Franchising as a technique of doing business under Cameroonian law: stakes and challenges

Project Details

Department
LAW
Project ID
L024
Price
5000XAF
International: $20
No of pages
100
Instruments/method
Doctrinal
Reference
YES
Analytical tool
Content Analysis
Format
 MS word & PDF
Chapters
1-5

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Abstract

As a result of globalization, today’s business is undergoing a fundamental transformation. Franchising as a business technique in Cameroon has become an accepted grown for business growth, economic development and job creation. However, the practice of Franchising in Cameroon has continued to evolve over time but  Modern technology has made it very cumbersome for this to be realised because it is easier to copy people’s data without their knowledge. The major problem identified is the insecurity in the protection and enforcement of the rights of the franchisee and the Franchisor and the obstacles in the execution of franchise contracts in Cameroon. The main aim of this paper was to critically examine the stakes and challenges involve in franchising agreements in Cameroon. Specifically, the study sought to ascertain the Legal Instruments Regulating Franchising and to examine the Nature of infringement of franchise Agreement, the study was also specifically out to bring out the different Formats or Structure for carrying out franchising. It should be noted that Cameroon does not have a specific law regulating Franchise contracts. Some of the challenges identified include corruption, technological changes, locus standi, lack of a good national legal instrument and many others. Looking at the nature and types of action to be taken, it was realized that the nature of a franchise contract depends on the terms of the franchisor, it seems to be a standard form contract. Types of actions include an action for fraudulent misrepresentation. The remedies could include among others rescission, payment of damages, specific performance and liquidation.  The court of the First Instance, the high court and the court of appeal have competent jurisdiction to hear and entertain matters arising from infringement or breach of a Franchise contract. The researcher finally recommends that a single law should be enacted to regulate franchising relationships in Cameroon. As a recommendation, the notion of locus standi should be broadened so that parties rights can be protected, Franchisors should also refrain from imposing risky terms.

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Theoretical background and history of franchising

Franchising began during the middle Ages. Historically, kings and noblemen granted fiefs land to live and farm on. In return, fiefs provided revenue from the sale of their crops, and in war, the fiefs would serve as loyal troops. This practice ended in 1562 with the enactment of the Council of Trent, but the basic idea of franchising had been established.

Franchising came to America in 1496, when King Henry VII granted Giovanni Caboto (John Cabot) and sons the following: “We have given and granted to them, their heirs and deputies, that all the firme lands isles, villages, towns, castles, and places whatsoever they be that they shall chance to finde, may not of any other of our subjects be frequented or visited without the license of the foresaid John and hissonnes…”.

Modern franchising began prior to the end of the civil war when Singer Sewing Machine Company chose franchising as a method of distribution. As time passed, more business persons used this method of distribution and the company names became throughout the country.

 The first examples of franchising as a way of doing business are found in mid-nineteenth-century Germany, where brewers set up contracts with tavern owners to sell their beer exclusively in the taverns. In the United States, the earliest example of the use of franchising was not found in breweries and taverns. Instead, it occurred in the sale of products to housewives located on the American parairie. In 1851, Isaac Singer became the first American product named franchisor when he began to sell to travelling independent salesmen the right to sell his sewing machines to end-users. Although the Singer sewing machine company was the earliest American product named franchisor, it was relatively quickly outpaced by an even more important product named franchisor; Coca-cola. In the early 1890s, Cola-Cola chose to franchise the rights to bottle its carbonated beverage to a large number of independent businessmen. Certainly, Coca-Cola was an important early product but it might not have been the most important one to begin operations at the turn of the 20th century. That distinction might be reserved for the pioneers in the American automobile industry which began to franchise at that time. Both Ford and General Motors began to franchise dealerships to independent business people to sell cars under their brand names to end-users because the companies did not have sufficient funds to create the needed retail outlets when they first began operation.

Another important innovation in franchising was the development of conversion franchising. Conversion franchising is the process of turning independent businesses under the umbrella of the franchisor’s brand name. The major oil companies were the pioneers in this activity when they began to offer independent repair stations the right to use their trademarks in the 1920s. We can also date several other pioneers in franchising in retail and service business to the 1920s and 1930s like;

  • The earliest retail franchisor is Ben Franklin stores, which started in 1920 and began to franchise around that time.

  • The earliest fast food franchise was A$W Root Beer, established in 1924 with Howard.

