Franchising law: does Nigeria need one? Do other countries have them?
Should Nigeria pass a franchise-specific legislation? Is there a case for franchise law reform?When it comes to regulatingfranchising, there is no uniform practice among countries. Countries follow a multiplicity of approaches. In general, countries fall into one of four groups. The first groupis made up of countries that have laws that explicitly regulate franchising. Not many countries fall into this group; about 33 countries in all. The second group is made up of countries that have laws that have direct or indirect impact on franchising. The third group is comprised of countries that have no national legislation on franchising but individual states and provinces within the country have promulgated franchising legislation. A classic example is Canada. In the fourth group are countries where both federal and state governments in varying degrees regulate franchising; a good example is the United States (US).
Countries with Explicit Franchise Rules
A small but growing number of countries have adopted franchise-specific laws. In Australia, the operative law is the Trade Practices (Industry Codes – Franchising) Regulations 1998. In Brazil the relevant legislation is the Brazilian Franchise Law (Law No. 8955 of December 15, 1994) and in China, the “Measures for the Administration of Commercial Franchise” (2005) is applicable.France’s LoiDoubin Law of 1989 is reputed to be the first European franchise disclosure law. Although South Africa does not have a franchise-specific legislation, many aspects of franchising are covered in the Consumer Protection Act that came into effect in April 2011.
Among countries with franchise-specific legislation, there are wide variations. The scope and depth of such laws vary. Franchise legislations typically cover one or more of the following issues: (1) pre-sale requirements, (2) rules governing the offer and sale of franchises; (3) registration requirements; (4) post-sale relationship between the parties; and (5) dispute settlement. For the most part when it comes to franchise-specific laws, you have the “disclosure” countries, the “relationship” countries, and the “registration” countries.”
In disclosure countries, the law typically mandates that prior to the signing of the franchise agreement and/or before any consideration is paid, the franchisor must provide to prospective franchisee a disclosure document setting forth specified information. In relationship countries, the law regulate some aspects of the relationship between franchisors and franchisees and can regulate issues such as grounds for terminating a franchise or grounds for not renewing a license. In registration countries, the laws merely spell out who and what must be registered in connection with a franchise. Such laws may require the registration of the franchise, registration of the franchise agreement, and even the registration of franchise advertising.
Countries That Have Laws that Impact Franchising
Most countries in the world do not have franchise-specific laws. Countries that do not have franchise-specific laws range from industrialized countries (e.g. United Kingdom, New Zealand, Germany, Finland, and Norway), to emerging economies (e.g. India, Chile, Czech Republic), to other developing countries (e.g. El Salvador andmost countries in Africa).The European Union does not have a franchise-specific policy and has not adopted a uniform franchise disclosure policy applicable in all member states.
Provincial and State Regulation
Franchising can be regulated at the state or provincial level. This is the case in Canada. Canada does not have a franchise-specific law in operation nationally. However, individual provinces in the country have adopted franchise specific laws. At least five provinces now have franchise-specific laws: Alberta (Franchise Act, Chapter F-23), Ontario (Arthur Wishart Act (Franchise Disclosure), 2000), New Brunswick (The Franchises Act ), Manitoba (The Franchise Act or Bill 15), and Prince Edward Island (RSPEI 1988, c F-14.1). Manitoba’s The Franchises Act (CCSM c F156) and Franchises Regulation (Man. Reg. 29/2012) recently went into force and has an effective date of October 1, 2012. In the main, the different laws require franchisors to provide a disclosure document to prospective franchisees. The laws also impose a duty of fair dealing on each party to a franchise agreement.
Federal and State Regulation of Franchising
In some countries, both the federal government and individual states within the country have adopted laws that specifically regulate franchising. The US is an example. In the United States, federal laws and state laws govern franchising. At the federal level, franchising is regulated by the U.S. Federal Trade Commission (FTC) and the main rule is the FTC Franchise Rule which essentially requires franchisors to provide each prospective franchisee with a disclosure document in prescribed form. The FTC does not require the registration of a franchise or a franchise agreement with the FTC. At least fifteen states in the US regulate franchising. There is wide variation in the scope of state franchising laws. The laws in varying degrees address registration, disclosure and the relational aspects of a franchising agreement.
