UCLA
UCLA Pacific Basin Law Journal
Title
Franchising in the Middle East: The Example of Egypt
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Journal
UCLA Pacific Basin Law Journal, 35(1)
Author
Elsaman, Radwa S.
Publication Date
2017
DOI
10.5070/P8351038200
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© 2017 Radwa S. Elsaman. All rights reserved.
FRANCHISING IN THE MIDDLE EAST:
The Example of Egypt
Radwa S. Elsaman
*
With the largest population in the Arab Middle East and a central
location between Europe and East Asia, Egypt offers one of the biggest
sources of franchising markets in the world for new business opportuni-
ties. Egypt, however, does not have specialized laws regulating franchising,
which results in real challenges for investors who are seeking to franchise
their businesses in Egypt, along with their legal advisors. It also creates
problems for the courts who must rule on disputes arising from franchis-
ing transactions.
Because of this lack of formal legal guidance in Egypt, other laws,
including contract, commercial and agency laws, have had a substantial
impact on franchising. This inconsistency in application can lead to contra-
dictions as to the specic nature of franchising, which can make it difcult
to negotiate and decide various issues arising under franchise agreements.
Further, the variety of applications can impose heavy burdens on fran-
chising parties.
With all of these factors in place, it seems like a perfect time to discuss
a new legal framework for franchising in Egypt. Such legal reform will be
important for Egypt in order to recover from the economic impact of the
January Revolution and subsequent political unrest, and also to improve
the chances for foreign investment. A comprehensive Egyptian franchise
law proposal should address various issues that are commonly dealt with
in other franchise law frameworks around the globe, such as disclosure
commitments, registration requirements, and substantive rights and obli-
gations of the parties.
*
Radwa S. Elsaman is Commercial Law Assistant Professor at Cairo Universi-
ty Faculty of Law and the German University in Egypt. Her academic interests include
companies’ law, investment law, capital market law, and commercial contracts. She is a
2012 graduate of the American University Washington College of Law, Washington DC.
Meanwhile, Dr. Elsaman has a huge reputation as a successful practitioner in M&As,
Capital Market, and Commercial Law in general. She also has several publications cov-
ering different areas of the Egyptian commercial and nancial laws. In addition, Ms.
Elsaman has been working as the legal consultant of the World Bank in 2015 and the
USAID in 2017 in a couple of the huge projects taking place in Egypt. For any com-
ments or questions, please contact the author at radwa_salah2002@yahoo.com.
40 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
T C
I ...............................................................................................40
I: Understanding the Legal Specications of Franchising ............42
1.1 Denition of Franchising ......................................................42
1.2 Distinguishing Franchising from Other Methodologies
to Expand a Business .............................................................44
1.2.1 Franchising v. Licensing ................................................44
1.2.2 Franchising v. Distribution ...........................................45
1.2.3 Franchising v. Agency ....................................................45
1.2.4 Franchising v. Employment ..........................................45
1.3 The Laws Regulating Franchising ..............................................46
II: F E: T C S .................................46
2.1 Applying Agency Law to Franchising Transactions .................48
2.2 Applying Transfer of Technology Law to Franchising
Transactions..................................................................................49
2.3 The Need for Legal and Economic Reform ..............................50
III: R E L S
F B C G A ..........51
3.1 The Subject Matter of Franchising Relationships .....................52
3.2 Scope of Application for Franchising Laws .............................. 52
3.3 Liability Arising out of Pre-Contractual Negotiations ............. 53
3.4 Contractual Liability and Liability to Third Parties ................. 53
3.5 Indemnity and Insurance Clauses ..............................................53
3.6 Remedies .......................................................................................54
3.7 Good Faith ...................................................................................55
3.8 Franchising Agreements ..............................................................56
3.9 Term ..............................................................................................57
3.10 Transfer .......................................................................................57
3.11 Termination ................................................................................58
3.12 Prohibitions Against Discrimination .......................................58
3.13 Settlement of Disputes ...............................................................59
3.14 Rights and Obligations of the Parties .......................................60
3.15 Disclosure and Registration Rules ...........................................61
3.15.1 Disclosure .........................................................................61
3.15.2 Registration ......................................................................63
C .................................................................................................. 65
I
Franchising is a business tool where a business owner, the franchisor,
allows another person, the franchisee, to trade in his goods or services in
conformity with the franchisor’s business plan and using the franchisor’s
trademark. Franchising is benecial for both franchisors and franchisees.
Franchising helps franchisors to expand their business rapidly through a
well-organized distribution system. Franchising also allows franchisees
to become a part of a successful business chain already mastered by the
412017] FRANCHISING IN THE MIDDLE EAST
franchisor and to receive the technical assistance necessary to efciently
operate the franchised business, such as guidance on store layout, design,
and site selection.
In Egypt, franchising is an emerging market and is treated as an
important investment methodology that signicantly contributes to the
Egyptian Gross Domestic Product (GDP).
1
It helps to speed up Egypt’s economic growth by attracting foreign
investment into Egypt and creating new job opportunities. This is par-
ticularly important considering Egypt’s central position in the Middle
East, making Egypt a connection point to Middle Eastern markets and
enhancing its attractiveness to franchisors.
2
Approximately forty inter-
national franchisors have outlets in Egypt, with twenty-ve in the food
sector alone. Furthermore, with a population of over 95 million, Egypt
has a high demand for top brands in fashion and technology. Given the
need for convenient services in Egypt, franchises can provide an effective
solution, but franchising is still an emerging market and can be heavily
concentrated. For example, Cairo, Egypt’s capital and largest city, con-
tains 65 percent of all Egyptian franchised outlets. Another 8.6 percent
are found in Alexandria, the second largest city.
3
Though franchising in Egypt is one of the primary investment strat-
egies, Egypt does not have a law on franchising. To comprehensively
regulate the specic aspects of a franchising transaction, franchising
laws should address issues such as: 1) the denition and elements of a
franchise, 2) protection of intellectual property granted by the franchi-
sor to the franchisee, 3) condential know-how, 4) non-competition and
non-solicitation, 5) disclosure of all relevant information by the franchi-
sor before the conclusion of the franchise agreement, and 5) the day to
day operation of the franchised unit by the franchisee, among others.
In Egypt, the lack of formal governance addressing the aforemen-
tioned issues has left regulation to a hodgepodge of other laws, such
as those governing general commercial contracts, intellectual property,
tax, insurance, and labor. This wide and varied application of laws and
regulations contradicts the specic nature of franchising transactions,
which requires strong protections for both parties, particularly with the
fast growth of technology and the complexity of international licensing.
Another issue faced in applying a mixture of laws to franchising is that
1. J. Perry Maisonneuve, Franchising in the Middle East: Business Perspective,
in F M E: N R R
W’ M I M 10 (The American Bar Association ABA Forum
on Franchising and the ABA Center for Continuing Legal Education ed., 2010).
2. Hussein Aboul Fath, Franchising Your Concept in Egypt, I’ F
A’. (Apr. 2007), http://www.franchise.org/franchise-news-detail.aspx?id=33656
[https://perma.cc/TX7M-2ZP9].
3. M-E, F C E 2004 (2004), http://www.
efda.org.eg/3A-Franchising-Census-Egypt-2004.pdf [https://perma.cc/AF99-PSSJ]
(powerpoint presentation summarizing report commissioned by SFD-SEDO, Fran-
chise Department).
42 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
the franchising parties generally prefer their agreements to be governed
by simple and comprehensive law, as the application of complex laws can
complicate negotiations and decisions on various issues arising under
an agreement. This is particularly true in a civil law country like Egypt,
where courts are more dependent on written statutes. A focused fran-
chise law could work as a reference point both for Egyptian courts in
deciding disputes and for parties in forming agreements. It is not sensible
for a country like Egypt to lack specialized law to regulate the growing
business of franchising.
This article aims to provide a comprehensive explanation of fran-
chising in Egypt and what solutions will best t the problems Egypt
currently faces in this arena. Part I of this article gives an introduction on
franchising in general. Part II analyzes and evaluates the current status of
franchising in Egypt. Part III explains comparative approaches to dealing
with franchising issues around the globe, and it provides recommenda-
tions based on such comparisons in connection with proposed legislation
that would t into the Egyptian legal system.
I. U L S F
An understanding about franchising and its legal particulars are
critical before discussing the situation in Egypt. As such, the rst section
of this Part explains the common denition of franchising, as a distribu-
tion and marketing methodology, provided by the relevant specialized
entities, as well as the main differences between franchising and similar
transactions such as licensing, distributorship, agency, and employment.
