Act No. 194 of 1993, and the latter in terms of the common law.

The CIPC administers the Trademarks Register in South Africa. Applicants seeking trademark registration must submit separate applications for each trademark class of goods or services within which they would like their mark to be protected. Once registered, a trademark holder is issued with a trademark registration certificate. Trademarks are valid for a period of 10 years, during which period the trademark holder has exclusive rights to use the relevant mark, subject to any conditions that may be imposed by the CIPC. Trademark registrations may be renewed after every 10-year period, for a further period of 10 years, and effectively a trademark holder could protect its rights indefinitely.

Know-how is protected under the common law, with further protections possible under contractual terms.

Real estate

What are the relevant aspects of the real estate market and real estate law?

There are no real estate laws specific to franchise arrangements.

It is likely that franchise business would be conducted from leased premises with lease rights secured via a lease agreement. General contract laws would govern the contractual relationship.

The franchisee is more likely to be the lessee in lease arrangements for leased premises from which a franchise business may be conducted, particularly in relation to franchise agreements where the franchisor is foreign.

The franchisor should prioritise leases as part of its due diligence investigation, and if possible should ensure that the franchise agreement allows for the lease agreement to be assigned to the franchisor without the landlord’s consent.

Franchising in the market

How widespread is franchising in your jurisdiction? In which sectors is franchising common?

The Franchising Association of South Africa’s (FASA), the organisation that promotes and supports franchising in South Africa, compiles a list of accredited franchise businesses, being those franchise businesses recognised, assessed, reviewed and monitored by FASA. Based on this list of accredited businesses, it appears that franchise businesses are found across 21 different business sectors in South Africa, including agricultural, mining, manufacturing and industrial services, building office and home services; fast food and restaurants, health, beauty and body culture; and the retail and direct marketing services sector.

It appears that franchising is most common in the fast food and restaurants sector as well as retail and direct marketing, with more than 30 franchise businesses active in each of these sectors in South Africa.

Franchising is considered an area for potential growth in the South African economic sphere, as well as in Africa.

Laws and agencies regulating the offer and sale of franchises

Legal definition

What is the legal definition of a franchise?

There is no specific legal definition of a franchise under South Africa law.

However, the Consumer Protection Act No. 68 of 2008 (CPA) defines a franchise agreement as:

an agreement between two parties, being the franchisor and franchisee, respectively -

(a) in which, for consideration 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 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 and services to be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor . . . .

FASA loosely defines franchising as the granting of a right to operate a business or licence under certain specific conditions.

Franchise laws and agencies

Which laws and government agencies regulate the offer and sale of franchises?

The CPA, and the Regulations published thereunder, together with the common law, regulates the offer and sale of franchises in South Africa.

The National Consumer Commission is the government agency tasked with the regulation of relationships between consumers and businesses in South Africa. Franchisees are, in certain respects, considered consumers as per the definition of a consumer set out in the CPA.

Principal franchise requirements

Describe the relevant requirements of these laws and agencies.

The CPA sets out certain requirements for franchise agreements, namely, in terms of section 7(1), 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 requirements of section 22.

Section 22 provides that agreements must be in plain and understandable language.

Regulation 2 under the Regulations to the CPA contains further information that must be contained in a franchise agreement as prescribed by the Minister, including information such as the name and description of the relevant goods and services, the consideration payable by the franchisee under the agreement and renewal terms.

Exemptions

What are the exemptions and exclusions from any franchise laws and regulations?

There are no exemptions or exclusions.

Franchisor eligibility

Does any law or regulation create a requirement that must be met before a franchisor may offer franchises?

No, there are no such eligibility laws.

Franchisee and supplier selection

Are there any laws, regulations or government policies that restrict the manner in which a franchisor recruits franchisees or selects its or its franchisees’ suppliers?

No, there are no such laws.

Pre-contractual disclosure

What is the compliance procedure for making pre-contractual disclosure in your country? How often must the disclosures be updated?

Generally speaking, parties are not required to make any pre-contractual disclosures in South Africa, save for certain specific types of agreements like insurance, partnership or agency agreements where parties are required to act in the utmost good faith and therefor to disclose any information that may be considered material for the other party in entering into the agreement.

Specific disclosures are required for franchise agreements. In terms of Regulation 3 of the Regulations to the CPA:

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 . . . .

There is no requirement that this disclosure document should be updated at any point.

Pre-sale disclosure to sub-franchisees

In the case of a sub-franchising structure, who must make pre-sale disclosures to sub-franchisees? If the sub-franchisor must provide disclosure, what must be disclosed concerning the franchisor and the contractual or other relationship between the franchisor and the sub-franchisor?