  • Howard Johnson was the first to franchise restaurants in 1935.

  • An early pioneer in service franchising was Arthur Murray Dance Studios, which got its start in 1938.

Franchising really took off as a form of business in the 1950s and 1960s when many of the current large franchiser chains, businesses such as Tastee-Freez, McDonalds and Burger King were established. The acceleration of franchising in the1950s and 1960s can be attributed largely to two factors which are; the rise of television advertising and the establishment of the national highway system.

The Federal trade Commission (FTC) initiated its first franchise fraud investigations in 1975. In that same year, the North American securities administration drew up draft guidelines for The Uniform Franchise Offering Circulars (UFOCs) which have become the standard form for disclosing franchise opportunities to franchisees.

Every business idea emanates from the mind. Such business ideas   usually serve as a springboard for divergence, innovation and discovery. These ideas are however protected under intellectual property law, infringement of which amounts to a crime or tort depending on the circumstances of each case. The inventors of such businesses however possess the latitude to expand their business. This led us to the notion of franchise.

Franchising refers to an arrangement where a party known as a Franchisor grants or licenses some rights and authority to another party known as a franchisee. It is a globally established marketing strategy for business expansion. A contractual agreement takes place between a franchisor and a franchisee and the franchisor authorizes a franchisee or licensee its know-how, to sell their products, goods, services and give rights to use their trademarks and brand name. The franchisee acts like a dealer and in return pays a onetime fee or commission to a franchisor and some share of revenue.

Franchising developed over time as an efficient way to do business and the vision of franchising employed in Europe centuries ago. The Notion of franchising is based on a marketing concept which can be adopted by an organization, as a strategy for business expansion. The word Franchising is of an Anglo-French derivation from franc meaning fee and it is used both as a noun and as a transitive verb. For the franchisor, use of a franchise system is an alternative business growth strategy as relatively compared through corporate pawned outlets or Chain stores. The adoption of a franchise system business growth strategy for the sale and distribution of goods and services minimizes the franchisors capital investment and liability risk. The researcher notes that franchising is not an equal partnership, especially due to the legal advantages the franchisor has over the franchisee, but under specific circumstances like transparency, favourable legal conditions, financial link and proper market research. Thus the concept of franchising can be likened to a springboard of success to both the franchisor and the franchisee. Franchising is also used as a foreign market entry mood.

Credits have been accorded to Isaac M Singar 1811 -1875 for beginning the modern use of franchising in the U.S. During the early 18th centuries, Singar who had improved an existing sewing machine model wanted to find a wider distribution for his products but however, lacked the money to increase manufacturing. He further faced the problem of non-purchase of his machine without training, a service which retailers were unable to provide. Singar resulted to charge a licensing fee to people who own the rights to sell its products in certain geographical areas. These licenses were responsible for teaching people how to use their machines, which created opportunities to bring a first commercially sewing machine to the public. The notion of franchising at this level was therefore employed on limited bases after the success of singar sewing machine distribution method. However, business format, franchising (the licensing of the brand name, trademarks and of the entire business concept) particularly the dominant mode of franchising today only came into the economic scene after World War 2. There was an overwhelming need for all types of products and services and franchising provided a way to quickly grow businesses.

 In Africa, the concept of franchising was introduced by The Franchise association in South Africa (FASA), a long-standing member of the world franchise and the oldest and most established Franchise Association on the African continent. It has spearheaded growth into the rest of Africa with the establishment of the African Franchise Federation.

The inaugural meeting held in 2013 was attended by a delegation from Egypt, Ethiopia, Mauritius, Tanzanian and Nigeria and is held each year alongside the international Franchise and Entrepreneurs EXPO IFE 2013 held in Johannesburg, South Africa. According to Vera Valasis, Executive Director of FASA, it is right to bring African countries together to explore the opportunities that Franchising can bring to growing African economies; South Africa has had a thriving first-world franchise sector since 1960 and over 80percent of the franchise concepts are homegrown and have also ventured into Africa with many of their goods and retail brands; Africa as a whole has lagged behind in franchise development.

First world countries are experiencing minimal growth while Africa is beginning to experience an enormous growth curve. Africa’s hidden strength is its growing middle class. In 2008, the continent combined GDP and was R11.2 trillion which was larger than that of India, Brazil and Russia combined. It is estimated that consumers spending on the continent will in a few years be R9.8trillion. Growth, according to experts, lies in the private sector which will be the driver of growth in Africa. Africa needs new enterprises that create jobs and wealth and it is the small and medium enterprise sector that carries the hope for the continent and the route Africans must pursue.