The second section of this Part introduces the main set of rules regulat-
ing franchising worldwide, including disclosure rules, relationship rules,
and registration rules.
1.1 Denition of Franchising
Franchising is a business tool through which one investor (the fran-
chisor) allows another investor (the franchisee) to trade the franchisor’s
goods or services, using the franchisor’s “know-how”, in conformity with
the franchisor’s business scheme, and using the franchisor’s trademark.
4
The franchisee runs such a business under the control and with the assis-
tance of the franchisor, and in return, the franchisee pays the franchisor
an agreed-upon amount of fees.
5
Know-how is dened as a collection of “identied,” “secret,” and
“substantial” data gathered through the franchisor’s practices and expe-
riences.
6
“Identied” means that the know-how is dened in an inclusive
4. Michael G. Brennan, Franchising and Licensing: Their Relevance to Corpo-
rate Counsel, 2000 B. L. I’ 222 (2000).
5. 16 C.F.R. §436.1(h)(2) (“The franchisor will exert or has authority to exert
a signicant degree of control over the franchisee’s method of operation, or provide
signicant assistance in the franchisee’s method of operation.”)
6. E. F F., E C E F, available
432017] FRANCHISING IN THE MIDDLE EAST
way that suits its condential nature.
7
“Secret” means that the know-how
is condential and undisclosed to the public.
8
“Substantial” means that
the know-how is material to the franchisee’s use in connection with the
franchised business whether in the eld of manufacturing, contacting
consumers, or managing the franchised business.
9
The element of business scheme outlines a method for operating
the business according to the system determined by the franchisor.
10
It
usually requires use of the franchisor’s trademarks, business standards,
product and service specications, training systems, operation manuals,
specic advertising systems, and other requirements determined by the
franchisor to establish a consistent look across all the franchised outlets.
11
Licensing the use of intellectual property is the cornerstone of
franchising transactions. For franchising purposes, the most important intel-
lectual property licensed to the franchisee is the franchisor’s trademarks.
The element of control and assistance is the extent to which fran-
chisors manage and direct different aspects of the franchised business. In
essence, control occurs through various activities, such as assisting fran-
chisees in choosing a location, preparing the premises, and fullling the
requirements for design and appearance. Control also includes assisting
(to a certain extent) with business operations, providing technical train-
ing for the franchisee’s employees, and providing help with establishing
accounting systems and marketing. Control and assistance is important
because it ensures that franchisors maintain the goodwill of their busi-
nesses and protect the use of their franchised trademarks.
12
Finally, fees cover all payments, whether direct or indirect, made by
the franchisee or any third party acting on his behalf, to the franchisor or
its afliates, whether by lump sum or installments, in any form, and pro-
vided in the franchise agreement or required by the practical nature of
the business.
13
Fees may include different forms of payments such as ini-
tial franchise fees, payments for advertising assistance, payments for rent,
payments for required equipment and supplies, security deposits, escrow
deposits, and royalties on sales.
14
at http://www.eff-franchise.com/Data/Code%20of%20Ethics2.pdf [https://perma.
cc/2856-LCUK] (last visited Feb. 22, 2012).
7. Id.
8. Id.
9. Id.
10. See, e.g., C. C. C §31005 (2012); C. G. S. §42-133e (2012).
11. Rochelle B. Spandorf, Franchise Player, 29 L A L. 34 (2006).
12. Mark H. Miller, Unintentional Franchising, 36 S. M’ L.J. 315 (2005).
13. Final Guides to the Franchising and Business Opportunity Ventures Trade
Regulations Rule, 44 Fed. Reg. 49,967 (Aug. 24, 1979) (discussing the FTC’s intent to
capture all hidden franchise fees).
14. Miller, supra note 12, at 36.
44 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
1.2 Distinguishing Franchising from Other Methodologies to
Expand a Business
Because many elements of franchising overlap with other forms of
legal business transactions, there may be confusion about the nature of
the franchise transaction. A product franchise, for instance, is a distri-
bution methodology that may cause confusion between franchising and
distributorship agreements.
15
In distributorship agreements, distribu-
tors agree to distribute goods under the same name of the principal. In
product franchises, franchisees do the same. Along similar lines, because
franchisors exercise a degree of control over the franchisees’ operation of
the business, franchising may be confused with employment agreements,
as well as agency and licensing.
1.2.1 Franchising v. Licensing
Franchising transactions are often confused with licensing agree-
ments because both kinds of transactions include the grant of a license
for the use of a trademark, a name, or other forms of intellectual prop-
erty rights.
16
Although the core of the franchisor-franchisee relationship
is licensing, the use of a trademark and the grant of know-how, market-
ing, and manufacturing are crucial, but ancillary, tasks. This contrasts with
licensing, where the main purpose is the manufacture of licensed goods.
As a result, franchising does not require the same level of prior expe-
rience in manufacturing. In particular, franchisors have more control
over the franchised business because franchisees need to follow the busi-
ness systems or plans of franchisors, unlike licensors, whose rights are
only to supervise the use of the license in order to protect it and to col-
lect royalties.
Franchising should also be distinguished from technology trans-
fer agreements. A technology transfer agreement is a form of licensing
agreement by which a license is given by the transferor to the transferee
to establish a manufacturing unit to manufacture a product using the
transferor’s technology without having control over the way the licensee
operates its business.
17
Nevertheless, a franchise agreement is only a lim-
ited license that allows the franchisor to authorize the franchisee to use
the franchisor’s trade name or mark to produce or distribute the fran-
chisor’s products or services where the franchisor has day-to-day control
over the franchisee’s operation of the business.
18
15. M M ., F L 10 (Martin Mendelsohn, ed.,
Richmond Law & Tax, 2d ed. 2004).
16. Id. at 47.
1 7. I’ I. U P L [UNIDROIT], G
I M F A 11 (2007).
18. Id.
452017] FRANCHISING IN THE MIDDLE EAST
1.2.2 Franchising v. Distribution
Distribution contracts are common for relatively low-cost products
requiring little pre- and post-sale services, or for products that consum-
ers are used to buying in retail outlets that carry multiple brands of the
same product, such as appliances.
19
Under a distribution model, a dis-
tributor buys goods from a manufacturer and title is transferred to the
distributor upon payment, with distributors then selling products under
their own name.
20
Moreover, distributors may sell competing or comple-
mentary products to the products they are charged to distribute. In these
arrangements, distributors sell products in their own way, using their own
business systems and methods. Distributors do not need the same level
of technical training.
In contrast, franchisees distribute franchised products under the
trade name or trademark of the franchisor. Franchisees are not allowed
to sell any competing products to the franchised products. In addition,
franchisees work according to the business system and the instruction of
franchisors. Finally, franchisees usually need special kinds of training pro-
grams run by franchisors.
21
1.2.3 Franchising v. Agency
A commercial agent is an intermediary who is authorized to nego-
tiate and conclude a commercial transaction on behalf of or in the name
of the principal, while a franchisee is completely independent of the fran-
chisor.
22
The franchisor and the franchisee are not liable for each other’s
behavior and the franchisee does not have the power to bind the franchi-
sor. In other words, an agent is a legal representative who deals on behalf
of, and for the benet of, the principal, while a franchisee operates the
franchised business on his own behalf and for his own benet, with no
authority to work on behalf of the franchisor.
23
1.2.4 Franchising v. Employment
While there are many distinctions between franchising and employ-
ment, the most important is that the degree of control exercised in each
relationship is different.
24
While employers maintain complete control
over employees, franchisees are considered independent and subject only
to a limited degree of control that includes the business and technical sys-
tems necessary to achieve expected outcomes. The amount and method
of payment, moreover, is one of the elements that distinguish franchising
19. Brennan, supra note 4, at 222, 225.
20. M, supra note 15, at 46.
21. Id.
22. UNIDROIT, supra note 17, at 9.
23. A J. S, F L –50 (Am. Mgmt.
Ass’n, 3d ed. 2003).
24. Peter C. Lagarias & Robert S. Boulter, The Modern Reality of the Con-
trolling Franchisor: The Case for More not Less, Franchise Protections, 29 F
L.J. 139, 145 (2010).
46 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
and employment relationships.
25
Employees do not make payment to
their employers to begin or maintain a business relationship. Finally, it
should be noted that franchisees are in control of the business to a cer-
tain extent. For example, they have the capacity to employ personnel and
be responsible for them.