The CPA does not directly address this issue. The sub-franchisor would have the direct contractual nexus with the sub-franchisees, and, therefore, it is reasonable to argue that the obligation would fall on the sub-franchisor. It is recommended that the master franchisor include a provision in the master agreement obliging the sub-franchisor to fulfil the disclosure obligations and to indemnify the master franchisee if it fails to meet the disclosure obligations.

Due diligence

What due diligence should the parties undertake before entering a franchise relationship?

A franchisor should conduct at least a basic due diligence into the party or parties wishing to become a franchisee. In the case of individuals, a credit check and criminal check are relatively easy and inexpensive to do. The individual directors of potential franchisee companies could be similarly investigated.

Potential franchisee companies should be asked about details of directors (as noted above) and shareholders, and to share company documents including financial statements. A major potential drawback is that franchisee companies are likely to be new companies set up for the particular purpose of operating the franchisee business. It is, therefore, important to look at the individuals involved and any other businesses or companies with which they may be involved.

Franchisees could verify and evaluate the intellectual property rights that form the subject of the licence granted in the franchise arrangement. Franchisees can also, more generally, contact existing franchisees, suppliers, employees and customers, study the disclosure documents and financial statements carefully in conjunction with professional advisers to check on financial health and forecasted profitability, check whether the franchisor is a member of industry bodies with enforceable codes of conduct, check for any court judgments or poor credit records against the franchise or, visit franchised stores with a view to experiencing the services/goods from the perspective of a consumer, consider the broader market - in particular how competitive it is - and consider the regulations and potentially forthcoming regulations that may affect the industry.

What must be disclosed

What information must the disclosure document contain?

In terms of Regulation 3(1) of the CPA, as a minimum the franchisor must disclose:

  • the number of individual outlets franchised by the franchisor;
  • 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;
  • a statement confirming that there have been no significant or material changes in the company’s or the franchisor’s financial position since the date of the last accounting officer, 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
  • written projections in respect of levels of potential sales, income, gross or net profits or other financial projections for the franchised business or the franchises of a similar nature with particulars of the assumptions upon which these representations are made.

Furthermore, in terms of Regulation 3(2):

Each page of the disclosure document . . . must be qualified in respect of the assumptions contained therein.

In addition, in terms of Regulation 3(3):

The disclosure document . . . must be accompanied by a certificate . . . certifying that -

(a) the business of the franchisor is a going concern;

(b) 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

(c) the franchisor’s audited annual financial statements for the most recently expired financial year have been drawn up -

(i) in accordance with South African generally accepted accounting standards;

(ii) except to the extent stated herein, on the basis of accounting policies consistent with prior years;

(iii) in accordance with the provisions of the Companies Act . . .;

(iv) fairly reflecting the financial position affairs, operations and results of the franchisor as at that date and for the period to which they relate.

In terms of Regulation 3(4), the disclosure document must further be accompanied by a list of current franchisees and outlets owned by the franchisor; and an organogram depicting the support system in place for franchisees.

Continuing disclosure

Is there any obligation for continuing disclosure?

No, other than initial disclosures required there is no obligation for continuing disclosures.

Disclosure requirements – enforcement

How do the relevant government agencies enforce the disclosure requirements?

Although not a government agency, FASA’s code of ethics provide for the payment of a fine up to 10,000 rand or termination of membership of the association if members contravene the CPA.

Disclosure violations – relief for franchisees

What actions can franchisees take to obtain relief for violations of disclosure requirements? What are the legal remedies for such violations? How are damages calculated? If the franchisee can cancel or rescind the franchise contract, is the franchisee also entitled to reimbursement or damages?

Failure to issue a disclosure notice is not in itself an offence under the CPA. A person failing to comply would first be issued with a compliance notice. It is not clear whether a franchise arrangement would be void or voidable as a result of a failure to supply a disclosure notice.

To the extent that the franchisor is a member of FASA, their failure to disclose can be reported to FASA.

The prospective franchisee can also report the failure to issue such notice, or particular violations of disclosure requirements to the National Consumer Commission.

Where a franchisor may have omitted certain information or provided incorrect or false information, the franchisee could pursue delictual remedies. To this end, the franchisee would need to prove the damage it suffered as a result of the franchisor’s failure to supply required or correct information.