With some of the world’s top franchise brand such as Burger king, Dominos pizza and pizza hut are entering the South African market. It is now time that FASA and the Pan African Franchise Federation should play a bigger role in promoting franchising and expanding this unique business format to not just selected countries, but to the continent as a whole.

As such, interest in growing from African countries including Ghana, Mauritius, Tanzania, Zimbabwe, Zambia, Angola, Nigeria, Uganda and Cameroon which are all keen to engage with both local and international franchise companies with a view to growing their franchise sector. It is a well known fact that some international franchise brands establish a footprint in the South African market first and then expand into other countries, says Vera Valasis. The association is in the process of establishing a network platform for local franchisors to meet and network with business representatives from these and other African countries at its forthcoming international Franchise Expo. 

Generally speaking, franchising means opening additional outlets through the sale of franchise rights to independent investors who will use the company’s name and operating system. A franchisee pays a franchisor an initial franchise fee in return for the rights to open and operate a business under the franchise system and for training in how to operate the business. In some cases, the fee may also cover additional services such as assistance with site selection. In most systems, after the start-up period, franchisees also pay an ongoing periodic royalty fee, 4 per cent to 10 per cent of sales on average for continued support and training in advertising, marketing, sales, operational guidance, financial and human resources consulting, and other services.

More and more entrepreneurs are finding that franchising is the best way to expand a great business quickly with minimal capital and risk. And franchising offers a number of advantages worth considering:

  • The franchisor expands his business using someone else’s money.

  • Franchisees are responsible for all hiring, leases, and unit-opening expenses, reducing risk.

  • Franchises can open quickly, often getting a new concept out ahead of the competition.

  • A franchisee assumes the risk of succeeding or failing.

  • Franchise owners are highly motivated operators.

So, with all of this going for it, we can take a closer look at what franchising involves. Therefore before making the decision to franchise, the franchisor must first determine whether franchising is a viable strategy for his particular business.

He may need professional advice to see the bigger picture objectively. Many entrepreneurs “just know” they have a hot, new concept and they act on their convictions. But unless the franchisor has opened several prototypes in a variety of markets to test those convictions, it is important to ask him candidly whether or not his concept will work in other locations under other owners.

The legal definition of a franchise comes from the Federal Trade Commission through Rule 436, amended in July 2007. It defines a franchise as a business relationship with three primary components:

  1. The use of a common name or trademark.

  2. The presence of significant operating assistance or control of a prescribed method of operation, including such things as procedures, practices, and techniques.

  3. A required payment by the franchisee.

It is important to remember here that regardless of what someone may wish to call a business relationship whether it is distributorship, joint venture, or business opportunity – the FTC will tell you that if it walks like a duck and quacks like a duck; it is a duck and therefore is subject to regulation as a franchise. Failure to observe federal and state franchise regulations can subject the franchisor to severe fines and even felony convictions. And infractions must be reported in the Franchise disclosure documents for 10 years.

“When one well-known franchisor was in its infancy” one of the principals was meeting with what he thought would be a dealer in California, and he had taken a check to cover the dealership fee. But his partner was back at the office reading up on franchise law and put in a frantic call to his eager colleague telling him to return the check and come home. A visit to a qualified franchise development consultant shortly afterwards helped them develop a proper franchise program, which they then registered with the appropriate state authorities. They now have a network of 200 franchise locations plus 20 company stores, but if they had not realized their mistake back when they started, they could have been barred from franchising for life.

More than one entrepreneur has fallen into the trap of becoming an accidental franchisor and rued the day. So if one plans to include expansion in any way through third-party investors, he is strongly advised to engage the services of an attorney experienced in franchise law.

One of the primary ingredients for a successful franchise program is a proven prototype. Franchising will continue to grow in the future. In the last ten years, there has been a 94% increase in franchise sales, and in the next century, franchising is expected to have a 50% growth rate. While it is not a legal requirement, it is the best possible illustration that the franchisor has something of value to offer. The legal by-ways are littered with the sad stories of hotshots who thought they could sell franchises based only on an idea. An example was one company that was formed by a trio of professionals: a lawyer, an experienced advertising executive, and an operations person. They believed they could create the perfect franchise concept despite the fact that none of the three had worked in the particular field they had in mind: the alteration of clothing in a shopping mall storefront. It just seemed like a good idea. They spent hundreds of thousands of dollars starting up and operating a prototype, creating glossy franchise marketing pieces, and memorializing store procedures in an operations manual. There was just one problem: The store was not profitable and turning customers into advocates.[17] This team was sunk before they even got started.