Is the Legal Framework for Franchising The Same in Most Countries?
Just because most countries do not have franchise-specific laws does not mean that the legal and regulatory framework for franchising is the same in most countries. Laws that affect franchising are wide-ranging and are varied. To fully assess the strength of a country’s legal and regulatory framework, it is important to look at the coverage of existing laws, the strength and quality of the agencies charged with enforcing the laws, as well as the dispute settlement procedures and mechanisms available in the country. Some countries that lack franchise-specific laws nevertheless have extensive disclosure rules that apply to all contracts including franchising contracts. Equally, some countries that lack franchise-specific laws have impressive and well-functioning laws in the area of consumer protection, health, anti-trust, and fair dealing. For example, New Zealand does not have a franchise-specific law but has laws such as the Fair Trading Act of 1986 and the Real Estate Agent Act of 2008 that are directly relevant to franchising.
Should Nigeria Pass a Franchise-Specific Legislation? Is there a Case for Franchise Law Reform?
Whether or not Nigeria should pass a franchise-specific legislation and what form such a law should take is not one that can be answered with a quick “yes” or “no.”As already noted, not all countries have franchise-specific legislations. Before a decision is made, at least four points must be borne in mind:
First, legislation is not the only pathway to regulating franchising. There are at least three options available for regulating franchising: (1) franchise-specific legislation; (2) self-regulation; and (3) generic legislation.
Second, whether or not Nigeria needs a franchise-specific law can only be answered after a careful review of existing laws. In most countries that have adopted franchise-specific laws, the laws were passed only after careful review of existing legal and regulatory framework. The goal of the review process is to identify gaps, if any, in existing laws.
Third, thereare arguments for and against franchise specific laws.There are at least three reasons why a franchise specific law may be a bad idea. First, regulation may become too restrictive, could discourage investors, and make the country as an unattractive place to do business. Second, regulation could lull the public into a false sense of security and encourage prospective franchisees to neglect to perform necessary due diligence.Third, laws can create new uncertainties that could result in endless litigation with resulting drain on limited resources available to the judiciary.On the other hand, there are good arguments in support of franchise specific laws. The most compelling argument is that there are often abuses associated with franchising that only clear rules and regulations can address.
Fourth, after extensive review processes, some countries nevertheless rejected proposals for franchise-specific laws.In the United Kingdom, the Minister of Industry, Margaret Hodge, conducted hearings but ultimately rejected calls for government regulation of franchising. The same is also true for New Zealand. In 2008, the then Ministry of Economic Development published a discussion paper on “The Review of Franchising Regulation in New Zealand.” Subsequently, the government determined that a franchise-specific law was not the way to go.
Conclusion
While law can be an enabler, law can also be a barrier to franchising. Regulation need not be the first solution to any perceived problem in the franchising sector. In many countries, regulation is viewed as a tool of last resort, to be used when other options prove ineffective. What then?
1. A Comprehensive Review of Existing Laws in Nigeria: The starting point must be a comprehensive review of existing laws. The relevant ministry can publish a discussion paper that invites input from all stakeholders. Legislative hearings may also be very important.
2. Ask The Right Questions: As part of the review process it is important that the right questions are asked. At least four questions are important: (1) Is there a persistent problem in the franchising sector which needs to be addressed; (2) Isreform of existing laws necessary or merely desirable?; (3) Will the benefits of changing the law outweigh associated risks and costs?; (4) Will a new law create unanticipated problems for market participants?
3. Strike the Right Balance: Even if law reform is considered advisable, the goal must be to strike a delicate balance between regulation and liberalization. The goal should be to ensure fairness in franchising and prevent deceptive practices without making franchising a less attractive means of doing business in Nigeria.Care is very important. Presently, Nigeria is not widely considered to have a robust and fair legal system. Nigeria ranked 131/183 on the World Bank’s Doing Business Report 2013an indication that when it comes to the strength of legal institutions and the complexity and cost of regulatory processes, Nigeria is still doing poorly. What this means is that any tinkering with existing laws must be approached cautiously and only after careful deliberation.
4. Broad Stakeholder Participation. Process Matters: Legislative reviews are important but even more important is the review process. Will be review be spearheaded by government officials or career politicians? Will the review allow opportunity for public hearings? Who will be allowed to take part in the review? How much time will be given for interested parties to make submissions? Will the review be well publicized and publicized well beyond the industry? Answers to questions such as these will determine if a review will be meaningful or not.