Disclosure violations – apportionment of liability

In the case of sub-franchising, how is liability for disclosure violations shared between franchisor and sub-franchisor? Are individual officers, directors and employees of the franchisor or the sub-franchisor exposed to liability? If so, what liability?

This issue is not specifically addressed in the relevant sections of the CPA.

Liability of this nature should be specifically addressed in the franchise agreement, failing which the ordinarily delictual remedies will apply.

General rules on offer and sale

In addition to any laws or government agencies that specifically regulate offering and selling franchises, what are the general principles of law that affect the offer and sale of franchises? What other regulations or government agencies or industry codes of conduct may affect the offer and sale of franchises?

As indicated above, the offer of a franchise is regulated by the CPA, and Regulation 3 sets out all the information that must be contained in the franchisor’s pre-sale disclosure, and the documentation that must accompany such a disclosure.

South African law does not specifically recognise the doctrine of culpa in contrahendo. Furthermore, there is no legally recognised general duty of good faith in contracting.

General rules on pre-sale disclosure

Other than franchise-specific rules on what disclosures a franchisor should make to a potential franchisee or a franchisee should make to a sub-franchisee regarding predecessors, litigation, trademarks, fees, etc, are there any general rules on pre-sale disclosure that might apply to such transactions?

No there are no further general rules. These are important issues to be factored into any due diligence investigation.

Fraudulent sale

What actions may franchisees take if a franchisor engages in fraudulent or deceptive practices in connection with the offer and sale of franchises? How does this protection differ from the protection provided under franchise sales disclosure laws?

In this instance, franchisees would be entitled to sue in delict for fraudulent misrepresentation.

Legal restrictions on franchise contracts and the relationship between the parties

Franchise relationship laws

Are there specific laws regulating the ongoing relationship between franchisor and franchisee after the franchise contract comes into effect?

Section 48 of the CPA provides that the terms of the franchise agreement must not be unfair, unreasonable or unjust.

Regulation 2 of the CPA sets out certain particular requirements to be contained in a franchise agreement.

Operational compliance

What mechanisms are commonly incorporated in agreements to ensure operational compliance and standards?

Franchise agreements do often incorporate provisions granting the franchisor rights of inspection and the ability to audit the franchisee in relation to compliance with certain operational standards or requirements. Reporting requirements are often provided for in the most detail in franchise agreements as this gives the franchisor the most insight into the commercial health and success of the franchise business as run by the franchisee. Reporting provisions are also the most useful rights particularly for foreign franchisors who may have less opportunity to conduct audits and physical inspections.

Amendment of operational terms

May the franchisor unilaterally change operational terms and standards during the franchise relationship?

In terms of the provisions of Regulation 44 (3)(h) and (i) of the CPA, any provisions of a franchise agreement purporting to (i) allow the franchisor to increase the prices of any goods or services without giving the franchisee the right to terminate, or (ii) enabling the franchisor to unilaterally alter the terms of the agreement, including the characteristics of the product or service, would be presumed not to be fair and reasonable, and accordingly such provisions would be prohibited under the CPA.

Other laws affecting franchise relations

Do other laws affect the franchise relationship?

Other laws may be relevant to the operation of the franchise business and may dictate what may be agreed between the parties (like for example, tax laws and competition laws), but there are no other specific laws that directly impact on the franchise relationship.

Policy affecting franchise relations

Do other government or trade association policies affect the franchise relationship?

No, there are no such policies. FASA membership is voluntary.

Termination by franchisor

In what circumstances may a franchisor terminate a franchise relationship? What are the specific legal restrictions on a franchisor’s ability to terminate a franchise relationship?

A franchise agreement may only contain a provision for the franchisor to terminate such agreement at will where the same right is afforded to the franchisee.

A franchisor may further only terminate an open-ended franchise agreement on reasonable notice to the franchisee, save where the franchisee has materially breached the franchise agreement.

Termination by franchisee

In what circumstances may a franchisee terminate a franchise relationship?

In terms of section 7(2) of the CPA, a franchisee may cancel a franchise agreement within 10 business days of signing the agreement, on written notice to the franchisor but without any cost or penalty to the franchisee.

The exact text of section 7(2) must appear at the top of the first page of the franchise agreement, together with a reference to the section and the CPA.

As set out in question 32, to the extent that a franchise agreement contains a provision allowing a franchisor to terminate the franchise agreement at will, then the same right must be afforded to the franchisee.

Renewal

How are renewals of franchise agreements usually effected? Do formal or substantive requirements apply?

Formal or substantive requirements will be governed by the terms of the relevant provisions of the franchise agreement.

