Imagine a Thursday evening, after a long and tiring day at work. You barely had time to grab a bite of the massive muffins your wife packed for you. You feel guilty for taking her through the trouble of making them but hey! You didn’t eat them because you were very busy hustling for the family, right? You are tired and hungry. Your curious imagination is manifesting very saucy drumsticks at this moment. You drive into KFC and grab yourself the Kentucky bucket. You trudge back to your car knowing very well the 11 piece chicken bucket meant for the family will barely make it to the driveway, but hey! You deserve it all; I mean…you were hustling for the family. As you sit lazily in your car, you take a triumphant bite into the first piece that is dripping sweet, salty, and savoury magic. You can’t help but marvel at the overwhelming talent of the chefs behind this magic.
Well, it might interest you to know that Kentucky Fried Chicken, popularly known as KFC is one of the largest food chains in the world. Currently, there are 22,600 KFC locations. How is this possible? The answer is simple: Franchising.
What is a Franchise?
Franchising is the grant of specified rights by one party to another in return for a fee. In a franchising business model, party A grants party B the right to distribute or deal in party A’s products or services at an agreed fee. It has become the most opted-for model by leading players in the business world i.e., McDonald’s, Subway, KFC, etc. The franchisor exercises strict control over the performance of the franchise agreement and has a right to say in all important matters like branding, methodology, and all matters affecting the franchisor’s business.
The Legal Framework
The operation of franchise agreements involves an interplay of different legal principles. For this reason, franchise agreements are regulated by a mix of statutes. They include the following:
a). The Law of contract
In the absence of express legal provisions essentially addressing franchise agreements, drawing franchise agreements must be done with precise finesse and information to avoid instances where discrepancies arise, causing disadvantage to either the franchisor or the franchisee.
The clause on governing law, for instance, is a conventional provision in all contracts. In international franchise agreements, parties have to decide which law governs the franchise agreement. Therefore, it is imperative that parties give thought to seek competent legal representation as far as the drawing of contracts is concerned.
b). Sector-specific laws
Industries such as the energy industry have laws drafted specifically for the operation of the industry. Therefore, ensuring compliance with these laws is critical if at all a franchise agreement is to sustain the test of legality.
c). Intellectual Property Laws
The operation of franchises involves the use of the franchisor’s brand in the franchisee’s activities. Therefore, to protect the franchisor’s interest, it is important to ensure the Franchisor’s intellectual property is sufficiently protected. This is done in the following ways:
A trademark is a symbol, word, or words legally registered or established by use as representing a company or product. An example of a trademark is the word ‘KFC’ or ‘Google’. Infringement of a trademark is actionable in court. It is vital therefore for a franchisor to ensure he has registered trademarks to his product to ensure he can claim in a case of trademark infringement. Where the trademark is duly registered, use of the same without permission from the franchisor may constitute passing off.
- Trade Secrets
Trade secrets are protected where they consist of confidential information with commercial value, (for example the secret Coca-Cola formula has proved to be of immense value) and there is an obligation to keep the information secret. Kenya and most African countries do not have trade secret statutes yet. However, the lack of specific statutes does not imply that trade secret is not protected. Protection is accorded in various pieces of legislation such as employment laws, contract laws, and others. These provisions must be taken into account when writing the franchise agreement.
- Consumer protection laws
Franchise agreements should be made in accordance with the provisions of the Consumer Protection Act and its regulations.
- Competition law
Part III of the Act lists activities that constitute unfair practices. Therefore, when entering into a franchise agreement, the franchisor must evaluate his representations against the checklist on unfair practices provided in the Consumer Protection Act to ensure compliance.
- Restrictive covenants
The contracts in the restraint of Trade Act provide that restrictive covenants that are unreasonable or contrary to public policy may be nullified by Courts. Post-termination provisions contained in the agreement must be carefully written to avoid instances where they are deemed unreasonable or contrary to public policy. Therefore, it is important to ensure that the franchise agreement fully complies with the law on restrictive covenants.
- The law of Agency
In a technical sense, a franchisee is an agent of the franchisor. The franchisor exercises a lot of control over the decisions made by the franchisee. In the absence of express legislation on franchise agreements, courts are guided by common law principles. Therefore, principles relating to the law of agency are very crucial.
- Tax laws
Taxation of companies in Kenya varies based on whether they are residents or non-residents. Local franchisors are subject to a tax rate of 30% on their income. Foreign franchisors with permanent establishments in Kenya are subject to 37.5%. The Income Tax Act makes elaborate provisions on taxation. Compliance with tax laws is mandatory. Ignorance of the same grossly affects the functioning of an organization.
Franchising is a process that requires in-depth legal attention. This article only gives an abstract spectacle of the requirements for setting up a franchise. At CR Advocates LLP, we deal in all the areas of law set out above. We shall be more than glad to walk with you in setting up a functional business with a global presence.