1.3 The Laws Regulating Franchising
Generally speaking, three types of rules regulate franchising rela-
tionships: (1) pre-sale disclosure laws that require disclosure of relevant
information; (2) registration laws requiring the registration of franchis-
ing agreements, disclosure documents, and any other related documents;
and (3) relationship laws organizing the franchise parties’ rights and
obligations.
26
Disclosure laws mandate that franchisors disclose to potential fran-
chisees any information that can be expected to affect the franchisees’
decision to enter into franchise transactions.
27
Disclosure laws are the
most common variation of these laws among countries regulating fran-
chising. Approximately thirty countries have specialized franchising laws
and of those, nineteen have only disclosure laws.
28
Registration laws are typically tied to disclosure laws.
29
Thus, regis-
tration rules usually require franchisors to le their disclosure documents,
as well as information on their intellectual property (and sometimes
documents related to their consultants and brokers), with a competent
government registration authority before making franchise sale offers.
30
Registration is usually required for authentication purposes.
Finally, a few countries have franchisor-franchisee relationship laws.
Relationship laws typically regulate the performance of the franchise
relationship after a franchise agreement has been nalized. Relationship
laws elaborate on issues such as the rights and obligations of the fran-
chising parties, renewal and transfer of a franchise agreement, good faith
performance of the agreement, and the methods available for settling dis-
putes arising out of the performance of a franchise agreement.
II. F E: T C S
Egypt is currently the franchising center of the Middle East, with
up to $14 billion invested in the franchising sector, although its history
25. S, supra note 23, at .
26. See Pamela J. Mills, Franchising Around the Globe, Relationship, Denition
and Regulation, in G I: F I B
T (American Law Institute and the American Bar Association ABA
Committee on Continuing Professional Education eds., 2005).
2 7. 16 C.F.R. §436.5 (2012).
28. E C S, T R F
N G E 227 (2010).
29. Id.
30. Id. at 248.
472017] FRANCHISING IN THE MIDDLE EAST
is fairly recent.
31
Franchising rst entered the Egyptian market with the
implementation of the Open Door Policy in 1973. Wimpy, an English
fast food chain, was the rst franchise in Egypt.
32
Within a few years, the
franchising sector experienced rapid growth, resulting in hundreds of
international brands establishing a presence in Egypt.
33
Since 1973, the Egyptian franchise market has continued to grow.
34
In fact, from the end of 2002 through 2004, the number of franchised
outlets increased by 14 percent.
35
Examples of famous foreign brands
in Egypt include Chili’s, Hard Rock Café, KFC, McDonald’s, Pizza Hut,
Baskin Robbins, Carvel Ice Cream and Ruby Tuesday.
36
Aside from the
food sector, markets for lifestyle brands, home appliances, and clothing
are also expanding due to similar investment.
37
In 2006, SAS-Egypt, an
Egyptian franchisor, bought La Senza and Esprit brands to distribute in
Egypt, and the Swedish company Ikea has established a home furnishings
franchise presence.
38
Egypt also has a specialized franchise association, the Egypt
Franchise Development Association (EFDA). The EFDA is a non-gov-
ernmental organization founded in 2001 to promote the Egyptian
franchising industry. With the establishment of the EFDA, Egypt became
the rst Middle Eastern country to be a member of the World Franchise
Council. The establishment of EFDA contributed to the development
of franchise sector in Egypt and made Egypt active in franchising on
a global scale in a way that enabled Egypt to join the World Franchise
Council. For instance, EFDA supports foreign investors, franchisors or
franchisees, planning to expand to Egypt. EFDA also provided a data-
base of the franchising industry in Egypt for interested foreign investors.
Moreover, EFDA provides information to the world about franchising in
Egypt through publications and international events attended by various
stakeholders from around the world.
The EFDA has a Law of Ethics that is binding on all members, but
not binding on parties to franchise agreements until they explicitly adopt
it as part of their franchise agreement.
39
The most important feature of
the Law of Ethics is that it requires the franchisor to have at least one
pilot operation before starting a franchised business. Further, under the
Law of Ethics, franchisors have to be the legal holder of the licensed
trademark, provide franchisees with necessary training, and disclose rele-
vant information about the franchised business to the franchisee.
31. Franchising Future, O B. G, Feb. 23, 2007.
32. Fath, supra note 2.
33. Id.
34. Maisonneuve, supra note 1, at 16.
35. M-E, supra note 3.
36. Id.
3 7. Franchising Future, supra note 31.
38. What is Franchising?, E F D. A’, http://www.efda.org.
eg (last visited March 15, 2011).
39. Id.
48 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
Despite all of these developments, there is little awareness about
what franchising entails in Egypt.
40
As explained earlier, the lack of
franchising laws represents the most important roadblock to the develop-
ment of Egyptian franchising. The applicable law is usually the law that
bears the closest relationship to the provisions of the franchise agree-
ment. The common laws applicable to franchising transactions in light
of the absence of an Egyptian franchising law include, mainly, agency
law and transfer of technology law. However, applying general laws to
franchising transactions can cause confusion for the relevant parties and
result in more conicts and disputes.
2.1 Applying Agency Law to Franchising Transactions
41
Some Egyptian practitioners and legal writers believe that agency
is the closest analog to franchising and recommend that franchise agree-
ments should be subject to the provisions of the Egyptian Commercial
Law governing agency and the Commercial Agency Laws. According to
the Egyptian Commercial Law, agency is the contract by which a com-
mercial agent undertakes to perform a specic 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.
42
Beside these general rules on agency, which regulate any agent
transaction where effects go to the principal, the Egyptian agency rules
regulate another special type of agency, contracts agency. Contracts
agency refers to the situation where the agent markets, negotiates, and
concludes transactions in a specic area, in the name and for the benet
of the principal.
43
Contracts agency is typically confused with franchising
due to its special nature, where the agent acts like a franchisee to a cer-
tain extent by marketing, negotiating and concluding the transaction for
the principal.
Comparing both relationships, agents are not legally independent
from principals. Rather, the principal is liable for the agent’s actions that
are done for the benet of and on behalf of the principal. Unlike agency,
the franchisee is legally independent from the franchisor. Here, the fran-
chisee does not have any power to bind the franchisor as the franchisee
acts in his or her own name and for his or her own benet.
Based on the distinction in where liability lies, the two relationships
are considered distinct. Moreover, agency laws provide rules on termina-
tion that are specic to the nature of the agency relationship, rather than
the franchise relationship. Thus, upon the expiration of a dened-term
agency contract, renewal is compulsory under Egyptian Commercial
Law. The principal must, if he or she decides not to renew the contract,
40. Maisonneuve, supra note 1, at 16.
41. See Law No. 17 of 1999 (Commercial Law), al-Jaridah al-Rasmiya, 17 May
1999, arts. 148–91(Egypt).
42. Id.
43. Id.
492017] FRANCHISING IN THE MIDDLE EAST
pay compensation to the agent, even if the contract provides otherwise.
In contrast, this compulsory termination rule does not t with the nature
of a franchise relationship, as compelling a franchisor to remain within
the franchising contractual relationship after its expiry might result in
harming his trademark and business. Consequently, agency is very differ-
ent from franchise and both are incompatible with each other.
2.2 Applying Transfer of Technology Law to Franchising
Transactions
Another perspective amongst Egyptian practitioners and legal
writers is that franchise agreements are essentially technology transfer
agreements, which would still make these agreements subject to the rel-
evant Egyptian Commercial Law provisions.
44
However, looking into the
rules regulating technology agreements shows that franchise agreements
are in fact distinct in multiple aspects. In technology agreements, the
licensor transfers technical information to the licensee to use in a special,
technical way to produce specic commodities or to install or operate
specic equipment. The mere sale of technical products is not itself a
transfer of technology.
45
Hence, licensing the use of a trademark is not, in
itself, a transfer of technology unless it is connected to an actual transfer
of a technology contract. In addition, the subject matter of a technology
transfer is different from franchising, as it is not restricted to technical
information related to the production of specic goods. Rather, it also
includes services.
Unlike the practice with franchises, technology transfer rules on
licensing are protective of licensees and limit licensor control of trans-
ferred technology. For instance, Article 75 of the Egyptian Commercial
Law provides that:
“Any contractual term or condition that may impose restrictions
on the licensee’s freedom to use the transferred technology may
be null. This shall, particularly, apply to conditions imposing any of
the following obligations on the licensee: i) compelling the licensee
to accept and pay for the improvements introduced by the licen-
sor, ii) prohibiting the licensee to amend the technology in a way
that matches with local requirements, iii) compelling the licensee to
accept the licensor’s business plan or business scheme, iv) compel-
ling the licensee to purchase raw material, machinery, equipment,
and spare parts, necessary for the technology operation, from the
licensor or supplier determined by the licensor...”.
