What is an OEM agreement?
Is an OEM agreement legally binding in South Africa?
“No assignment of copyright and no exclusive licence to do an act which is subject to copyright shall have effect unless it is in writing signed by or on behalf of the assignor, the licenser or, in the case of an exclusive sublicence, the exclusive sublicenser, as the case may be.”
“a person may because of his control over the making of a computer program be the author of that program even if the creator of the program is an independent contractor.”
“Except to the extent contemplated in subsection (4), the producer or importer, distributor or retailer of any goods is liable for any harm, as described in subsection (5), caused wholly or partly as a consequence of— (a) supplying any unsafe goods; (b) a product failure, defect or hazard in any goods; or (c) inadequate instructions or warnings provided to the consumer pertaining to any hazard arising from or associated with the use of any goods, irrespective of whether the harm resulted from any negligence on the part of the producer, importer, distributor or retailer, as the case may be.”
“The practice of minimum resale price maintenance is prohibited.”
When you need an Original Equipment Manufacturer Agreement
- You make a product — a device, an app or a software platform — and want to build in another company’s engine, SDK, library or firmware and sell the result under your own brand.
- You own a technology component and want manufacturers or software houses to embed it in their products for a per-unit royalty, without losing control of your code or your brand.
- A partner asks for exclusivity in a sector or territory, or wants you to commit to minimum annual volumes in exchange for a lower royalty.
- The finished product will reach consumers — a vehicle tracker, a security or medical device, a smart-home gadget — so a fault in the embedded component could injure someone or damage property.
- The royalties cross a border: a South African OEM paying a foreign provider, or a South African provider licensing its technology to an OEM overseas.
What an Original Equipment Manufacturer Agreement should contain
Licence grant: embed, copy and sublicense
Spell out exactly what the OEM may do: build the component into a named product or product line, copy it onto each unit or installation, distribute it only as part of that product, and give end users a sublicence to use it. Fix the territory, the field of use, whether the OEM receives object code only, and whether it may modify the component. The provider keeps ownership of the component and the OEM keeps its own product; any custom integration work should be allocated expressly. Every copy shipped is a reproduction — an act section 11B of the Copyright Act reserves to the copyright owner — so a vague grant leaves the whole installed base exposed.
Flow-down end-user terms
The provider has no contract with the OEM’s customers, so it protects itself through minimum terms the OEM must include in its own customer contract: no reverse engineering, no use outside the product, the provider’s liability excluded as far as the law allows, and any export or data-handling rules. Agree whether the provider’s terms are reproduced word for word or summarised, and who updates them. Terms aimed at consumers must still respect the Consumer Protection Act, so the flow-down cannot simply import a foreign template.
Branding and “powered by”
Decide whose name appears where. The OEM’s brand goes on the finished product; the provider’s name appears only if the agreement says so — as a “powered by” credit, an attribution screen or a line in the documentation. If the provider’s trade mark is used, license it expressly with usage rules and approval rights: under section 38 of the Trade Marks Act 194 of 1993, licensed use counts as the provider’s own use, which helps protect its registration against removal for non-use. Say too whether the OEM may keep the component’s origin confidential.
Royalties, minimum volumes and audit
Set the price model — a royalty per unit shipped, per activation or per subscriber, plus any upfront fee and annual minimum. Require regular unit reports, give the provider audit rights with reasonable notice and a frequency limit, and say who pays for an audit that uncovers under-reporting. In cross-border deals, fix the currency, who carries exchange-rate risk and who bears royalty withholding tax. The provider sets its own royalty, but should not dictate the price at which the OEM sells its product.
Exclusivity and non-compete
If the OEM gets exclusivity — say, the only alarm-panel maker in Southern Africa allowed to embed the engine — define the field, territory and duration tightly and link them to minimum volumes. Say what happens if the minimums are missed: dropping to non-exclusive is usually better for both sides than termination. An exclusive licence must be in a signed written agreement to have effect (Copyright Act, s 22(3)). Clauses stopping the OEM from using competing components must be justifiable under the Competition Act, especially if the provider is dominant.
Back-to-back support, updates and security patches
The OEM supports its own customers at first and second line; the provider supports the OEM at third line, on response times at least as fast as the OEM’s own promises to its customers. Cover bug fixes, new versions, how long older versions stay supported and — critical for connected devices — how quickly security patches are delivered and who pushes them to units already in the field. The service levels can sit in a separate support addendum so they can be updated without reopening the whole agreement.
