Regulatory & Legal Framework - Do We Need a Franchising Law in India? 1

Regulatory & Legal Framework – Do We Need a Franchising Law in India?

It’s miles unnecessary to consolidate all the to be had legal guidelines beneath a specialized law in India.

Mater Franchising preparations are the taste of the day because it provides the franchisor the benefit of the franchisee’s know-how of the local environment; provides get right of entry to to nearby income and advertising understanding and channels; reduces funding; calls for negligible authorities approvals; offers freedom from recruitment of neighborhood staff and therefore lowers the economic chance of the franchisor. The cutting-edge regulatory regulations on retail trading with the aid of foreign groups coupled with the sustained economic boom; an ever-expanding marketplace with a thriving class of city customers; nice awareness among India consumers are a number of the elements contribution to franchising being increasingly used as a version by foreign companies for entering India for the first time. A traditional grasp franchise association enables the master franchisee to increase the business in a given territory beneath the franchisor’s logo call and trademark with or without the proper to manufacture the goods according to with the franchisors’ operating suggestions coupled with assured financial returns to the franchisor.


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There is lots of debate on the requirement of enacting a specialized regulation to regulate this growing area in India. Before I proceed with my thoughts on the issue, I would really like to quote some lines from a record offered by way of the International Institute for the Unification of Private Law (UNIDROIT, an impartial intergovernmental organization of which India is a member) which states that “the muse of a a hit franchising industry in any usa lies inside the life of a “healthful commercial law environment” which has been defined as one with a ‘popular rules on business contracts, with an ok company regulation, where there are sufficient notions of joint ventures, in which highbrow property rights are in location and enforced and wherein businesses can depend upon ownership of trademarks and understanding as well as on confidentiality agreements’. The Indian felony environment is characterized by means of some of these key attributes, a fact hooked up by means of ever-increasing international franchise relationships with India.

To examine the need for a new law, allow us to first recognize some of the keys problems/worries involving a franchising association that normally leads to ability disputes or disconnects between the events and the way they’re covered or can be covered within the realm of modern-day Indian regulation:

(1) Licensing and Use of Intellectual Property Rights: IP rights are a vital a part of all franchising arrangements and each franchising settlement includes transfer of a few form of IP right, either as a license of a trademark/provider mark/exchange call, or a copyright, or a patent, invention, layout or an alternate secrets. The way of use of the IP rights and their protection towards misuse is one of the most crucial worries of the Franchisor. Some of the disputes that get up throughout the implementation of the franchise agreement relating to the scope and cause of the trademark license, exclusivity of use and geographical scope, the safety of confidentiality, volume of a switch of the knowledge, misuse and damage caused to the logo and goodwill of the franchisor, and so on. Similarly, publish termination associated problems include unauthorized use of the trademarks publish termination, restricted right to use the logos for the purposes of disposal of pending stock (inside the absence of which the inventory may match waste), destruction of desk-bound containing emblems/exchange names, return and cessation of use of IP rights. India already has a bunch of IPR associated laws including the Trademark Act of 1940, Copyright Act, 1957, the Patent Act, and so on that provide for the widespread protection and enforcement mechanism for the highbrow property rights together with an everlasting and mandatory injunction towards infringement and passing off. India is also a signatory to the global conventions on intellectual property rights which includes the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), thereby imparting protection to emblems or logo names, as well as copyright and designs of the overseas franchisor. Recognition and protection are likewise prolonged to provider marks in India enabling the overseas franchisor to license its mark to a franchise to provide the services synonymous with him to the purchasers in India. IPR legal guidelines have additionally been recently amended to make them compliant with unique proper duties underneath TRIPS and hence, the criminal law meet international requirements for IPR protection. Even the Indian courts are quite sensitive and proactive in regards to enforcement of infringement movements. It is, therefore, glaring it isn’t always the absence of IPR laws or its enforcement that cause ability disputes but a loss of carefully drafted and negotiated agreements among the franchisor and the franchise related to IPR issues that cause capability IP related litigations.

(2) Obligations of Franchisor and Franchisee: Another critical difficulty that cause capacity disputes amongst the parties relate to implementation of the obligations of a franchisee together with the responsibilities and offerings to be rendered by way of the franchisee, the investment and infrastructure of the franchise, adherence to unique running hints or manual to hold uniformity, reporting requirements, first-class renovation of the product or services delivered; introduction of an enterprise among franchisor and franchisee, appointment of sub-contractors to fabricate and sub-franchisee to sell the goods and franchisor and franchisee’s liability thanks to their acts/omissions; meeting of annual market penetration goals; minimal inventory purchase/import obligations; monetary returns to the franchisor, such as royalty and rate. Similarly, responsibilities of the franchisor related to periodic schooling as to the behavior of commercial enterprise, upgrading the franchise with new techniques and technology, ongoing aid, hints on standard operational, control, accounting and administrative practices, joint advertising and advertising campaigns, sharing of advertising charges generally cause coronary heart burns to the franchise.India

The Indian Contract Act, 1872 is applicable to all of the franchise preparations and affords for particular parameters for legally enforceable agreements, lawful object, and purpose of an agreement, lawful consideration for an settlement, overall performance of an agreement, statutory interventions in unfair or unconscionable transactions, consequences of fraud, misrepresentation and undue have an impact on, voidability and rescission/repudiation of settlement, contracts in restraint of exchange, contingent and conditional contracts, performance of reciprocal guarantees, discharge and frustration of contracts, outcomes of breach and rights associated with liquidated damages, enforcement of indemnification rights, dealers and important dating and duties thereto. It isn’t the shortage of industrial regulation but a loss of carefully drafted agreements that normally fail the parties. It is therefore essential that a franchise tries to bridge all potential gaps via figuring out and studying “what if?” conditions maintaining in perspective the franchisee’s monetary, technical, production, advertising, human useful resource, sales and business making plans capabilities.