46
The success of transfer of technology given the type of management
and purchase of relevant raw material could be understood, particularly
in high technology sectors, as they are typically protective of the tech-
nical assets. In particular, licensors tend to be monopolistic, which can
44. Maisonneuve, supra note 1, at 16
45. Id.
46. Id.
50 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
eliminate competitive activities and put markets at risk. This leads the leg-
islature to intervene in order to protect weaker parties and competition.
In contrast, franchising is just a methodology to expand the franchisor’s
business in a way that complies with the business plan, marketing plan,
and operation mechanism of the franchisor. Thus, in franchise transac-
tions, the franchisee runs the franchised business under the control of and
with the assistance of the franchisor.
In addition, applying rules of transfer of technology to franchise
agreements would make franchise agreements subject to obligatory
choice of law and forum requirements.
47
This is because the Egyptian
Commercial Law provides that Egyptian courts shall have sole jurisdic-
tion to rule on disputes arising from technology transfer agreements. It
even mandates the application of the Egyptian law when the agreement
provides otherwise. Furthermore, the Egyptian Commercial Law pro-
vides that if the parties of a transfer of technology choose arbitration
as a method of solving disputes arising out of a transfer of technology
agreement, arbitration must be held in Egypt according to Egyptian
law.
48
Accordingly, applying transfer of technology laws to franchising
would not work.
2.3 The Need for Legal and Economic Reform
Recent economic turmoil has highlighted the need for addressing
franchising and similar issues. In particular, the Egyptian economy has
declined due to political instability since the January Revolution.
49
For-
eign investors ed, taking their capital with them. More than 300 Egyptian
businessmen are on a government watch list.
50
Over the following year,
Egyptian GDP declined four times. The foreign exchange reserves with
the Central Bank of Egypt dropped from $36 billion at the beginning of
2011 to $22 billion in October 2011, and further dropped to $15 billion
in January 2012. Tourism decreased by 35 percent and the stock market
saw a decline of more than 40 percent.
This indicates that the Egyptian
transitional government did not adequately support the Egyptian econ-
omy during the transition period,
51
and therefore the new government
will face the potential of severe economic decline. These economic risks
4 7. See Law No. 17 of 1999 (Commercial Law), al-Jaridah al-Rasmiyah, 17 May
1999, art.75 (Egypt).
48. Id.
49. The continuing unrest due to the contradictions between different de-
mands—majority interests v. minority rights, secular vs. religious, military vs. civilian,
Christians vs. Muslims, Muslim Brotherhood vs. Salasts, poor and unemployed vs.
elites, old vs. young. See Ben W. Heineman Jr., Why Egypt’s Economy Matters, T
A,(Dec. 12, 2011), http://www.theatlantic.com/international/archive/2011/12/
why-egypts-economy-matters/249718/ [https://perma.cc/3WPR-PRX8].
50. David Schenker, Egypt and the Arab Fall, L.A. T, (June 1, 2011), http://
articles.latimes.com/2011/jun/01/opinion/la-oe-schenker-egypt-20110601 [https://per-
ma.cc/RG4F-7W8E].
51. I S, C E’ E T 2 (2011), http://
carnegieendowment.org/les/egypt_econ_transition.pdf.
512017] FRANCHISING IN THE MIDDLE EAST
highlight the importance of careful attention to both applied economic
and legal policies. Despite all of this, through a consideration of Egyptian
laws, the government should be able to boost the recovery of the Egyp-
tian economy and improve the nancial situation in Egypt after these
problems caused by the January Revolution. Pursuing legal reform will
help and, specically, establishing franchising law can be a strong solution
to redeveloping economic prosperity in Egypt.
52
III. R E L S
F B C G A
As mentioned earlier, comprehensive franchising laws around the
world usually regulate three areas: pre-sale disclosure, registration of
franchise offers, and regulation of the relationship between the contract-
ing parties.
53
Disclosure laws, the most common among countries regulating fran-
chising, mandate that franchisors disclose to potential franchisees any
information that can be expected to affect the franchisees’ decision to
enter into franchise transactions.
54
Approximately thirty countries have
specialized franchising laws and of those, nineteen have disclosure laws.
55
Registration laws typically accompany disclosure laws. Thus, regis-
tration rules often require franchisors to le their disclosure documents,
as well as information on their intellectual property (and sometimes
documents related to their consultants and brokers), with a competent
government registration authority, e.g., ministry of commerce and trade,
before making franchise sale offers. Registration is usually required for
authentication purposes.
Finally, a few countries have franchisor-franchisee relationship
laws. These relationship laws typically regulate the performance of the
franchise relationship after a franchise agreement has been nalized.
56
The laws clarify details about the rights and obligations of the franchis-
ing parties, renewal and transfer of the franchise agreement, good faith
performance of the agreement, methods available for settling disputes
arising out of performance of the agreement, and termination of a fran-
chise agreement.
57
52. G I, C I R: E (2011), http://
myinsight.ihsglobalinsight.com/servlet/cats?lterID=1147&serviceID=4078&type-
ID=15431&pageContent=report&pageType=ALL – inaccessible without an account
53. See Pamela J. Mills, Franchising Around the Globe, Relationship, Denition
and Regulation, in G I: F I B
T (Am. Law Inst. and the A.B.A. Comm. on Continuing Prof’l Educ. eds.,
2005).
54. 16 C.F.R. §436 (2012).
55. S, supra note 28, at 227
56. Id. at 263.
5 7. Id.
52 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
3.1 The Subject Matter of Franchising Relationships
Some legal systems do not exclude similar business tools like
employer-employee relationships and partnerships, which can be con-
fused with franchising, from the systems’ denitions of franchising.
58
In
order to develop applicable franchising laws, a clear, detailed denition
is necessary.
59
Specically, the denition would need to clarify that the
franchisor grants a franchisee a license to operate a business under the
franchisor’s trademark and to use the franchisor’s trade secrets or other
intellectual property, while holding administrative rights and control over
the business in return for fees paid by the franchisee, as distinguished
from partnerships, services agreements, and agency relationships.
60
The
Egyptian legislation should provide a comprehensive denition of fran-
chising, including factors such as control and assistance, a marketing
plan, and a community of interests, fees, and licensing intellectual prop-
erty. Such a denition, according to this paper’s proposal, should exclude
other forms of licensing transactions that have similar features to fran-
chising, as noted earlier.
61
3.2 Scope of Application for Franchising Laws
In some legal systems, franchising law applies only to franchises
located under its jurisdiction.
62
Other systems require governmen-
tal approval to franchise in their territory.
63
Some systems apply their
franchising law only if the the offer or acceptance is issued within their
territory or if the business operation takes place within their territory.
64
In Egypt, proposals recommend that the proposed law apply to franchis-
ing actually occurring in Egypt, whether in the form of offer, acceptance,
operation, or conclusion of the contract. Specically, the Egyptian leg-
islator provides for the application of various local laws only if offer,
58. B E. F B S. S, F R D,
Westlaw (2011).
59. Franchise Act 1998, Warta Kerajaan seri Paduka Baginda Gazette, 31 De-
cember 1998, available at http://www.commonlii.org/my/legis/consol_act/fa199895/
(Malaysia) [hereinafter Malaysian Franchise Act], at art. 4
60. See id.
61. Examples include agency and transfer of technology agreements.
62. See 16 C.F.R. §436.2 (2007).
63. Article 7(4) of the Chinese Old Measures provideprovides that “A fran-
chisor shall have the following conditions: 4) Having at least two direct sales stores
that have been undertaking the business for more than a year or direct sales stores
established by its subsidiary companies or its holding companies within the territory
of China.” Shāngyè tèxǔ jīngyíng guǎnlǐ bànfǎShangye Texu Jingying Guanli Banfa
(商业特许经营管理办法) [Measures for the Administration of Commercial Fran-
chises] (promulgated by the Ministry of Commerce, Dec. 30, 2004, effective Feb. 2,
2005) art. 7(4), (China), https://perma.cc/8YCM-T2W5].T2W57(4),CLI.4.56488(EN)
(Lawinfochina).
64. See Warta Kerajaan seri Paduka Baginda Gazette, [Franchise Act 1998]
Jan.1, 2013) (Malay.), http://www.commonlii.org/my/legis/consol_act/fa199895/.
