Mater Franchising arrangements are the flavor of the day because it supplies the franchisor the main benefit of the franchisee's understanding of the area environment; provides usage of local sales and marketing expertise and channels; reduces investment; requires negligible government approvals; provides freedom from recruitment of local workforce and consequently lowers the financial risk of the franchisor. The present regulatory restrictions on retail trading by foreign companies in conjunction with sustained economic growth; ever expanding market with a thriving class of urban consumers; quality consciousness amongst India individuals are a few of the factors contribution to franchising being increasingly used as a design by foreign companies for entering India for the first time. An average master franchise arrangement enables the master franchisee to produce the business in certain territory underneath the franchisor's brand name and trademark with or without the best to manufacture the merchandise in accordance with the franchisors' operating guidelines in conjunction with assured financial returns to the franchisor.
There is a lot of discussion on the necessity of enacting a specialized law to regulate this growing sector in India. Before I proceed with my thoughts about them, I wish to quote several lines from a report presented by the International Institute for the Unification of Private Law (UNIDROIT, an independent intergovernmental organization of which India is a member) which states that "the inspiration of an effective franchising industry in virtually any country lies in the existence of a "healthy commercial law environment" which includes been defined as you with a 'general legislation on commercial contracts, with an adequate company law, where you can find sufficient notions of joint ventures, where intellectual property rights are in place and enforced and where companies can count on ownership of trademarks and know-how in addition to on confidentiality agreements' ;.The Indian legal environment is characterized by each one of these key attributes, an undeniable fact established by ever expanding international franchise relationships with India.
To judge the necessity for a new legislation, let's first understand a few of the keys issues/concerns involving a franchising arrangement that generally results in potential disputes or disconnects involving the parties and how they're protected or can be protected within the realm of current Indian legislation:
(1) Licensing and Utilization of Intellectual Property Rights: IP rights are an integrated part of franchising arrangements and every franchising agreement involves transfer of some kind of IP right, either as a license of a trademark/service mark/trade name, or perhaps a copyright, or perhaps a patent, invention, design or perhaps a trade secrets. The manner of use of the IP rights and their protection against misuse is certainly one of the main concerns of the Franchisor. A few of the disputes that arise during implementation of the franchise agreement relate with the scope and intent behind the trademark license, exclusivity of use and geographical scope, protection of confidentiality, extent of transfer of the know-how, misuse and damage caused to the brand and goodwill of the franchisor, etc. Similarly, post termination related issues include unauthorized use of the trademarks post termination, limited to use the trademarks for the purposes of disposal of pending inventory (in the absence of which the inventory may go waste), destruction of stationary containing trademarks/trade names, return and ceassation of use of IP rights. India already has a bunch of IPR related laws including the Trademark Act of 1940, Copyright Act, 1957, the Patent Act, etc that provide for extensive protection and enforcement mechanism for the intellectual property rights including permanent and mandatory injunctions against infringement and passing off. India can be a signatory to the international conventions on intellectual property rights including the Agreement on Trade Related Facets of Intellectual Property Rights (TRIPS), thereby offering protection to trademarks or brands, in addition to copyright and designs of the foreign franchisor. Recognition and protection can be extended to service marks in India enabling the foreign franchisor to license its mark to a franchisee to supply the services synonymous with him to the consumers in India. IPR laws have been recently amended to make them compliant with exclusive right obligations under TRIPS and accordingly, the laws meet international standards for IPR protection. Even the Indian courts are quite sensitive and proactive with regard to enforcement of infringement actions. It is therefore evident it's not the absence of IPR laws or its enforcement that result in potential disputes but lack of carefully drafted and negotiated agreements involving the franchisor and the franchisee linked to IPR conditions that result in potential IP related litigations.
(2) Obligations of Franchisor and Franchisee: Another crucial issue that result in potential disputes between the parties relate with implementation of the obligations of a franchisee including the duties and services to be rendered by the franchisee, the investment and infrastructure of the franchise, adherence to specific operating guidelines or manual to keep up uniformity, reporting requirements, quality maintenance of the product or services delivered; creation of an agency between franchisor and franchisee, appointment of sub-contractors to manufacture and sub-franchisee to offer the merchandise and franchisor and franchisee's liability owing to their acts/omissions; meeting of annual market penetration targets; minimum stock purchase/import obligations; financial returns to the franchisor, including royalty and fee. Similarly, obligations of the franchisor linked to periodic training regarding conduct of business, upgrading the franchisee with new methods and technologies, ongoing support, recommendations on general operational, management, accounting and administrative practices, joint marketing and advertising campaigns, sharing of advertising costs generally cause heart burns to the franchisee.