One of the most valuable assets of a franchise program is a protected trademark. A trademark represents the brand the whole identity and mystique of the concept. Failure to protect a trademark is a typical mistake made by new franchisors, so the first task is to develop a name that can be protected that is, one that is not in use by anyone else so it can be approved by the U.S. Patent and Trademark Office. This is a good example to be emulated by Cameroon and other African Countries. Securing a registered trademark is an easy but tedious process that can often take a year or more to complete. Under the OAPI system, it is possible to have a sign registered as a mark in three months, but many companies will begin franchising before their trademark is fully registered, one will certainly want to have at least begun the process. The rights to trademark vest on the date the franchisor file the trademark application, and without this protection, he will be throwing away marketing dollars–and throwing a monkey wrench into any plans to franchise.

1.2 Statement of the research problem

Franchising continues to exist and evolve from decade to decade. In a franchise outlet, one of the Major problem ones seeks to outline in Franchising agreement in Cameroon are the violation of the right of the franchisee in a franchise agreement as well as the violation of the right of the Franchisor. The protection of the rights of both parties by the law is of paramount importance. It has been realized that the franchise agreement in most African countries and in Cameroon, in particular, is more or less a standard form contract. Though it is a little different from a standard form contract, the agreement is always presented to the franchisee to read and sign without any alterations.

Another major impediment identified in the franchise agreement is the high taxes that are levied on most businesses by the government. Some of the taxes are imposed on mostly the franchisor that is the more outlets, they give out, the more taxes they pay to the government. This has gone a long way to discourage this technique of doing business in Cameroon

This research work has developed a precise and effective technique and method to identify the problems and impediments in the franchise business relationships. Modern technology has made it very cumbersome for this to be realized because it is easier to copy people’s data without their knowledge. One of the major problem of franchising as a technique of business in Cameroon is the fact that there is no specific law that governs Franchising.

It should be noted that the law governing Franchising in Cameroon applies to any trader, natural or legal person, Cameroonian or foreign, who exercises within the national territory. It concerns all activities related to production, distribution and services. Public auctions practised by public officers and sworn officials or agents, occasional services vendors and service providers are excluded from its scope of application.

In Cameroon, any business should aim to contribute to the stimulation of activities of production of goods and services as well as competitiveness, creation of job-generating companies, rationalization and streamlining of goods and services distribution circuits, meeting customer needs both in terms of availability, quality of goods and services and price and fight against poverty. This law calls for the animation of the urban and rural commercial life.

However, any foreign commercial company that wants to establish itself to Cameroon to conduct business must have its head office based in Cameroon.

Law No. 2015/018 of 21st December 2015 which approves the new legal framework on Commercial Activities in Cameroon provides for administrative and criminal penalties. The Minister of Commerce is responsible for administrative sanctions, including the suspension of operations of any trader or professional who does not respect the obligations and prohibitions of the law or who refuses to submit to the supervision of sworn officers duly authorized.

1.3 RESEARCH QUESTIONS

1.3.1 Main Research Question

To what extent are the instruments regulating franchising as a technique of doing business in Cameroon effective for settling disputes resulting there from?

1.3.2 Specific Research Questions

1.3.2.1. What are the legal instruments regulating franchising?

1.3.2.2. What are the different formats or structures for carrying out franchising?

1.3.2.3. What is the nature of infringement in a franchise Agreement?

1.3.2.4. What can be done to improve upon the existing instruments regulating franchising in Cameroon? 

1.4 Research hypothesis

The regulation of disputes hinged on franchising as a technique for doing business in Cameroon requires the courts to draw inspiration from the practice in other countries.

1.5 Objectives of the research

1.5.1 Main Objective

To examine the effectiveness in dispute settlement of instruments regulating franchising as a technique of doing business in Cameroon

1.5.2        Specific Objectives

1 To ascertain the legal instruments regulating franchising

2 To examine the different formats or structures for carrying out franchising

3. To examine the nature of infringement in a franchise agreement;

4. To propose what can be done to improve the existing instruments regulating franchising in Cameroon

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