532017] FRANCHISING IN THE MIDDLE EAST
acceptance, business operation, or conclusion of the contract takes place
in Egypt. Examples of these local laws include sales law.
3.3 Liability Arising out of Pre-Contractual Negotiations
Once the parties sign the nal documents, classic rules of contracts
apply, but many issues that are not regulated by these rules can nonethe-
less arise. This can include letters of intent, existence of pre-contractual
disclosure obligations, and liability arising out of these obligations.
Franchising laws seem to leave these issues to general contract law, adver-
tisement law, and tort law, among others. Notwithstanding general rules
related to pre-contractual liability, a proposed Egyptian franchising law
should avoid silence on disclosure requirements during pre-contractual
negotiations. Egypt should be more prudent and should create a separate
disclosure requirement during pre-contractual negotiations. This would
reduce opportunities for fraud by franchisors, as disclosure makes fran-
chisees aware of all information that is expected to affect their decision
to enter into franchise transactions. In a country like Egypt, with a large
number of small investors as franchisees, disclosure rules will guarantee
a minimum level of transparency.
3.4 Contractual Liability and Liability to Third Parties
In some legal systems, vicarious liability arises for a franchisor
when a third party claims that it is legally responsible for an act or omis-
sion of a franchisee or any member of the franchisor’s network.
65
A
common rule is that franchisors are vicariously liable only when there
is an agency relationship between the franchisor and the franchisee or
member. In addition, direct liability for the franchisor can arise in cases
of an injury on the franchise premises where franchisors breach duties
to third parties, and this breach directly causes the injury in question.
66
Examples of such direct liability include instances where franchisors are
liable for inspecting and xing premises defects, or when franchisors are
responsible for designing or constructing franchise premises.
67
Because
the Egyptian Civil Code recognizes both vicarious and direct liability and
clearly regulates them, proposed Egyptian franchising law does not need
to include separate provisions. Franchising agreements can be regulated
by the general rules governing contracts without the need for repetition.
3.5 Indemnity and Insurance Clauses
Franchise agreements typically include indemnication clauses
requiring the franchisee to indemnify the franchisor for any settlements
or judgments levied against the franchisor for the franchisee’s actions
65. See generally Joseph H. King, Jr., Limiting the Vicarious Liability of Franchi-
sors for the Torts of Their Franchisees, 62 W. L L. R. 417 (2005).
66. Heather C. Perkins, Sarah J. Yatchak & Gordon M. Hadeld, Franchisor Li-
ability for Acts of the Franchisee, 29 F L.J. 174, 177 (2010).
6 7. Id.
54 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
and costs associated with defending against those claims. In addition,
franchise agreements often require the franchisee to list the franchisor
as an additional insured party on the franchisee’s liability policy. Passing
responsibility to the franchisee makes sense in a vicarious liability claim,
because it is the franchisee’s negligence, not the franchisor’s, that brought
the franchisor into the litigation.
68
While some legal systems require an
explicit indemnication provision in the agreement for the franchisee’s
own negligence,
69
other legal systems are silent on the indemnication
issue.
70
Indemnication clauses in Egypt are determined by the contract
parties and are regulated by the provisions of the agreement in question.
Accordingly, the proposed Egyptian law should not provide any specic
provisions on indemnications.
3.6 Remedies
Franchising law should have a comprehensive list of remedies avail-
able for breaches of franchising agreements. Having different remedies
gives judges a broad discretionary power and a variety of options when
deciding remedies. In addition, listing various remedies helps the con-
tracting parties reach a satisfactory contractual performance rather than
a termination of the franchise agreement. Remedies come in different
forms, depending on whether the breach in question was of a franchise
agreement, franchise laws, or disclosure and registration laws. Available
remedies include injunctive relief, payment for goodwill, and repur-
chase of inventory. For instance, one possible remedy for breach of a
franchise agreement (for termination without good cause or for declin-
ing renewal), is making the franchisor buy the franchisee’s inventory.
71
The main remedy granted in case of breach of franchise agreements is
68. See generally Jay Hewitt, Franchisor Direct Liability, 30 F L.J. 35
(2010); see also Perkins, supra note 66, at 181.
69. See Joyce Mazero, Impact of Other Local Laws, in F I-
F 265 (Richard M. Asbill & Steven M. Goldman eds., 2001).
70. E.g., Progressive Child Care Sys., Inc. v. Kids ‘R’ Kids Int’l, Inc., No. 2-07-127-
C V, 2008 Tex. App. LEXIS 8416, at *1 (Ct. App. Tex. Nov. 6, 2008).
71. Thomas M. Pitegoff & W. Michael Garner, Franchise Relationship Laws, in
F F (Rupert M. Barkoff & Andrew C. Selden eds., 3rd
ed 2008)).
552017] FRANCHISING IN THE MIDDLE EAST
injunctive relief,
72
in addition to damages.
73
Some laws also provide for
monetary remedies in cases of a breach of the obligations imposed by the
law itself, such as the non-fulllment of condentiality obligations, or a
breach of disclosure laws, such as the franchisor giving misleading state-
ments of material facts.
74
The proposed Egyptian franchising law can refer to the remedies
available under the general rules of contracts found in the Egyptian Civil
Code that regulate performance of contracts in a comprehensive way.
75
The Egyptian law, however, should go further, adding provisions address-
ing both repurchase of inventory and payment for goodwill, as these are
not addressed by Egyptian contract law at all.
3.7 Good Faith
The principle of good faith and fair dealing encompasses differ-
ent standards around the globe that vary between civil and common
law countries and change depending on the nature and requirements
of each contractual relationship. A majority of civil law countries gen-
erally require good faith in contracts. Similarly, common law countries
regularly impose a duty of good faith and fair dealing in the performance
and enforcement of contracts, whether through statutes or the courts.
76
In
72. A good example is Progressive Child Care Sys., Inc. v. Kids ‘R’ Kids Int’l,
Inc., where the franchisee was operating the franchisor’s two childcare facilities under
the trade name “Kids ‘R’ Kids” in return for 5% of the enrollment-based revenue. The
franchisee stopped paying the franchisor royalties in March 2002 and started operat-
ing both facilities under the name “Legacy Learning Center.” Kids ‘R’ Kids claimed
breach of contract, breach of personal guaranty, fraud, and conspiracy. The jury award-
ed $1,385,008.72 to the franchisor for past and future royalties. The courtCourt of ap-
pealsAppeals of Texas afrmed and explained that under Georgia contract law (that
governing the agreement) an injured party should be placed in the position in which
it would have been absent the breach. Applying this principle, the court found that
the injured party could claim damages for lost prots, which entitled the franchisor to
an amount of money equal to lost future royalties. Progressive Child Care Sys., Inc. v.
Kids ‘R’ Kids Int’l, Inc., 2008 Tex. App. LEXIS 8416, at *1. (Ct. App. Tex. Nov. 6, 2008).
73. Also, Petro Franchise Sys., LLC v. All Am. Props., Inc., is a good example
for injunctive relief. In that case, the franchisor started providing competing products
in the exclusive territory of the franchisee and the franchisee refrained from paying
royalties. While the court found there to be no dispute over whether the franchisee
failed to pay royalties, it found that the franchisor correctly followed the termination
procedure after the franchisee stopped paying. Moreover, the court found that los-
ing the franchise does not represent irreparable harm to the franchisee particularly
because this harm could be compensated through monetary damages. On the other
hand, though, if the franchisee were to continue to use the franchisor’s trademarks
without authorization, the franchisor would suffer irreparable harm. The court, there-
fore, granted the franchisor’s request for a preliminary injunction. Petro Franchise
Sys., LLC v. All Am. Props., Inc., 607 F. Supp. 2d 781, (W.D. Tex. 2009).
74. 16 C.F.R. §436.2 (2007).
75. See generally Law Al-Jarida Al-Rasmiyya [Civil Law] No. 131 of 1948 (Civ-
il Law), al-JaridahWaqa’i’ al-Rasmiyah,Misriyah 29 July 1948 at, arts. 126, 203, 221.
(Egypt).
76. E.g., Robert S. Adler & Richard A. Macc, Good Faith: A New Look at an Old
56 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
addition to general rules regulating good faith and fair dealing, contract-
ing parties typically include provisions on good faith and fair dealing.
77
In franchise agreements, these provisions may be referred to explicitly,
impliedly, or by reference. Though the Egyptian general rules of con-
tracts require that a contract be performed in good faith, the proposed
Egyptian franchising law should have a separate provision to clarify how
broadly good faith can be interpreted in the context of franchising.
