Mater Franchising arrangements are the flavor of your day since it provides the franchisor the advantage of the franchisee's familiarity with the local 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 danger 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 number of the factors contribution to franchising being increasingly used as a type 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 under the franchisor's brand name and trademark with or without the proper to manufacture these products in accordance with the franchisors' operating guidelines in conjunction with assured financial returns to the franchisor.
There will be a lot of discussion on the requirement of enacting a specialized law to regulate this growing sector in India. Before I proceed with my thoughts on the subject, I wish to quote a couple of lines from a written report presented by the International Institute for the Unification of Private Law (UNIDROIT, an independent intergovernmental organization which India is really a member) which states that "the foundation of an effective franchising industry in just about any country is based on the existence of a "healthy commercial law environment" that has been defined as you with a 'general legislation on commercial contracts, with an adequate company law, where you will find sufficient notions of joint ventures, where intellectual property rights are in place and enforced and where companies can rely on ownership of trademarks and know-how along with on confidentiality agreements' ;.The Indian legal environment is characterized by every one of these key attributes, a fact established by ever expanding international franchise relationships with India.
To gauge the need for a fresh legislation, let's first understand a number of the keys issues/concerns involving a franchising arrangement that generally contributes to potential disputes or disconnects between the parties and how they are protected or can be protected within the realm of current Indian legislation:
(1) Licensing and Use of Intellectual Property Rights: IP rights are an intrinsic part of franchising arrangements and every franchising agreement involves transfer of some form of IP right, either as a license of a trademark/service mark/trade name, or even a copyright, or even a patent, invention, design or even a trade secrets. The types of utilization of the IP rights and their protection against misuse is among the most crucial concerns of the Franchisor. A number of the disputes that arise during implementation of the franchise agreement relate to the scope and intent behind the trademark license, exclusivity of good 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 utilization of the trademarks post termination, limited to utilize the trademarks for the purposes of disposal of pending inventory (in the lack of that your inventory may go waste), destruction of stationary containing trademarks/trade names, return and ceassation of utilization 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 offer for extensive protection and enforcement mechanism for the intellectual property rights including permanent and mandatory injunctions against infringement and passing off. India can also be a signatory to the international conventions on intellectual property rights including the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), thereby offering protection to trademarks or brand names, along with copyright and designs of the foreign franchisor. Recognition and protection can also be extended to service marks in India enabling the foreign franchisor to license its mark to a franchisee to provide the services synonymous with him to the consumers in India. Immigrants IPR laws have been recently amended to produce them compliant with exclusive right obligations under TRIPS and accordingly, the laws meet international standards for IPR protection. Even the Indian courts can be sensitive and proactive pertaining to enforcement of infringement actions. It's therefore evident it is not the lack of IPR laws or its enforcement that cause potential disputes but lack of carefully drafted and negotiated agreements between the franchisor and the franchisee linked to IPR issues that cause potential IP related litigations.
(2) Obligations of Franchisor and Franchisee: Another crucial issue that cause potential disputes amongst the parties relate to 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 maintain 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 sell these products 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 or any the franchise arrangements and offers up 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's not the possible lack of commercial law but lack of carefully drafted agreements that generally fail the parties. It's therefore important a franchisee tries to bridge all potential gaps by identifying and analyzing "what if?" situations keeping in perspective the franchisee's financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities.
All of this does not demand a specialized law which is already in existence in the shape of the Indian Contract Act but a reasonably detailed and well negotiated contract. Regardless a specialized law can just only provide a wide frame work, the facts and the nitty-gritty of the partnership needs to be always contractually agreed.
(3) Payment Terms: Delay in payment or non-payment of license and/or royalty payments might be another area of concern for the franchisor. Which means way and the changing times at which such payments are to be made should be carefully addressed. In the event the franchisor is really a foreign entity, applicability of prior approvals and terms and conditions for foreign remittance should really 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. For instance, an Indian franchisee can remit royalty towards license of trademark upto the quantity of 1% of domestic sales and 2% of exports without prior government approval. If the licensor also provides technical learn 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 need prior government approval. Detailed tax laws happen to be in place to cope with the withholding tax liability on such payments which might get reduced based upon the provisions in the applicable double taxation avoidance agreement. The important thing issue is that the franchisor and franchisee should be manufactured aware in advance on the payment and taxation related regulations.
(4) Duration, Renewal and Termination and its Consequences: Another serious concern of a franchisee could be the extendibility of the definition of of the franchising and licensing agreement. Typically, extension of the definition of is within the only discretion of the franchisor centered on annual sales turnovers and performance of the franchisee. Frequently a franchisee struggles with the franchisor for renewal of the definition of especially once the franchisor is lined up with many other franchisees offering higher royalties. The other 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 want a law to tackle with this abrupt termination or non-renewal situations. To begin with, it must be clearly understood that most agreements entered into between private parties (whether under franchise domain or some other commercial arrangements) are terminable in nature. This really is whatever 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 in the lack of specific clause authorizing and enabling either party to terminate the agreement, from the very nature of the agreement, which is private commercial transaction, the exact same might be terminated even without assigning any reason by serving a reasonable notice.
Keeping this in perspective, it is 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 under the Indian Contract Act, it is advisable to stipulate liquidated damages or substantial termination fees payable by the franchisor on breach of express termination provisions. Suitable exit options must also be provided if both parties aren't ready to continue. A number of the key post termination issues that cause potential dispute and are adequately protected by the existing Indian laws include:
(i) Misuse of IPR rights and Confidential Information post termination is generally a mater of concern for the franchisor. While you will find adequate IPR protection laws against misuse and consequent infringement/passing off actions in conjunction with rights for permanent and mandatory injunctions under the Specific Relief Act, it is important to provide provisions constraining the franchisee from utilizing 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 concerning non-competition post termination. It ought to be understood a negative covenant restraining the franchisee from directly or indirectly undertaking business competing with the business of the franchisor during 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. This in turn protects the franchisee against unreasonable negative covenants imposed by the franchisor post termination.
