KP insights [7]

The Legal Framework Governing Franchise Contracts in Egypt

I.?????????????Introduction:

1-????????Franchise is an agreement between the franchisor and the franchisee whereby the franchisor grants the franchisee the right to operate a business, or offer, sell, or distribute goods or services identified or associated with the franchisor's trademark in return for royalties paid by the franchisee.[1] This does not mean the transfer of business ownership to the franchisee.

2-????????The main purpose behind franchising for new entrepreneurs, who are starting a business, especially when entering a highly competitive industry, is having access to an established company's brand name, and exploiting the existing brand reputation of the franchisor, thus they do not need to spend much on creating brand awareness. While for the franchisor, it is considered an opportunity to expand into new geographical markets without incurring additional cost. The franchise contract specifies the product sold, retail quality standards, prices and hours of operation and does not leave much independence to the franchisee.

3-????????Franchise Agreements are used continuously since franchising is a widely used business model. Yet they are not regulated under a specific separate law in Egypt, instead they are governed by different articles provided in different laws as the commercial law and the intellectual property rights law. Consequently, franchise contracts are confused with other similar contracts, which may be part of the franchise contract as the transfer of technology contracts, or entirely different contracts as commercial agency, distribution, and employment contracts.

II.???????????Laws governing franchise:

4-????????Egypt currently does not have a specific law regulating franchise agreements. However, the applicable laws, which are usually the laws that bear the closest relationship to the provisions of the franchise agreement, are; first Law No. 120 of 1982, for the regulation of the commercial agency acts. Second the Commercial Code Law No. 17 of 1999 would also come into play as the relationship would have aspects of technology transfer, in addition to regulating the agency relation. Finally, the Protection of Intellectual Property Law No. 82 of 2002, for the protection of Intellectual property rights, as trademarks, copyrights and confidential know-how.

5-????????Moreover, there is the Egyptian Franchise Development Association " EFDA "which is a non-governmental and a non-profit organization representing and serving the franchise industry in Egypt. It was formed in 2001, registered by no. 518/2001 as per law No. 32 for the year 1964, to encourage and promote entrepreneurship through franchising. The EFDA's Code of Ethics attempts to promote ethical franchising, as it requires EFDA members to comply with ethical provisions and aims to establish the framework for the implementation of best practices to the franchise relationships and activities of the EFDA members. The Code is a self-regulation on how EFDA and its members will govern themselves, and thus it is not intended to replace any Egyptian legislation that may apply to the franchise business but to support full compliance with it.[2]

a.???Agency Laws

6-????????Some Egyptian practitioners propose that the Commercial Agency Law should apply to the franchisor and franchisee relationship, due to their similarities.[3] The Commercial Agency Law regulates the licensing and operation of commercial agents, it defines agency agreement as a contract by which a commercial agent undertakes to perform a specific legal service in favor of the principal, whether in the name of the principal or the name of the agent himself, in cases of undisclosed agency.

7-????????In franchise agreements, the franchisor pays the franchisee royalties in return for using his trademark and operating under the franchise name, while in a commercial agency, the principal pays the agent. In addition, the agency law provides that the commercial agent must be registered in the registry of the Ministry of Foreign Trade and Industry,[4] while currently there are no specific requirements that a franchisor must be registered in Egypt.?

8-????????With regard to the liability there is a great distinction between two relationships. The agent is not legally independent from the principal, as the principal is liable for the agents acts done in the name and for the benefit of the principal. While the franchisee is legally independent from the franchisor, as the franchisee is acting in his own name and for his own benefit.

9-????????In addition to the general rules governing commercial agency in the commercial code, there are special kinds of commercial agency as the contract agency. Contract agency occurs when the agent undertakes on consistent basis and in a specific area of activity, marketing, negotiating and concluding transactions in the name and for the benefit of the principal in return for payment. Contract agency is usually confused with franchise agreements as the agent, to some extent, acts as a franchisee in promoting, negotiating and concluding transactions on behalf of the principal.[5]

b.???Technology Transfer Laws

10-?????Even though many law practitioners consider franchise agreements to be transfer of technology contracts and hence, subject to the commercial code no. 17 of 1999, they are distinct in many aspects. The Egyptian trade law defines in Art 72 the transfer of technology contract as an agreement where the supplier of the technology undertakes to transfer technical know-how to the importer of technology against payment to be used in a special technical manner of production or development of a certain commodity, the installation or operation of machinery or equipment or for the provision of services...".However, the mere sale, purchase of trademarks is not considered to be a transfer of technology.