78
To
be effective, the provision should give examples of violations of good
faith in franchising transactions. The provision could also provide pen-
alties for violations of its requirements by contracting parties. These
penalties would help ensure a robust application of the principles of good
faith and fair dealing and the protection for weaker parties against unfa-
vorably drafted provisions, which would contribute to reducing future
disputes among the contracting parties.
3.8 Franchising Agreements
A couple of issues arise in connection with the franchise agree-
ment, including whether the agreement must be in writing, and if not,
the consequences of such an oral agreement. It is also important to think
about whether a franchise agreement should be required to include spe-
cic provisions, without which the agreement would be void. The general
rule of Egyptian contract law is that a contractual relationship does not
need to be in writing to be valid. This rule, however, has some exceptions
that are comprehensively stated by governing law. Examples include
the exception provided by the Egyptian Civil Law that business asso-
ciations’ articles of incorporation must be in writing, otherwise they are
invalid.
79
Similarly, the Egyptian Commercial Law requires that a trans-
fer of technology agreement be in writing.
80
Applying general rules of
contract law, franchising agreements would not need to be written, nor
would they be required to include specic provisions. Nevertheless, to
facilitate the process of proof of a franchise transaction and to reduce any
potential disputes, the proposed Egyptian franchising law should in fact
require that a franchise agreement be written and include specic provi-
sions, the absence of which will void the agreement. Disputes could arise
in connection with any of the franchise transaction components such as
trademark, condential information, exclusive nature of the transaction,
royalties, and others.
Doctrine, 28 A L. R. 31, 42 (1994).
7 7. See Andrew Terry & Cary Di Lernia, Franchising and the Quest for the Holy
Grail: Good Faith or Good Intentions?, 33 M U. L.R. 542, 549 (2009).
78. Law No. 131 of 1948 (Civil Law), Al-Jarida Al-RasmiyyaCode), al-Waqa’i’
al-Misriyah, 29 July 1948 (Egypt).
79. Id. at art. 507(1).
80. Id. at art. 74 (1).
572017] FRANCHISING IN THE MIDDLE EAST
3.9 Term
Many franchising laws require a minimum term for the franchise
agreement, the violation of which may result in invalidation of the agree-
ment.
81
The rationale behind this rule appears to be protection of the
franchisee who needs a proper amount of time to see the results of invest-
ing capital in franchising transactions. Egyptian contract law recognizes
the freedom of contracting parties to set a term for their contract, except
in select situations where the law itself mandates a minimum term. For
example, the technology transfer agreement is required to be at least ve
years and is considered void if any shorter.
82
A proposed Egyptian fran-
chising law should incorporate a provision that provides a minimum term
for franchise agreements, in order to guarantee protection for the fran-
chisee against abusive or wrongful termination.
3.10 Transfer
Transfer means enabling either party; the franchisor or the fran-
chisee to transfer his rights and obligations arising from the franchise
agreement to a third party. Transfer provisions are usually hard to
negotiate because franchise relationships are usually based on per-
sonal considerations. It is common for franchise agreements to include
the franchisee’s obligation not to assign the franchised business or the
franchise agreement without the prior approval of the franchisor.
83
Reg-
ulating transfer is important, because the franchisor may want to replace
the franchisee, or the franchisee may need to nd an individual to replace
his or her role in the business.
Laws generally handle the issue of transfer from varying perspec-
tives. Some laws prohibit the franchisor from unreasonably withholding
its consent to the transfer made by the franchisee. For instance, a fran-
chisee may transfer the franchised business on the condition that the
transferee meets the reasonable qualications of the franchisor so long as
those qualications are based upon legitimate business concerns (train-
ing programs, payment of franchise fees, etc.).
84
Some other laws require
franchisees to notify the franchisor of his intent to transfer the franchise
and to include specic information in the notice, such as the transfer-
ee’s name, address, and business experience, to enable the franchisor to
decide upon the transfer.
85
81. UNIDROIT, supra note 17, at 48–49.
82. Egyptian Commercial Law, supra note 47, at art. 86.
83. Bruce S. Schaeffer, Succession Planning Forfor Franchisees, 21 F
L.J. 90, 92 (2001).
84. I C §523H.5(1) (2011).
85. A. C A. §4-72-205(a) (2017) (“It shall be a violation of this sub-
chapter for any franchisee to transfer, assign , or sell a franchise or interest therein
to another person unless the franchisee rst noties the franchisor of that intention
by written notice, setting forth in the notice of intent the prospective transferee’s
name, address, statement of nancial qualication, and business experience during
the previous ve years.”); I C §523H.5(1) (2011) (“A franchisee shall give the
58 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
The proposed Egyptian franchising law could require the fran-
chisor’s consent to transfer a franchise agreement. The reason behind
obtaining the franchisor’s prior approval for transfer is that the franchi-
sor is not obliged to accept a contracting party he or she did not choose.
In return, to avoid any abusive denial by the franchisor of the transfer,
the law may require a franchisee to grant the franchisor the right of rst
refusal before offering transfer of the franchise to a third party.
3.11 Termination
Termination is one of the most important issues that may arise
with respect to franchise agreements because termination ends the fran-
chising parties’ relationship and all the rights and obligations attached.
Accordingly, franchising laws have strict rules on termination to protect
both parties, particularly the franchisee, against abusive termination and
to reduce the number of disputes and losses arising out of termination.
The proposed Egyptian franchising law should provide a compre-
hensive set of termination rules. It should provide franchisors a right
of termination for good cause and should explain precisely what good
cause entails. It should also give hypothetical situations for termination
for clarity. Moreover, subject to appropriate exceptions, such as in cases
of insolvency, criminal actions, or repeated bad acts by the franchisee,
the Egyptian law should grant the franchisee a period to cure any mis-
takes or deciencies that may otherwise give the franchisor a legal right
to terminate or refuse to renew the agreement. The period of time would
vary depending on the reason for termination. While the franchisee could
be given a reasonable period of time to cure a breach arising of force
majeure event, a franchisee could hardly be given any period of time in
cases of insolvency, or repeated bad acts by the franchisee.
Finally, to create equilibrium between franchising parties’ rights of
termination, the Egyptian law should allow the franchisee the right to
terminate the franchise agreement in certain cases, such as when fran-
chisors intentionally fail to meet disclosure requirements. A reasonable
period for termination notice from the terminating party should also be
required in all cases.
3.12 Prohibitions Against Discrimination
Prohibitions against discrimination promote equal treatment of dif-
ferent franchisees by their franchisor. Unjustiable discrimination might
result in potential franchisees refraining from entering into franchise
agreements since they would not receive similar benets to the rest of the
franchisees. Unjustiable discrimination among franchisees might also
result in unfair competitive behavior by various franchisees within the
franchisor no less than sixty days’ written notice of a transfer which is subject to the
provisions of this section, and on request from the franchisor shall provide in writing
the ownership interests of all persons holding or claiming an equitable or benecial
interest in the franchise subsequent to the transfer or the franchisee, as appropriate.”).
592017] FRANCHISING IN THE MIDDLE EAST
same pool. Prohibitions against discrimination are particularly import-
ant in master franchise agreements where sub-franchisees are committed
through franchising agreements with common provisions to run the busi-
ness of a master franchisor. Prohibitions against discrimination should
consider the circumstances surrounding each franchising transaction.
For example, differences between franchisees based on the time the
transaction concluded or the training needed may lead to acceptable dis-
crimination in franchise agreement provisions.
The proposed Egyptian franchising law should also prohibit dis-
crimination among franchisees based on color, religion, sex, or the like. It
should also prohibit discrimination with respect to goods and equipment
supplied, services or training provided, royalties conveyed, and renewal
or transfer terms granted. Additionally, a unique rule could support both
franchisor and franchisee interests by allowing discrimination in specic
cases when capital needs, experience, or other franchisee requirements
are different. The Egyptian law should provide a list of situations where
discrimination is acceptable and will not be deemed a breach of the law
or against justice. Discrimination against franchisees could be prohibited,
for example, in connection with paid fees or royalties, supplied goods,
services or equipment, and advertising services. However, discrimination
related to differences in time of concluding franchise agreements and dif-
ferences among franchisees’ needs regarding capital, training, experience,
or other qualications could be legitimate. Other permissible discrimi-
nation includes that related to governmental efforts to promote specic
goods or services, and franchisees’ needs to treat decits or problems
arising with business operations.
