Monday, 27 September 2010

Franchising in Egypt: a tale of tactics

One of the easiest and cheapest ways for the owner of a business brand to develop it is through the establishment of a business format franchise, licensing the use of its trade marks, know-how and sundry other IP rights to any number of non-exclusive licensees who, as franchisees, own and finance their own businesses and are subjected to a rigorous regime of supervision and quality control -- if the franchisor is any good, that is.

In "Trade Law hurdles and solutions for franchisors", published online on International Law Office and written by Ayman S Nour (Nour & Partners Law Firm), the Egyptian legal set-up which governs business format franchises is reviewed and explained. The current law favours what are presumably principally local franchisees against what are likely to be foreign franchisors, the law's provisions being "in favour of franchisees in order to protect importers of technology and know-how". However, as the author informs Afro Leo, there are ways for franchisors to overcome such limitations.

Businesses franchising their IP into Egypt should note that their contracts will be unenforceable if the franchisee must
* accept modifications to the technology and pay for the privilege of doing so;
* refrain from improving the technology so as to adapt to and conform with local conditions;
* use specific trade marks to distinguish the commodities for which the technology has been used;
* refrain from obtaining analogous or competing technologies;
* allow the licensor of the technology to run the licensee's establishment or interfere in choosing its permanent employees;
* purchase raw materials, equipment, machines, apparatus or spare parts for operation of the technology exclusively from the licensor or from specific entities dictated by the licensor; or
sell the product exclusively to the licensor or persons determined thereby.
Nullity does not apply if any of these limitations was provided for in the agreement in order to protect consumers or a real and legitimate interest of the technology provider (ie, the franchisor).

Franchisors can do something to protect themselves, though by
* obtaining from franchisees advance letters of credit guaranteeing substantial cash sums if the franchisee breaches any term of the franchise agreement;
* obtaining from franchisees advance initial franchise fees in substantial amounts, to be depleted over the duration of the franchise agreement; and
* acquiring shares in the Egyptian franchisee by virtue of a conditional sale of shares agreement.
These methods are effective because they circumvent the option to litigate against the franchisee locally.

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