11-?????In franchise agreements, the subject matter is the license to use trademark in addition to the transfer of technology and technical knowhow, both subjects have a different legal reform that regulate them. Yet the subject matter in the transfer of technology contract is restricted to the transfer of technical information. Moreover, the technology importer in a technology transfer contract must include a clause stating the technology supplier's obligation to provide assistance to the technology importer as it's not an assumed obligation[6] unlike in franchise agreements, where the obligation of the franchisor to provide assistance to the franchisee is one of the fundamental obligations that any franchise agreement cannot lack. Assistance must be significant by relating to the franchisee’s overall method of operation and not a small part of the franchisee’s business. The franchisor is not only obliged to transfer the know-how, but also must assist the franchisee whether through how to produce the product or by providing training to the employees.[7]

12-?????There is a special consequence to applying the transfer of technology legal provisions to franchise agreements, is that franchise agreements would be subject to the Egyptian law, in the event that the technology is imported to and intended to be used in Egypt. The Egyptian legislator provided special rules for arbitration and legislation that leads all to the exclusive application of the Egyptian Law, and the Egyptian courts would have exclusive jurisdiction to adjudicate any disputes arising from transfer of technology contract. Therefore, if the parties to a franchise agreement chose to settle their dispute through arbitration, it must be held in Egypt according to the Egyptian law. Although the arbitration Law No. 27 of 1994 does not contain any mandatory provisions that certain disputes should be seated in the Egyptian jurisdiction. However, the Egyptian Trade Law No.17/1999 has a special provision for transfer of technology disputes,[8] where the legislator allowed the parties to resort to arbitration; however, he conditioned that the arbitration should be according to the provisions of the Egyptian law. The purpose of this rule is to protect the weak Egyptian franchisee, and it would not drive away international franchisors due to the lucrative Egyptian market.

13-?????Yet the commercial Law is not alone sufficient to govern the franchise contracts as it does not govern the protection of trade mark and other intellectual property.

c.???Intellectual Property Protection Laws

14-?????The law governing IPR is law no. 82 of 2002; it covers trademarks, industrial designs and confidential knowhow. Licensing the use of trademark is when one party, the trademark owner, gives permission to the other party to use the trademark in return for payment. Licensing the use of trademarks is the cornerstone of franchising agreement. For franchising purposes, the most important intellectual property licensed to the franchisee is the franchisor’s trademarks.

15-?????Although some legal practitioners consider that franchise contract is similar to trademark license agreement, the have some differences.[9] First the subject matter of franchise agreements are two contracts; the transfer of technology which is governed by the commercial code 17 of 1999 and licensing the use intellectual property which is governed by the IPR law no.82 of 2002.?Moreover, the franchise agreement is not limited to licensing the use of trademark only, but also licenses the use of other intellectual property as the industrial designs and know-how. In the end, franchise agreement is compilation of license agreements; however, each license agreement separately is not considered a franchise agreement.

d.???The need for a comprehensive franchise law

16-?????Franchise agreements may be similar to commercial agency, transfer of technology and License to use intellectual property, yet it has distinctive aspects that differentiate it from them. Thus, it needs its own separate legal provisions that govern it instead of the laws governing the aforementioned similar contracts.

III.?????????Conclusion:

17-?????Franchising has developed quite extensively in Egypt, as there are widespread franchise agreements both on the national and international levels.?The practical problem facing Franchise in Egypt is the vagueness of its legal nature, and the dispersion of the legal regime that determines the nature and effects of this contract on the parties; in terms of rights and obligations of each. Therefore, this type of contract is subject to the parties' agreement. Thus, it usually involves unfairness to the rights of the franchisee as he is often the weak party in the negotiations and the contractual relationship. In addition, the absence of any legal rule obliging the franchisor to provide pre-contractual disclosures to the franchisee eventually results in the loss of the franchisees' rights.

18-?????Since franchise is a business mechanism with a profound impact on the national economy, hence it requires appropriate legislative and regulatory treatment that suits its unique nature. Subsequently Egypt does need a franchise law. Currently there is a proposed franchise law that will hopefully enter into force soon!

[1] ??????????Franchise Agreement, Legal Information Institute, Cornell Law School, 2021.

[2] ??????????The EFDA's Code of Ethics. www.efda.org.eg/index.php/code-of-ethics ??

[3] ??????????Radwa S. Elsaman, Franchising in the Middle East: The Example of Egypt, , Pacific Basin Law Journal [Vol. 35:39].

[4] ??????????Art.2, Commercial Agency law No. 120 of 1982.

[5] ??????????Radwa S. Elsaman, Franchising in the Middle East: The Example of Egypt, Pacific Basin Law Journal [Vol. 35:39].

[6] ??????????Galal wafaa Mohamadeen, legal framework of transfer of technology in light of international efforts, Dar al gamea al gadeda, Alexandria, 2004

[7] ??????????Mohamed Mohsen Ibrahim Al Nagar, Commercial Franchise Contract, transfer of know-how, Dar al gamea al gadeda, Alexandria, 2007.

[8] ??????????Shehata & partners, Transfer of Technology Agreements & the Arguably “Mandatory” Egyptian Seat, 2020.

[9] ??????????Radwa S. Elsaman, Franchising in the Middle East: The Example of Egypt, Pacific Basin Law Journal [Vol. 35:39].