3.13 Settlement of Disputes
The importance of regulating the franchising dispute settlements
arises most prominently in countries with long, complicated litigation
procedures that make arbitration more efcient. Other countries con-
sider recourse in court a matter of public order, and these countries may
be reluctant to accept arbitration or other alternative methods of settle-
ment. Arbitration clauses can also favor big business, which can make
policymakers uncomfortable. In all of these situations, statutory interfer-
ence may be necessary to encourage efcient settlements.
In Egypt, arbitration is preferred by contracting parties, because
it guarantees condentiality and supports the special needs of commer-
cial reputations and trade secrets, particularly with regard to technology
transfer agreements. The importance of regulating settlements in general
(and arbitration in particular) is heightened in Egypt, because judicia-
ries are often accused of being inuenced by the executive branches of
government. This implies that the contracting parties usually trust arbi-
tration more than the judiciary, which makes it important to provide a
exible and practical regulation of arbitration to facilitate the process of
settlement of disputes.
60 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
In Egypt, arbitration law has three notable aspects: 1) it distin-
guishes national and international arbitration, as the law applies to any
arbitration held in Egypt; 2) it gives parties absolute freedom to choose
the applicable procedural and substantive law; and 3) it leaves the par-
ties free to hold the arbitration either in Egypt or abroad. The rule of the
freedom of the parties to choose the applicable substantive and proce-
dural law has some exceptions. For example, the Egyptian Commercial
Law considers it a matter of public order that arbitration in a technology
transfer agreement must be subject to Egyptian substantive and proce-
dural arbitration laws, and any agreement to arbitrate under a different
foreign law is automatically null and void.
86
Some critics refuse the con-
servative attitude of the Egyptian legislator requiring the application of
the Egyptian law in arbitration in transfer of technology. They argue that
this conservative approach discourages foreign investors from transfer-
ring technology into Egypt.
Due to the fact that both transfer of technology and franchising
include the transfer of know-how and may be accused of favoring a spe-
cic party, the Egyptian legislature might adopt similar rules to those
conservative arbitration rules in transfer of technology to franchising.
Nevertheless, the proposed Egyptian franchising law should avoid adopt-
ing the conservative requirement of applying Egyptian law to arbitration
to franchising, because requiring the application of the Egyptian law in
arbitration in franchising would reduce contractual parties’ desire to
resort to arbitration.
3.14 Rights and Obligations of the Parties
Few legal systems provide comprehensive lists of the rights and
obligations of franchising parties. This may be because rights and obli-
gations in franchising transactions vary according to the nature and
requirements of each transaction. Some systems, however, provide more
examples than others, such as training, guidance on operation of the fran-
chised business, and technical support for the franchisee. In the same way,
other laws require the franchisor to assist the franchisee in operating the
franchised business, supply required materials, and provide training ser-
vices. It may indeed be difcult for Egyptian law to outline all rights and
obligations in franchising agreements. Nevertheless, the law should pro-
vide for minimum rights and obligations, which are the most common,
such as condentiality, non-competition, and training by the franchisor.
86. Egyptian Commercial Law, supra note 41, at art. 87 (“The Egyptian courts
shall have the jurisdiction of deciding disputes arising from the technology transfer
contract referred to in article 72 of this law. Agreement may be reached on settling the
dispute amicably or via arbitration to be held in Egypt according to the provisions of
the Egyptian law. In all cases, deciding the subject of dispute shall be according to the
provisions of the Egyptian law, and all agreement to the contract otherwise shall be
null and invalid.”).
612017] FRANCHISING IN THE MIDDLE EAST
3.15 Disclosure and Registration Rules
Disclosure and registration are the most important issues arising
in franchising. In fact, in some countries, franchise laws are essentially
disclosure laws. Disclosure laws require the franchisor to disclose to the
franchisee specic, material information that would substantially affect
the franchisee’s decision to invest.
87
Registration rules require register-
ing disclosure documents with the competent governmental agency.
88
Disclosure and registration requirements give the franchisee access to
necessary information about the franchised business, the franchisor,
and the potential franchise agreement. Having access to such informa-
tion assists the potential franchisee in reaching an informed investment
decision, and it inspires condence in the franchisor that the franchisee
meets its requirements, because the franchisee is acting with knowledge
that all the necessary information has been disclosed.
89
Moreover, dis-
closure and registration reduce the chances for fraud, misunderstanding,
and false expectations based on uncertain assumptions. This condence
helps reduce the chances that the franchise will fail.
3.15.1 Disclosure
The timing of disclosure, types of issues that are required to be dis-
closed, protection of the condentiality of the disclosed information, and
remedies in case of a failure to comply with disclosure requirements vary
from one country to another.
90
Legal systems also vary on when disclo-
sure documents must be submitted. Franchisors are typically required to
submit disclosure documents ten to thirty days before the conclusion of
a franchise contract.
91
Common disclosure requirements include information about the
franchisor, such as the background of its ofcers and directors, litigation
history, bankruptcy history, and nancial statements. These disclosures
also include information on the franchised system, such as intellectual
8 7. Regulations on Administration of Commercial Franchises (promulgated by
the State Council, Jan. 31, 2007, effective May 1, 2007) art. 5 (Lawinfochina) (China)
[hereinafter Chinese New Regulations].
88. Malaysian Franchise Act, supra note 59, at art. 57.
89. Kevin M. Kennedy, Drafting an Enforceable Franchise Agreement Arbitra-
tion Clause, 22 F L.J. 112, (2002).
90. Id.
91. In the United States, for example, disclosure take place fourteen days before
paying the consideration, executing the franchise agreement, or any time earlier if the
franchisee reasonably requires disclosure. 16 C.F.R. §436.2(a). Another example is the
Chinese New Regulations and the Chinese Measures for the Administration of Infor-
mation Disclosure, which require franchisors to submit both the franchise contract
and disclosure documents thirty days before the conclusion of a franchise contract.
Chinese New Regulations, supra note 87, at art. 21; see also S, supra note 28,
at 182. Chinese Measures for the Administration of Information Disclosure of Com-
mercial Franchises (promulgated by the Ministry of Commerce, Apr. 6, 2007, effective
May 1, 2007) art. 4 (Lawinfochina) (China) [hereinafter Chinese Measures for the
Administration of Information Disclosure].
62 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
property information, advertising programs, and training programs.
Moreover, information on franchisor requirements, such as site selection,
restrictions on sales, and initial investment, are often included. Disclo-
sures not only cover the substance of the business, but also cover the
proposed agreement itself, including initial fees, territorial rights, dis-
pute resolutions, term, transfer, and termination.
92
In addition, disclosure
typically covers the franchisor, including a sample of the trademark, a
description of the business, the initial investment, contact information,
type of business entity, location, market data about franchised goods and
services, laws and regulations, nancial issues like payments for goods or
services, franchisee fees, or estimated initial investment amounts for the
franchisee, and required sources of supplies and equipment.
93
Franchise
agreement information should be disclosed as well, including franchisee
obligations, franchisor assistance, exclusivity or other territorial issues,
intellectual property issues, restrictions on the sale of goods or services,
information on the renewal of the franchise agreement, termination of the
franchise agreement, transfer of the rights and obligations arising form
the franchise agreement, and dispute resolution.
94
Other information
about franchised outlets used in advertising and nancial performance
information, such as past sales, income, and prots, falls under nancial
issues. This requires disclosure of the franchisor’s nancial statements for
the last two years, as well as copies of all agreements related to the fran-
chise offer, including the franchise agreement, any lease agreements, and
purchase agreements.
95
It is common under franchise laws to give a franchisor the right to
execute a condentiality agreement with the franchisee before disclos-
ing any information to him.
96
Some laws also require the franchisee to
issue the franchisor a receipt, to be signed by both parties, that the fran-
chisee received the disclosure documents.
97
Various legal systems provide
that if the franchisor fails to comply with the basic disclosure require-
ments it may be liable for civil penalties and damages. In addition to
remedies, some legal systems require the franchisor to take action to cor-
rect the breach.
98
Applying the above concepts on disclosure to the proposed Egyp-
tian franchising law, the proposed Egyptian franchising law should
require a thirty-day disclosure period before the fees are due. This will
make it easy for the parties to decide when the thirty days start. To be
exible, the proposed Egyptian franchising law could always require
92. Scott, W. Andrew, Jeffrey H. Wolf, & Allan P. Hillman, Franchising from
A(Arbitration) to T (Termination), 22 Franchise L.J. 192 (2002).
93. §436.6(h).
94. §436.6(q).
95. §436.6(w).
96. See Chinese Measures for the Administration of Information Disclosure,
supra note 91, at art. 7.