The Indian Contract Act, 1872 is applicable to all the franchise arrangements and provides for specific parameters for legally enforceable agreements, lawful object and intent behind an agreement, lawful consideration for an agreement, performance of an agreement, statutory interventions in unfair or unconscionable transactions, consequences of fraud, misrepresentation and undue influence, voidability and rescission/repudiation of agreement, contracts in restraint of trade, contingent and conditional contracts, performance of reciprocal promises, discharge and frustration of contracts, consequences of breach and rights linked to liquidated damages, enforcement of indemnification rights, agents and principal relationship and obligations thereto. It is not the possible lack of commercial law but lack of carefully drafted agreements that generally fail the parties. It is therefore important that the franchisee tries to bridge all potential gaps by identifying and analyzing "imagine if?" situations keeping in perspective the franchisee's financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities. Estate
This does not require a specialized law which can be already in existence in the form of the Indian Contract Act but a reasonably detailed and well negotiated contract. In any case a specialized law can only provide a wide frame work, the facts and the nitty-gritty of the connection must be always contractually agreed.
(3) Payment Terms: Delay in payment or non-payment of license and/or royalty payments might be another section of concern for the franchisor. Therefore the manner in which and the occasions at which such payments are to be made must certanly be carefully addressed. In case the franchisor is a foreign entity, applicability of prior approvals and terms and conditions for foreign remittance must certanly be informed to the foreign party. The Foreign Exchange Management Act, 1999 and the Regulations made there under specifically address the outbound payment related issues. As an example, an Indian franchisee can remit royalty towards license of trademark upto the total amount of 1% of domestic sales and 2% of exports without prior government approval. If the licensor also provides technical know how to the Indian licensee, the Indian company can remit royalty upto 5% of domestic sales and 8% of exports and lump sum payment of upto US$ 2 million without prior government approval. Payment of royalty above the percentages specified above would require prior government approval. Detailed tax laws are already in position to manage the withholding tax liability on such payments which may get reduced dependant on the provisions in the applicable double taxation avoidance agreement. The important thing issue is that both the franchisor and franchisee should be produced aware before hand on the payment and taxation related regulations.
(4) Duration, Renewal and Termination and its Consequences: Another serious concern of a franchisee may be the extendibility of the definition of of the franchising and licensing agreement. Typically, extension of the definition of is the sole discretion of the franchisor based on annual sales turnovers and performance of the franchisee. Quite often a franchisee struggles with the franchisor for renewal of the definition of especially once the franchisor is prearranged with a great many other franchisees offering higher royalties. Another possible scenario is whenever a franchisee is suddenly informed of an abrupt termination of the franchise agreement leaving the franchisee with costs of salaries, infrastructure and interest on working capital and other debts. Now do we need a law to tackle with this abrupt termination or non-renewal situations. First of all, it must be clearly understood that most agreements entered into between private parties (whether under franchise domain or any other commercial arrangements) are terminable in nature. This really is regardless of the terms in the franchise agreement that the contract is interminable. The Indian Contract Act 1872 and the Specific Relief Act, 1963 supported by various Supreme Court judgments are clear that even yet in the absence of specific clause authorizing and enabling either party to terminate the agreement, from ab muscles nature of the agreement, which can be private commercial transaction, exactly the same might be terminated even without assigning any reason by serving an acceptable notice.
Keeping this in perspective, it's advisable to negotiate for an open ended term (i.e., no fixed term) agreement with suitable termination clauses on breach with adequate notice period for rectification of breach/default. Though non-provision of the agreed notice will render the franchisor liable for damages underneath the Indian Contract Act, it's advisable to stipulate liquidated damages or substantial termination fees payable by the franchisor on breach of express termination provisions. Suitable exit options also needs to be provided if both parties are not willing to continue. A few of the key post termination conditions that result in potential dispute and are adequately protected by the present Indian laws include:
(i) Misuse of IPR rights and Confidential Information post termination is generally a mater of concern for the franchisor. While you can find adequate IPR protection laws against misuse and consequent infringement/passing off actions in conjunction with rights for permanent and mandatory injunctions underneath the Specific Relief Act, it is very important to supply provisions constraining the franchisee from utilising the IP rights of the franchisor and return of confidential information obtained during the definition of of the agreement.
(ii) Protection of franchisees against negative covenants particularly associated with non-competition post termination. It ought to be understood that the negative covenant restraining the franchisee from directly or indirectly undertaking business competing with the business of the franchisor through the subsistence of the agreement may not be violative of section 27 of the Contract Act, but post termination negative covenants may not be enforceable under Indian laws. As a result protects the franchisee against unreasonable negative covenants imposed by the franchisor post termination.