In terms of the Regulations to the CPA, to the extent that a franchise agreement contemplates renewal, both the franchisor and the franchisee must be able to renew the agreement.

Refusal to renew

May a franchisor refuse to renew the franchise agreement with a franchisee? If yes, in what circumstances may a franchisor refuse to renew?

To the extent that a franchise agreement does not contain any renewal provisions with which the franchisor is obliged to comply, there is no specific obligation on the franchisee to renew. Franchisors typically consider the franchisee business’s performance during the initial term to determine whether or not to renew.

A franchisor may also refuse to renew a franchise agreement where there has been a material breach of the agreement by the franchisee.

Transfer restrictions

May a franchisor restrict a franchisee’s ability to transfer its franchise or restrict transfers of ownership interests in a franchisee entity?

Yes, a franchisor may impose these restrictions.

Fees

Are there laws or regulations affecting the nature, amount or payment of fees?

Other than exchange control laws (dealt with below), there are no specific laws or regulations affecting the nature, amount or payment of fees.

Usury

Are there restrictions on the amount of interest that can be charged on overdue payments?

In terms of the Prescribed Rate of Interest Act, the interest on debts where no rate is agreed upon is the repo rate plus 3.5 per cent per annum. The prescribed rate of interest on debt in South Africa is currently 10.25 per cent. A different rate may be applied by law, trade custom or agreement between the parties.

This prescribed rate of interest will apply to all debts outstanding in terms of a franchise agreement unless the parties agree to another interest rate.

The National Credit Act limits the amount of interest that can be charged on unpaid amounts to 2 per cent per month; however, this will only apply where the National Credit Act applies to the franchise agreement. It is unlikely to apply in many instances given that a requirement is that the franchisee would either need to be an individual, or a juristic person with an annual turnover less than 1 million rand per annum.

Foreign exchange controls

Are there laws or regulations restricting a franchisee’s ability to make payments to a foreign franchisor in the franchisor’s domestic currency?

Exchange control approvals from the South African Reserve Bank (SARB) would be required where royalties are to be paid to a foreign entity. The Department of Trade and Industry (DTI) acting on behalf of SARB must grant approval for any arrangement, including a franchise arrangement, in which products are manufactured locally under licence from a foreign licensor. The DTI has provided guidelines regarding licence terms that it deems to be acceptable and unacceptable, and in particular relating to the structure of the licence fee payable and the quantum of any licence royalties payable.

Confidentiality covenant enforceability

Are confidentiality covenants in franchise agreements enforceable?

Yes, confidentiality covenants are generally enforceable.

Good-faith obligation

Is there a general legal obligation on parties to deal with each other in good faith during the term of the franchise agreement? If so, how does it affect franchise relationships?

Good faith is recognised as an underlying concept of South African contract law.

Franchisees as consumers

Does any law treat franchisees as consumers for the purposes of consumer protection or other legislation?

Yes, in terms of the definition of consumer under the CPA, a franchisee is included as a consumer.

Language of the agreement

Must disclosure documents and franchise agreements be in the language of your country?

There is no specific statutory requirement that these documents or agreements need to be in any particular South African language. However, FASA does require that disclosure documents and supporting documents should be in English.

South Africa has 11 official languages, with English, Afrikaans, Zulu and Xhosa being the most widely used. English is considered standard for use in business communication and legal agreements.

Restrictions on franchisees

Describe the types of restrictions placed on the franchisees in franchise contracts.

Particular restrictions will be specific to the requirements of the franchisor and the concerns they may have for the protection of their brand. Territorial restrictions are particularly common, and foreign franchisors often want to provide that the governing law of the franchisor’s country of origin would apply.

Certain restrictions are legally prohibited, like restrictions related to the minimum prices that franchisees can charge to their customers. While franchisors can issue a recommended retail selling price, prescribing a particular minimum sales price is prohibited under South African competition laws.

Competition law

Describe the aspects of competition law in your country that are relevant to the typical franchisor. How are they enforced?

Parties in a franchise agreement are deemed to be in a vertical relationship. The Competition Act 89 of 1998 (the Competition Act) contains broad provisions to prevent anti-competitive arrangements (section 5 stipulates that an agreement will be deemed to be anticompetitive if it has the effect of substantially preventing or lessening competition in a market, unless a party to the agreement can prove that any technological, efficiency or other pro-competitive, gain resulting from that agreement outweighs that effect). Specifically, the practice of minimum resale price maintenance is prohibited (as indicated above) although a non-binding recommendation for a resale price is acceptable.