9 7. Id. at art. 8.
98. Id. at art. 28.
632017] FRANCHISING IN THE MIDDLE EAST
disclosure of all relevant information without requiring an exclusive list
of information. Under such a system, additional information may need to
be disclosed if required by the franchisee and material to the transaction.
Requiring relevant information without listing it exclusively would pro-
vide the contracting parties with more exibility and protect franchisees
that may need access to information which varies according to the nature
of each transaction.
Further, the proposed Egyptian franchising law should require the
franchisee to issue the franchisor a receipt for the disclosure documents
and guarantee protection of the condentiality of information disclosed
by the franchisor. As for remedies, in cases where the franchisor is in
breach of disclosure obligations, the proposed Egyptian franchising law
could require civil penalties as is common among various legal systems.
3.15.2 Registration
Registration typically occurs via ministries and relevant agencies
(Registrar).
99
Registrar could be agencies established for the purpose of
receiving and ruling on registration applications.
100
Alternatively, it could
be a unit within the relevant ministry concerned with general issues
including receiving registration applications by franchisors.
101
Registra-
tion applications usually consist of a list of documents that the franchisor
must submit.
102
These documents cover primary information on the
transaction, potential franchised outlets, working licenses, trademark reg-
istration certicates, a copy of the franchise agreement, a description of
the operations manual, any required approvals, and a commitment certif-
icate issued and sealed by the franchisor’s legal representatives.
103
The process of registration usually starts with the franchisor sub-
mitting all required documents followed by the competent authority
archiving these documents, unless the documents are found to be incom-
plete.
104
Some other systems require submitting registration applications
before making any offer to sell a franchise, and non-compliance with
99. Rochelle B. Sandorf & Mark B. Forseth, Franchise Registration, in F-
F 140 (Rupert M. Barkoff & Andrew C. Selden eds., 3d ed.,
2008).
100. In the United States, for example, franchisors submit registration applica-
tions to state agencies competent with receiving and deciding upon registration ap-
plications submitted by franchisors. The registration agencies are usually granted the
right to deny an application in various situations such as the franchisor’s failure to
comply with the state’s law. Id.
10 1. F I F, supra note 69, at 97. See also
Chinese New Regulations, supra note 87, at art. 8; Chinese Measures for the Admin-
istration of Information Disclosure, supra note 91, at art. 6; S, supra note 28, at
182.
102. Chinese Measures for the Administration of Information Disclosure, supra
note 91.
103. Id. at art. 5.
104. Id. at art. 10.
64 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
this requirement can be a penalized offense.
105
Most legal systems give
the Registrar broad discretionary power to decide whether to accept
or refuse registration and to impose conditions for approval.
106
In most
legal systems, franchisor’s failure to register disclosure documents does
not make the franchise agreement null unless the law provides for the
franchisee’s right to void the agreement.
107
These other systems impose
different penalties and procedures depending on the degree of the breach
of registration rules.
Finally, some legal systems authorize the Registrar or its depu-
ties to take enforcement action with written approval of the competent
minister.
108
Enforcement investigations typically cover the activities of
franchisors, franchisees, or brokers.
109
In such an investigation, authorized
ofcials may enter premises to inspect, search, seize, or seal anything rel-
evant to the inquiry.
110
Exercising such powers may take place with or
without a warrant.
111
Sometimes, a franchise advisory board is formed,
composed of a maximum of fteen persons experienced in franchising
issues and chosen by the minister.
112
The role of the advisory board is
to issue non-binding advisory opinions to the minister and Registrar on
issues related to franchising when appropriate.
113
The best model to follow in Egypt is the one that provides a detailed
registration process and sets forth clear standards for all forms, applica-
tions, reports, and notices that need to be considered during registration.
The Registrar should be established by a competent minister, and its
duties must be specically spelled out.
Further, the proposed Egyptian franchise law should require certain
registration forms to be led with the disclosure documents, including
a copy of the franchise agreement, the operations manual, the training
manual, nancial statements, and any additional documents required by
the Registrar. The law could also require that registration takes place
before making any offer to sell a franchise. However, giving the Registrar
broad discretionary power to accept or refuse registration and to impose
conditions for approval may not be the best option in Egypt, as it may lead
to abuse of power or corruption. There should, therefore, be supervision
through the Ministry of Trade and Industry, or something similar, to pro-
vide oversight. It is also important to provide franchisors with the right to
appeal the Registrar’s decision to the Minister within a specic period of
time, and the Registrar should be required to give reasons for declining a
105. Malaysian Franchise Act, supra note 59, at art. 6.
106. Id. at art. 8.
107. TKO Fleet Enter., Inc. v. Elite Limousine Plus, Inc., Inc., 708 N.Y.S.2d 593
(Sup. Ct. 2000); C. C. C §31300 (West 2005).
108. Malaysian Franchise Act, supra note 59, at art. 42.
109. Id. at art. 43.
110. Id. at art. 44.
111. Id. at art. 45.
112. Id. at art. 35.
113. Id. at art. 36.
652017] FRANCHISING IN THE MIDDLE EAST
registration. The law should also specify the effective date of registration,
which will likely be the day mentioned in the written notice issued by the
Registrar. The Registrar should be granted the right to withdraw registra-
tion if franchisors do not correct deciencies after the Registrar noties
them. Finally, franchisors should be required to notify the Registrar of
any modications or changes to the submitted documents.
Submitting false or misleading documents should be a criminal
offense to deter improper behavior. The law should provide penalties for
violating the registration rules, whether by franchisors or the relevant
employees. Furthermore, enforcement guarantees should be provided,
such as allowing the Registrar to conduct investigations including, if nec-
essary, the power to enter the premises and to inspect, search, seize, and
seal anything for the investigation. An advisory board composed of expe-
rienced experts in franchising could be established to issue non-binding
advisory opinions to the minister and Registrar on issues related to fran-
chising when required.
C
Egypt is a rapidly growing and emerging market that is considered to
be the franchising center of the Middle East. Egyptian business and legal
protocols are quite consistent with those of the EU and North America,
which opens the door to expanding franchising services between Egypt
and other areas of the world. This could help promote foreign invest-
ment in the Egyptian franchising sector. Nevertheless, there is notably
less awareness of the franchising business model in Egypt, because nei-
ther Egyptian laws nor its case precedents address franchise agreements.
The time is ripe for establishing franchising laws in Egypt in order to face
the economic, investment, and legal challenges that have arisen in the
aftermath of the January Revolution.
In essence, this paper draws lessons from analyzing global models
to assist in designing future rules that may create a legal framework for
franchising in Egypt. This inquiry shows that, although there are certainly
differences among the franchising laws of different legal systems, the
number of material similarities is far greater. In particular, some critics
argue that Islamic law will pose a barrier to the recommended changes
to franchising industry in Egypt. Although Islamic law may affect the
business needs of franchising, such as market demand and the types of
franchised goods and services, it does not directly affect the legal require-
ments of a franchising law. Therefore, the fact that Islamic law is the main
source of law in Egypt may not weigh heavily when drafting a franchis-
ing law in Egypt.
Moreover, comparing and analyzing the characteristics of fran-
chising laws with varying perspectives favors an Egyptian franchise law
that addresses the different franchising issues, including disclosure rules,
substantive rules regulating the relationship between parties, and reg-
istration rules. The disclosure rules help to ensure that franchisees are
66 [Vol. 35:39PACIFIC BASIN LAW JOURNAL
provided with proper information to assist them in reaching a well-in-
formed investment decision, and the substantive rules guide parties to
better conclusions and performance in their agreements. Registration
rules guarantee the authenticity and transparency of franchising docu-
ments produced by franchisors and the credibility of others involved in
the franchising process, such as franchise brokers.
It should be noted that a franchising law can still be comprehen-
sive, even if it focuses only on the concepts that have a direct connection
with franchising, aside from the other general issues dealt with through
other laws. Examples of these include enforcement issues, consumer pro-
tection, force majeure, and tax issues. Accordingly, a proposed Egyptian
franchising law can still be comprehensive by regulating franchising spe-
cialties and incorporating by reference the provisions of other laws that
affect franchising.
This paper proposes a balance between the different interests that
must be reconciled in franchising laws. A franchising law should not
only address the needs of the local market, but should also address the
expectations of business partners acting in more than one jurisdiction.
In summary, the conclusions of this paper can contribute to the estab-
lishment of an Egyptian franchising law that would inclusively enhance
franchising transactions in Egypt and the entire Middle East.