Warranties, IP indemnity and product liability
The provider should warrant that the component performs to its specification and that it has the right to license it, including any open-source code inside it. It should indemnify the OEM against third-party claims that the component infringes their intellectual property — defending the claim, then securing a licence, modifying the component or refunding fees. The OEM indemnifies for its own product, its marketing claims and its customer terms. Because section 61 of the Consumer Protection Act makes the supply chain jointly and severally liable for unsafe goods, allocate that risk by cause and back it with insurance and a recall procedure.
Term, end-of-life and the installed base
Plan the ending at the start. Units already sold must keep working, so end-user sublicences should survive termination. Give the OEM a sell-off period for stock, a last-time-buy window if the provider discontinues a hardware module, and security patches for a fixed period after end-of-life. Where the OEM’s business depends on the component, add source-code escrow released on the provider’s insolvency, business rescue or abandonment of the product, and deal with a change of control of either party — for example, the provider being bought by the OEM’s competitor.
OEM vs white-label vs reseller agreement
| Feature | OEM agreement | White-label agreement | Reseller agreement |
|---|---|---|---|
| What the customer buys | The OEM’s own product, with the provider’s technology built in as one ingredient | The provider’s whole product, renamed as the partner’s | The provider’s own named product, sold through a channel |
| Whose brand the customer sees | The OEM’s; the provider appears only if a “powered by” credit is agreed | The partner’s only; the provider is invisible | The provider’s |
| Who contracts with the customer | The OEM, for its whole product; the component licence sits upstream, with flow-down terms | The partner, on its own terms, with the provider’s minimum flow-down terms | Usually the provider’s licence or subscription terms; the reseller handles orders and invoicing |
| Who supports the customer | The OEM; the provider supports the OEM behind the scenes | The partner at first line; the provider at second and third line | The provider directly, or the reseller at first line with escalation to the provider |
| Who owns the customer relationship | The OEM, clearly | The partner — subject to what the termination terms allow | Contested — the provider often knows and renews the customers |
| Typical SA example | A mapping or text-recognition engine inside a fleet-tracking or document product | A payments or lending platform rebranded by a bank | An IT firm reselling Microsoft 365 or Sage licences |
| Commercial model | The OEM pays the provider a royalty per unit or activation, often with annual minimums | The partner pays per-seat, per-transaction or revenue-share fees, often with minimums | The reseller buys at a discount or earns a margin on each licence it sells |
Common South African pitfalls
- Papering an OEM deal on a reseller or white-label template. Those templates assume the customer is buying the provider’s product. An OEM deal needs a licence to embed and copy, a right to sublicense end users, and support that runs behind the OEM. Get the structure wrong and the provider ends up supporting customers it never contracted with — or the OEM ships units it had no right to copy.
- A licence that forgets the end customers. A grant that lets the OEM build the component in, but says nothing about sublicensing end users — or lets their rights end when the OEM agreement ends — puts every installed unit at risk. Section 22(8) of the Copyright Act only protects use the OEM was entitled to authorise, so the sublicence right and its survival after termination must be written in.
- Exclusivity agreed informally. An exclusive licence of copyright has no effect unless it is in writing and signed by or on behalf of the licensor (Copyright Act, s 22(3)). Exclusivity promised on a call, in a chat or in an unsigned term sheet may be worth nothing when a competing OEM appears. Put the exclusivity, its field, its territory and its conditions in the signed agreement.
- Pricing and market-sharing clauses that breach the Competition Act. A clause fixing a minimum price for the OEM’s product risks being treated as minimum resale price maintenance, which section 5(2) prohibits outright. Where the provider also sells its own branded version in competition with the OEM, agreeing to split customers or territories between them can amount to prohibited market division under section 4(1)(b)(ii). Administrative penalties can reach 10% of a firm’s annual turnover in South Africa and its exports (s 59(2)).
- Assuming a business-to-business deal escapes the Consumer Protection Act. Software counts as goods under the CPA, and the OEM, by branding the product, is its producer. Section 61 makes the supply chain liable for harm from unsafe or defective goods without proof of negligence, jointly and severally, and section 5(5) applies section 61 even where the sale is otherwise exempt. Without a cause-based indemnity, insurance and a recall procedure, the OEM can end up paying for a defect in the provider’s component.
- Forgetting tax and exchange control on cross-border deals. A South African OEM paying royalties to a foreign provider must withhold 15% — less only if the provider gave the prescribed treaty declaration and undertaking before payment (Income Tax Act, ss 49B and 49E), and must pay the tax over by the end of the following month (s 49F(2)). If the contract requires a gross-up so the provider receives its full royalty, the OEM carries the tax. Assigning intellectual property to a non-resident is an export of capital that needs prior approval (Exchange Control Regulations, reg 10).
