Regulating franchising in Nigeria: legal and institutional options to consider
Franchising and other non-equity modes (NEMs) of investment such as contract manufacturing, services outsourcing, and licensing, presents opportunities and challenges for Nigeria and other developing countries. NEMs “include contract manufacturing, services outsourcing, contract farming, franchising, licensing, management contracts and other types of contractual relationships through which TNCs coordinate activities in their global value chains and influence the management of host-country firms without owning an equity stake in those firms” (UNCTAD 2011).According the United Nations Conference on Trade and Development (UNCTAD), NEMs “present opportunities for developing and transition economies to deepen their integration into the rapidly evolving global economy, to strengthen the potential of their home-grown productive capacity, and to improve their international competitiveness.” In 2010, NEMs generated over $2 trillion in sales, much of it in developing countries.
Potential advantages of franchising and other NEMs for countries in Africa include: opportunity for technology and skills building; integration into the global value chain; opportunity to build production capacity; employment creation; contributions to GDP; and export gains. The gains associated with NEMs are not automatic. On the contrary, UNCTAD warns that “[p]olicies are instrumental for countries to maximize development benefits and minimize the risks associated with the integration of domestic firms into NEM networks of TNCs.” Countries will need to integrate NEM policies into their overall national development plans, establish an enabling legal and regulatory framework, build the capacity of private sector, and proactively address the potential negative effects of NEMs.
Not surprising, many countries are beginning to view franchising as a tried and proven way to create and increase the number of local entrepreneurs and are working hard to improve the legal and institutional dimensions of franchising in their jurisdiction. For example, in Malaysia, the Franchise Act of 1998 regulates franchising in the country. The National Franchise Development Blueprint 2012-2016 was adopted and is shaping policy and practice in the country. Within Malaysia’s Ministry of Domestic Trade, Cooperatives and Consumerism, is the PerbadananNasionalBerhad (PNS). The primary mission of PNS is “to develop world class franchisepreneurs through superior delivery of comprehensive product and integrated services.” Bringing it home to Nigeria, what options are there for Nigeria as far as providing an enabling legal and regulatory environment for franchising in the country? Besides regulation, what else can the government and industry stakeholders do to make Nigeria franchise friendly?
When it comes to regulating franchising, there are several options available to policy makers in Nigeria. At least three options can be considered: (1) maintain the present status quo by relying on generic body of laws and filling in gaps in the law where necessary and/or desirable; (2) adopt afranchise-specific legislation at the federal level, state level or both; and (3) self-regulation by the industry. In addition to regulation, Nigeria can learn can also learn a thing or two from countries like Malaysia that are devoting resources towards strengthening small and medium-sized enterprises (SMEs) and addressing the main impediment to entrepreneurship which is access to capital.
Regulation Through Generic Body of Laws
Many countries do not have franchise specific laws but rely on a wide array of contract and commercial laws. However, many countries are modernizing and up-dating their legal and regulatory apparatus and are working hard to improve the overall environment for doing business in their jurisdiction realizing that competition is getting tighter and that the way we live and do business is changing and changing fast. Even when relying on generic laws, there could be noticeable gaps in the law. In this respect, there are several questions to consider. First, are there gaps in the contract law and commercial law framework in Nigeria that needs to be addressed? For example, gaps couldexist in the area of competition law, bankruptcy law, and even in the area of data protection law. Many countries now have up-to-date privacy laws and data protection laws. An example of such law is the Swedish Personal Data Act. Second, are existing laws outdated? Can we still rely on common law and inherited colonial laws and be competitive?An example of an area where the law may need some updating is in the area of know-how and trade secret protection. Although many countries still rely on common law to address theft and misappropriation of trade secrets, in the interest of clarity and harmonization, an increasing number of countries are adopting laws to address industry espionage which is a growing problem. Puerto Rico’s Trade Secret Law, Act No. 80 which was adopted on 3 June 2011 is an example. Mexico’s Industrial Property Law also specifically protects trade secrets. In the United States, trade secret protection is addressed primarily at the state level; almost every state in the US has enacted the Uniform Trade Secrets Act (UTSA) which has as its goal the codification and harmonization of common law rules on the subject. Third, are existing laws in-step with technological changes? Globalization and the increasing reliance on informational and communication technologies is making e-commerce a necessary and indispensable part of the way business is done today. Are the nation’s laws e-friendly? Can all forms needed to start and operate a business be filed electronically? Can all permits relevant to a franchising operation be obtained electronically and filed electronically?
Self-Regulation
Self-regulation is common in the franchising sector. Self-regulation basically means that the industry regulates itself typically through a trade association. In many countries, the national franchise associations do much more than raise awareness about franchising. In some countries, the franchise association plays a leading role in regulating the conduct of members. While membership in such associations is usually not mandatory, many franchise associations have adopted code of ethics that are binding on their members. Examples of existing code of ethic are: The European Code of Ethics for Franchising developed by the European Franchise Federation; the Code of Ethics of the German Franchise Association; the Code of Ethics of the Danish Franchise Association; and the British Franchise Association (bfa) Code of Ethics. Most codes of ethics set out the obligations of the franchisor, the obligations of the franchisee, rules relating to recruitment, advertising and disclosure, and even the essential minimum terms of a franchise agreement. The Nigerian Franchise Association (NIFA) does not presently have a code of ethics.
