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A second look

Stirrings in South Africa


Philip Zeidman

This column last visited the South African market several years ago: “Franchising and the Antitrust Laws:  The International Perspective,” (September 2005).  Recent developments there suggest it is time for a fresh look.

Periodically, either through the experience of assisting franchisors entering the country or through association with knowledgeable observers, we will learn something of the trends in South African franchising:

  • The growth in the franchising sector, to a reported 12 percent of gross domestic product in 2007 (almost 500 franchisors, more than 25,000 franchisees, employing more than 400,000 people).
  • The Franchise Association of Southern Africa projects growth over the next five years at an annualized 10 percent.
  • The effect of interest rates, especially on real estate.
  • The growth in personal services and entertainment and leisure, with prediction of growth to come in child-care, education and health-care concepts.
  • The view (at least, of the Franchise Association of Southern Africa) that there is "a huge pool of potential franchisees....So many of the franchise companies are oversubscribed – they have more potential franchisees than they know what to do with."

The emergence of technology in certain segments of franchising, even in small and medium enterprises, especially in industries where speed of response is essential.

The emerging argument that franchising may have a role to play in a country where undeniable economic growth has not materially increased job opportunities.

From a legal perspective, South Africa has remained one of that dwindling number of significant economies without a trace of franchise-specific legislation. Only the common law is applicable; and, except for statutes which apply to contracts or commercial behavior generally, there is no regulation. No statute, for example, addresses presale disclosure to prospective franchisees, or the relationship between a franchisor and a franchisee; and there are no government agencies which deal with either subject. The Franchise Association urges its members to provide disclosure of specified information to franchisees; but, although from time to time arguments have been made that courts should look to those and other positions of the Association as embodying standards to which all franchisors should adhere, there is no evidence that the courts are heeding that admonition.

Occasionally issues have arisen in the realm of taxation, especially withholding tax, or in connection with governmental approval of royalties or of the transmission of funds to nonresident franchisors. But most of those issues have now been resolved satisfactorily, and in a relatively straightforward way.

The Competition Act applies to franchise agreements and practices, as it does to non-franchised economic activity. Most of the prevalent principles will be quite familiar to American or multinational franchisors; if there is a single element which is distinctive to South Africa it is one which arises from the turbulent social and political history of that country in the last half of the 20th Century:  the enshrinement here, as in other legislation, of the goal of black empowerment.

From time to time the Competition Commission has specifically addressed concerns arising in the context of franchising. In issuing illustrative "guidelines" regarding franchising, the Competition Commission noted that several provisions and practices typically present in franchise arrangements could, depending upon circumstances, run afoul of the Act. That cautionary observation was, fortunately, made against the backdrop of statements recognizing "the contribution of franchising to job creation and the fact that it is one of the best vehicles and an effective way to open up markets to small and medium-sized enterprises and the historically disadvantaged persons to participate in the mainstream of the country." The guidelines also acknowledge that "franchise agreements facilitate entry of new firms and/or products and have efficiency enhancing benefits" and conclude that "franchising is good for economic development."

So in that relatively placid and unthreatening atmosphere, it is puzzling that we see some close observers quoted within recent years as saying that a franchise statute here is inevitable in the next few years.

Explanations for this paradox vary. One is that it may be a manifestation of the determination to protect the black business community against underfunded (and in some cases unscrupulous) promoters of enterprises, however uncommon those may be.

Whatever the precise origin, for the first time specific regulation of franchising will become part of South Africa's legislative structure if the newly introduced Consumer Protection Bill is adopted in its current form.  It addresses all businesses, and is designed to protect consumers from a range of unfair business practices. It remains to be seen how franchisors will be affected in practice; for example, will franchisees be viewed as a class to be protected for all purposes?  It clearly, however, includes some franchise-specific provisions (some examples: a 10-day cooling off period; required disclosures of material information; a prohibition against one-sided provisions; notice of unusual provisions; and limitations on the right of the franchisor to require purchases from itself or a designated supplier.

The Bill is expected to be adopted by Parliament by the end of the year, and the franchising community will be watching closely. While early indications are that it may be tolerable, it will be especially interesting to see whether the final form will be affected by developments in the interim.  Last month, for example, a group of franchisees announced proposed legal action against a franchisor which, they allege, engaged in misrepresentations as to costs, and in a variety of ways engaged in conduct designed to ensure that the franchisees would fail. Whatever the truth of the allegations, we have seen elsewhere that controversies of this sort occurring during a period of legislative consideration can have an impact on the legislation itself. Franchisors, both those in South Africa and those considering entry into that country, would be well advised to monitor developments carefully.


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