The Competition Commission is established in terms of the Competition Act to investigate and evaluate alleged anti-competitive practices. The Competition Tribunal is mandated to adjudicate on any matter referred to it by the Commission.

Technically, certain aspects of franchising could be argued to infringe the provisions of the Competition Act. The Competition Commission issued a franchising note addressing the application of certain provisions of the Competition Act, as amended, to franchise agreements.

The note concludes that:

Franchising agreements are as such not necessarily anticompetitive. They are used to establish a distribution network and this creates opportunities and benefits to both parties. The franchisor exploits expertise in other markets without substantial capital investment in setting up a retail network. The franchisee, on the other hand, also gets access to trading methods, which have been tried and tested. Therefore, any agreement that is necessary to support the essential features of the franchise relationship should not raise competition concerns, for example, the protection of the know-how, protection of network reputation, or selective distribution clauses which are normally introduced for efficiency reasons.

Despite the potential infringements . . . the structure of franchising has a potential of creating collusion among competitors (franchisees) on price and market allocation and may also substantially lessen competition and cause harm to consumers. There may therefore be anti-competitive practices that are a result of franchising agreements, which the competition authorities should be concerned about.

Courts and dispute resolution

Describe the court system. What types of dispute resolution procedures are available relevant to franchising?

The judicial system in South Africa is established in the Constitution of the Republic of South Africa, 1996 (the Constitution) as follows:

  • the Constitutional Court is the highest court in the land as regards constitutional matters;
  • the Supreme Court of Appeal is the highest court in the land for all matters other than constitutional matters. As the name implies, this Court deals exclusively with appeals, where a bench of three to five senior, experienced judges decide on matters;
  • a number of High Courts have jurisdiction throughout the various provinces in South Africa, dealing with serious criminal offences and civil matters. There are also a number of specialist High Courts - in this regard the Labour Court, Tax Court and Competition Court may be relevant and of interest to a franchisor in South Africa; and
  • there are various lower courts, known as magistrates’ courts (regional and district), which are mandated to hear matters involving claims of up to 200,000 rand.

Parties to a franchise agreement may choose to include mediation and arbitration proceedings as options for dispute resolution.

Mediation may be less formal and would essentially be a continued negotiation between the parties overseen by an independent third party with relevant experience, as agreed between the parties.

An arbitration would be a more formal, more adversarial process than a mediation. See further details below.

Arbitration – advantages for franchisors

Describe the principal advantages and disadvantages of arbitration for foreign franchisors considering doing business in your jurisdiction.

The main advantages of the settlement of disputes via arbitration proceedings in South Africa include that:

  • parties are free to choose (and include in any relevant contract) the particular rules that will be applicable to and govern any arbitration;
  • arbitration proceedings are generally shorter, or have a known time frame for their conclusion, or both;
  • an appointed arbitrator to a dispute will have specialist knowledge and skill relevant to the dispute;
  • arbitration proceedings offer a more private, ‘closed’ forum, which is particularly important where sensitive commercial information is to be dealt with;
  • in some instances, arbitration is likely to be less costly than litigation proceedings, or at least costs can be estimated ahead of time (because time frames for arbitrations are often more circumscribed); and
  • in international disputes, there may be a perceived sense of neutrality given that both parties have chosen the particular forum and rules and parameters that will apply (as opposed to the authority of a court of local jurisdiction of one of the parties).

The primary disadvantages include that, in some instances, arbitration could be a more expensive avenue; and where third parties become embroiled in a dispute these relevant parties will have to consent to participate in arbitration proceedings as they cannot simply be joined in a matter as they would in court proceedings.

National treatment

In what respects, if at all, are foreign franchisors treated differently from domestic franchisors?

Except for the effect of the exchange control regulations, foreign and domestic franchisors are not treated differently in any respect, legally or otherwise.

Update and trends

New legislation and regulation

Are there any proposals for new legislation or regulation, or to revise existing legislation and regulation? Are there other current developments or trends to note?

New legislation and regulation49 Are there any proposals for new legislation or regulation, or to revise existing legislation and regulation? Are there other current developments or trends to note?

From a legislative and regulatory perspective, there are no new developments on the horizon in the franchising space.

A recent survey conducted by FASA indicates that, despite a tough economic climate in South Africa, the franchising sector is expected to continue with positive, albeit quite conservative, growth. Online presence, particularly social media marketing, was highlighted as an important tool for franchises.

Social franchising, where commercial franchising concepts are used to promote and achieve social benefits, was noted as an important area for development in South Africa.