5. Not All or Nothing. Even if some reform of existing law is deemed necessary, the response need not a new statute that regulates all aspects of franchising. As already noted, in their franchise-specific statutes some countries focus on disclosure issues, some focus on relational issues, and some focus on both. It may well be that at this particular time, disclosure rules are all that legal system can handle and all that is necessary given that franchising is still a relatively unknown business model in Nigeria. In adopting any law, it is important to focus on broad structural, procedural and regulatory issues rather than on particular franchising disputes that may have occurred in the past or that may be occurring today.
6. Prioritization. Even if law reform is deemed necessaryand/or desirable, the country may decide that is not yet a priority given so many other areas of law reform currently clamouring for attention. There are several reasons why review may not be a priority at the present time. Franchising as a business model is still relatively new in Nigeria. It is therefore too early to talk of systemic problems that need urgent attention. Franchising is also still below the radar as far as the government, the industry, and the legal profession is concerned. There are presently few legal practitioners well-versed in franchising in Nigeria and the Nigerian Franchising Association (NIFA) is still a relatively weak organization compared to similar organizations in some other countries. The result is that it may be difficult and premature at the present timeto have meaningful discussion about the future direction of franchising laws in Nigeria.
7. Franchise Specific Law versus Broader Legal Climate in Nigeria?Instead of a franchise-specific legislation, it may be better to devote time, resources and attention towards improving the enabling environment for the growth of small and medium-sized enterprises in Nigeria and the overall environment for doing business in Nigeria. What may be needed is across-the-board reform that can improve Nigeria’s franchise friendliness and at the same time improve the ease of doing business in Nigeria across all sectors. A number of laws that affect franchising and other business models are absent in Nigeria and are urgently needed. Issues such access to capital, contract enforcement, anti-competitive business practices, bankruptcy issues, and weak judicial system are begging for urgent attention in the country
Conclusion
Nigeria has no franchise-specific legislation and no mandatory disclosure regime but does it need one? Nigeria may or may not need a franchise-specific law. Much depends on whether and to what extent there are gaps in the existing legal and regulatory framework for franchising in the country. While there are numerous laws in Nigeria that affect franchising, there are also glaring gapsin the legal system seen for example in the absence of a comprehensive law that regulates anti-competitive practices across all sectors of the economy. It may no longer be enough to rely oncommon law and inherited colonial laws. In a fast-changing global environment it may sometimes be necessary to adopt laws to address new problems and issues as they arise. New Zealand lacks a franchise-specific legislation but a lot is found in the country’s Fair Trading Act 1986, the Commerce Act 1986 and the Contractual Remedies Act 1989.
The goal should be to usher a legal and regulatory framework that is sound and will help Nigeria become franchise competitive. There are several options that can be considered including use of existing generic laws, self-regulation by the industry, franchise-specific laws, and public education. Trade association policies can also play an important role in regulating franchising. Even if a franchise-specific law is determined to be the best option for Nigeria, there are many forms such a law can take. Nigeria could decide to become a “disclosure country” by regulating the offer and sale of franchises typically by imposing disclosure requirements on franchisors. On the other hand, Nigeria could decide to become a “relationship” country by adopting laws that only regulate the ongoing relationship between franchisor and franchisee after the franchise contract comes into effect.
Before the country delves into law reform, better information about the state of franchising in Nigeria will be needed. For example, what is the annual growth of franchising business model in Nigeria? How many franchise brands and units are operating in the country today? How many people are employed in franchise-operated units? Which sectors of the economy is making use of the franchise business model? What is the state of home-grown domestic franchises in Nigeria? Are local franchises maturing and are they now going offshore? Are there more oversea systems wanting to enter Nigeria? What reasons do some franchises give for their hesitation to enter Nigeria? How many oversea franchises operate outside Lagos and Abuja? Is the link between franchising and economic development becoming evident in Nigeria?
Dr. Uche Ewelukwa Ofodile
LL.B. (Nigeria), LL.M. (London), LL.M. (Harvard), S.J.D. (Harvard)
Professor, University of Arkansas School of Law