Frequently asked questions
What is the difference between an OEM agreement and a white-label agreement?
In a white-label deal the provider’s whole product is sold under the partner’s brand, so the customer is really buying the provider’s product with a different name on it. In an OEM deal the provider’s technology is one ingredient built into the OEM’s own, larger product — a text-recognition engine inside a document system, or firmware inside a device. The OEM owns the finished product, the customer relationship and first-line support, while the provider licenses a component and supports the OEM behind the scenes.
Do the OEM’s customers have to accept the provider’s licence terms?
Not directly, because the customer contracts only with the OEM. Instead, the OEM agreement lists minimum terms the OEM must pass on in its own customer contract, such as no reverse engineering and no use outside the product. Under section 22(8) of the Copyright Act, use that the OEM authorises within the scope of its own licence is treated as licensed by the provider — which is why the OEM’s right to sublicense end users must be written into the grant.
Does an OEM agreement have to be in writing?
A non-exclusive copyright licence can legally be oral or even inferred from conduct (Copyright Act 98 of 1978, s 22(4)), but an exclusive licence, and any assignment of copyright such as custom integration work, has no effect unless it is in writing and signed (s 22(3)). In practice an OEM deal involves royalties, audits, liability caps and end-of-life rights that nobody can prove from memory, so it should always be a signed written agreement.
Who is liable if a product with an embedded component injures someone?
Potentially both the OEM and the provider. Under the Consumer Protection Act software counts as goods, a business that brands a product is treated as its producer, and section 61 makes the producer, importer, distributor and retailer liable for harm caused by unsafe or defective goods without proof of negligence — jointly and severally. The OEM agreement cannot remove that liability, so it should share the loss by cause through indemnities, insurance and a recall procedure.
Can the provider stop the OEM from using a competitor’s technology?
Usually, within competition-law limits. A non-compete between a supplier and its customer is a vertical agreement, prohibited under section 5(1) of the Competition Act 89 of 1998 only if it substantially prevents or lessens competition and no efficiency or other pro-competitive gain outweighs that effect. If the provider is dominant — a firm with 45% or more of a market, or a smaller share with market power (s 7) — requiring a customer not to deal with a competitor is a listed exclusionary act under section 8(1)(d)(i) unless the provider can show gains that outweigh the harm.
Who owns the integration work and customisations?
Whoever the contract says, so say it. Without an agreement, copyright in a computer program belongs first to its author, who is the person that exercised control over its making (Copyright Act, ss 1 and 21), and in Haupt v Brewers Marketing Intelligence [2006] ZASCA 40 the Supreme Court of Appeal held that this can be the person directing the work even where an independent contractor writes the code. In an OEM project both sides often direct parts of the integration, so allocate ownership expressly and record any assignment in signed writing.
What happens to customers’ devices and installations when the OEM agreement ends?
Only what the agreement provides. A well-drafted OEM agreement lets end-user sublicences for units already sold survive termination, gives the OEM a sell-off period for remaining stock, and commits the provider to security patches for a set period. A non-exclusive licence granted by contract can only be revoked as the contract allows (Copyright Act, s 22(4)), and a licence binds a later owner of the copyright unless that buyer acquired it in good faith without notice of the licence (s 22(7)).
Is withholding tax payable on OEM royalties paid to a foreign provider?
Usually, yes. A royalty for the right to use intellectual property, including copyright in software, paid by a South African resident to a foreign person attracts 15% withholding tax under section 49B of the Income Tax Act 58 of 1962, which the payer must withhold under section 49E and pay over by the end of the following month. A lower treaty rate applies only if the provider submits the prescribed declaration and undertaking before payment, and that declaration lapses after five years (s 49E(3) and (4)).
Sources & authority
- Copyright Act 98 of 1978, ss 1 (“author” of a computer program), 11B, 21 and 22
- Haupt t/a Softcopy v Brewers Marketing Intelligence (Pty) Ltd and Others (118/05) [2006] ZASCA 40; 2006 (4) SA 458 (SCA) (29 March 2006)
- Consumer Protection Act 68 of 2008, ss 1 (“goods”, “producer”), 5(5) and 61
- Competition Act 89 of 1998, ss 1, 4(1)(b), 5, 7, 8(1)(d) and 59(2)
- Trade Marks Act 194 of 1993, ss 27 and 38 (permitted use by a licensee)
- Income Tax Act 58 of 1962, ss 9(2)(c), 23I, 49A, 49B, 49E and 49F (withholding tax on royalties)
- Exchange Control Regulations, 1961, reg 10 (restriction on export of capital; intellectual property)
This guide is general information, not legal advice. It reflects the law as at October 2026.