Franchise-Specific Laws
Franchise-specific statutes come in all shapes and sizes and are by no means uniform. There are generally three types of statutes: registration statutes, disclosure statutes, and relationship statutes. Registration statutes provides for registration of the franchisor, the franchisee, the franchise and/or the franchise agreement. Such laws sometimes require that the franchise agreement be translated into local language before it can be registered.Disclosure statutes that operate at the pre-contractual phase and have as their goal facilitating due diligence among market participants. Relationship statutes operate at the contractual phase. Relational statutes address contractual power imbalances by imposing mandatory contractual terms (e.g. the duty of good faith) on the parties. Sometimes relationship statutes operate at the post-contractual phase when they address dispute resolution Sometimes such law offers enhanced dispute resolution such as mandatory mediation and/or arbitration.
According to International Institute for the Unification of Private Law (UNIDROIT), a disclosure law serves as “a means to create a secure legal environment between all the parties in a franchise agreement.” Specifically, a disclosure law “ensures that the prospective franchisees who intend to invest in franchising receive material information about the franchise offerings, this permitting them to make an informed investment decision.”On 25 September 2002 the Governing Council of UNIDROIT adopted the Model Franchise Disclosure Law (2002) which can serve as a guide for countries.A good number of countries already have pre-sale disclosure laws. Country’s having such laws includesdeveloped countries (e.g. Japan, Canada, and Australia), emerging economies (e.g. China, Brazil, Indonesia and Malaysia) and other developing countries (e.g. Vietnam.). In Sub-Saharan Africa, only South Africa has a well-developed and functioning disclosure law. The information that the franchisor must provide varies from country to country with some countries having very detailed and comprehensive list of mandated disclosure. In addition to the mandatory disclosure requirement, some countries require that the disclosure document be filed with a specific government agency. In disclosure countries, the law also specifies the minimum number of days the document must be given to a prospective franchisee (14 days in Australia; 20 days in case of China; 30 days under Italian law) before the franchise agreement is signed and/or before the franchisor receives any money from the franchisee. Some countries have what is known as “cooling off period.” The cooling off period is a stipulated period of time from the date of the franchise agreement is signed during which a franchisee may change its mind and terminate the franchise agreement.
Relational laws address a host of issues including: restrictions on a franchisor’s ability to terminate a franchise agreement, prescribe circumstances when a franchisor may refuse to renew a franchise agreement with a franchisee, limits the franchisor’s ability to restrict a franchisee’s ability to transfer its franchise, regulates the nature and amount of franchising fees and the payment of such fees, restricts the ability of a franchisee to make payments to a foreign franchisor in the franchisor’s local currency, and generally stipulates minimum obligation of the franchise and the franchisee.
Beyond Regulation: Creating an Enabling Environment
Even more than regulation is the need to improve the environment for doing business in Nigeria and remove the impediments to the operation of small and medium-sized enterprises (SMEs) in the country. Nigeria ranks very poorly (131/183) on the World Bank’s Doing Business Report2013. We need to strengthen legal institutions and reduce the cost and complexity of the regulatory process in Nigeria. Access to credit must be addressed as a matter of priority. In this regard, Nigeria can learn from Malaysia. In Malaysia, the PNS is doing a lot to promote franchising in Nigeria as a way to increase the number of entrepreneurs in the country.One of the aims of PNS is “to develop the franchise industry while increasing the number of franchise entrepreneurs through its expertise in providing quality service and products.” One of PNS’s objectives is to develop local products and market them abroad. PNS offers financing to businesses in Malaysia. This year alone, it is expected that PNS will provide RM49.6mil financing (about US$ 1.4479) to the franchise industry. PNS is actively encouraging businesses in Malaysia to expand their business abroad. In this respect, the PNS’s specific objectives are to provide financial assistance to franchisors / master franchisees to expand their business, to encourage and facilitate franchisors to venture into international expansion and to assist franchisors / master franchisees in strengthening their capabilities and capacity to support franchisees for business expansion. It has a wide range of financing schemes including: pre-franchise scheme, franchisor-financing schemes, franchise executive schemes, and franchise micro financing scheme. Through the PNS Academy franchise courses and soft skills courses are offered to individuals and businesses in the country.
Conclusion
On the march towards becoming franchise-friendly, Nigeria need not adopt a franchise-specific legislation. What is relevant is that the country has sound, robust, up-to-date, clear and transparent laws and institutions. Regarding the legal framework for franchising in developing countries, UNCTAD acknowledges that “There is work to be done.” However, UNCTAD does not necessarily call for franchise-specific laws. According to UNCTAD, “ There is need to: establish clear and stable rules particularly in the area of contract and commercial law; strengthen the judicial system in the different countries; strengthen the bargaining power of local NEM partners vis-à-vis TNCs; develop competition law and policy; and pay attention to law and policy pertaining to consumer protection.”
Dr. Uche Ewelukwa Ofodile
LL.B. (Nigeria), LL.M. (London), LL.M. (Harvard), S.J.D. (Harvard)
Professor, University of Arkansas School of Law
By: Uche Ofodile