The headquarters of the well-known pizza chain Domino’s Pizza is located in the United States where it was first established. The same holds true for other restaurants, such as Krispy Kreme and Kentucky Fried Chicken. However, these restaurants have so many locations in Nigeria that it nearly seems as though they were first founded here. Companies like Shoprite and SPAR were first founded in South Africa as well, but they now have a large consumer base in Nigeria. This is made possible through Franchising.
MEANING OF FRANCHISING:
Franchising is a business model that businesses use to expand their brand and operational footprint. A franchisor is a company, business or person that has developed a system/name and grants a third party the right to operate a business under the system and name in consideration of fees from the third party. Franchising provides a means of expanding a business’ reach into new markets, new products and access to a wider customer base without the need for extensive capital investment.
LEGAL FRAMEWORK OF FRANCHISING
There is no specific franchising legislation in Nigeria. However, it must be stated that there are several regulatory provisions, existing in bits and pieces that affect franchising in Nigeria. An example is the National Office for Technology Acquisition and Promotion Act Cap. N62 LFN 2004 (hereinafter referred to as “NOTAP Act”) which established NOTAP. Although NOTAP deals mainly with the transfer of technology from foreign entities, Sections 4(d) and (e) NOTAP Act grants NOTAP the power to register franchise agreements involving foreign franchisors. The section goes further to state that the agreement shall be registrable if in the opinion of NOTAP, it involves the use of trademarks, the right to use patented inventions, the supply of technical expertise in the form of the preparation of plans, diagrams, operating manuals or any other form of technical assistance of any description whatsoever, the provision of operating staff or managerial assistance and the training of personnel etc.
The NOTAP Act stipulates that an agreement for the transfer of technology must not exceed a term of 10 years. Within this ambit, NOTAP usually approves a franchise agreement for a period of three years and upon its expiration, it needs to be renewed for further periods of three years. The NOTAP also has the power to refuse the registration of a franchise agreement which contains provisions that impose obligation on the franchisee to acquire equipment, tools, parts, or raw materials exclusively from the franchisor or any other person or given source.
LEGAL CONSIDERATIONS WHEN SETTING UP A FRANCHISE IN NIGERIA
Before venturing into setting up a franchise, there are some key legal considerations that have to be made in order to ensure a successful setup.
- Brand Protection:
There is a need to ensure timely renewals of trademarks. By default, Intellectual Property protection does not ensure perpetuity, and the franchisor must ensure a mechanism to perpetuate this protection where the law allows for such. Section 23 Trademarks Act, Cap. T13, LFN 2004 for instance, provides that the registration of a trademark shall be for a period of seven years, but may be renewed from time to time. Patents, on the other hand, are for one block of non-renewable terms. Section 7, Patents and Design Act, Cap. P2, LFN 2004 provides that the term of a patent shall be twenty years from the filing date of the application.
- Real Estate Franchise Lease:
The terms of the lease and the terms of the franchise must be in substantial alignment. A key issue that could arise, where these terms do not align is in the area of mismatch in the tenure of the respective agreement. For instance, a franchisee may be left with no premises to run the franchise if its lease expires during the life of the franchise. Also, where the franchise term ends while the lease term is still operational, the franchisee may be left with a lease term without any optimal utility value. Both of these scenarios are not only uncomfortable but can occasion unnecessary financial exposure for franchisees. So, it is important to ensure that all of this is put into consideration when entering into a franchise agreement.
- Restraint of Trade:
It is important that a trade restraint clause is included in a franchise agreement, in order to prevent the franchisee from leveraging the franchisor’s trade secrets in competition against the franchisor within a certain period. It is trite law that trade restraint clauses are enforceable as long as same is within the scope of reasonability and justified by a protectable interest. The supreme court held in Koumolis V. Leventis Motors Limited, that an employer can lawfully prohibit the employee from setting up a competing business which is likely to destroy the employer’s trade connection by a misuse of his acquaintance with the employer’s customers or clients. While the above-mentioned case is on strict employment violation, it is not unlikely that the court would apply the same principle to a franchise relationship.
- Labour Issues:
Here, a clause should be included stating that the franchisor cannot directly control the franchisee’s employees, including hiring or firing them. This is necessary in order to avoid joint employer liability where the franchisee violates a labour or employment law.