All of this doesn’t require a specialized regulation which is already in life within the form of the Indian Contract Act but a reasonably specific and nicely negotiated agreement. In any case, even a specialized law can simplest provide a broad framework, the details and the nitty-gritty of the connection need to be constantly contractually agreed.

(3) Payment Terms: Delay in charge or non-price of license and/or royalty bills can be every other region of the issue for the franchisor. Therefore the manner in which and the instances in which such payments are to be made ought to be carefully addressed. In the event the franchisor is an overseas entity, the applicability of prior approvals and phrases and conditions for foreign remittance must be informed to the foreign celebration. The Foreign Exchange Management Act, 1999 and the Regulations made there underneath particularly address the outbound charge associated issues. For example, an Indian franchisee can remit royalty closer to the license of the trademark to the amount of one% of home income and 2% of exports without prior government approval. If the licensor also affords technical recognize how to the Indian licensee, the Indian enterprise can remit royalty up to 5% of domestic sales and 8% of exports and lump sum charge of up to US$ 2 million without previous authorities approval. Payment of royalty above the chances detailed above could need earlier government approval. Detailed tax laws are already in location to cope with the withholding tax liability on such bills which may get reduced depending upon the provisions within the relevant double taxation avoidance agreement. The key difficulty is that each the franchisor and franchisee have to be made aware earlier than the hand on the price and taxation related policies.

(4) Duration, Renewal and Termination and its Consequences: Another severe subject of a franchise is the extendibility of the term of the franchising and licensing agreement. Typically, the extension of the term is at the sole discretion of the franchisor based on annual sales turnovers and overall performance of the franchise. Quite regularly a franchise struggles with the franchisor for renewal of the time period mainly when the franchisor is covered up with many other franchises providing higher royalties. The different possible scenario is when a franchise is abruptly knowledgeable of an abrupt termination of the franchise settlement leaving the franchise with expenses of salaries, infrastructure, and hobby on working capital and other debts. Now, will we need a regulation to tackle this abrupt termination or non-renewal situations? First of all, it has to be virtually understood that every one agreement entered into between private events (whether under franchise area or another business arrangements) are terminable in nature. This is regardless of the phrases in the franchise agreement that the settlement is interminable. The Indian Contract Act 1872 and the Specific Relief Act, 1963 supported by using various Supreme Court judgments are clear that even inside the absence of specific clause authorizing and enabling both birthday celebration to terminate the agreement, from the very nature of the agreement, which is non-public business transaction, the same will be terminated even without assigning any cause by way of serving a reasonable note.Legal

Keeping this in perspective, it is really useful to negotiate for an open-ended time period (i.E., no fixed time period) settlement with suitable termination clauses on breach with adequate observe duration for rectification of breach/default. Though non-provision of the agreed observe will render the franchisor accountable for damages below the Indian Contract Act, it’s miles advisable to stipulate liquidated damages or significant termination fees payable through the franchisor on breach of explicit termination provisions. Suitable go out alternatives need to also be supplied if each event isn’t inclined to retain.

Some of the keys put up termination troubles that lead to potential dispute and are competently covered by the prevailing Indian laws consist of:

(i) Misuse of IPR rights and Confidential Information post-termination is usually a matter of the problem for the franchisor. While there are adequate IPR protection legal guidelines against misuse and consequent infringement/passing off moves coupled with rights for everlasting and mandatory injunctions under the Specific Relief Act, it’s far important to offer provisions constraining the franchisee from using the IP rights of the franchisor and go back of all private records received in the course of the time period of the settlement.

(ii) Protection of franchisees towards terrible covenants, in particular, relating to non-opposition put up termination. It must be understood that a negative covenant restraining the franchisee from immediately or circuitously assignment business competing with the commercial enterprise of the franchisor in the course of the subsistence of the settlement may not be violative of phase 27 of the Contract Act, however, post-termination poor covenants may not be enforceable underneath Indian criminal law. This, in turn, protects the franchise in opposition to unreasonable negative covenants imposed with the aid of the franchisor put up termination.

(iii) Inventory dealing with: Inventory coping with is a definite ache location trouble post-termination. Provisions associated with re-buy of the unsold inventory/raw material publish termination, destruction of sub-preferred products or extension of the trademark license to allow the franchisee sell the goods within an agreed time period are vital. Vague clauses together with inventory shall be disposed as consistent with at the same time agreed phrases and conditions need to be strictly averted.

(5) Governing legal guidelines and implementation of laws: Choice of governing regulation and region of jurisdiction is some other critical issue that has to be carefully idea upon earlier than being documented. Often jurisdictional hardships deter the events from taking corrective actions towards breach of the franchise agreement. Indian Code of Civil Procedure confers authority to a court docket to adjudicate upon a dispute both based on territorial jurisdiction; private jurisdiction; concern-rely jurisdiction, and so forth. Detailed provisions supported via judicial precedents are already to be had to properly manual the events to deal with the jurisdiction problems.

In nutshell, most of the vital problems which can be count number of a situation to the franchise and franchisor can be dealt under a cautiously drafted and negotiated franchise settlement.

I am conscious that there might be certain worries with regard to the bargaining energy of the franchise to firmly negotiate the settlement towards a longtime franchisor. In this regard, associations together with Franchising Association of India can play a crucial position. For example, FAI can put together and introduce a code of behavior for franchise arrangement wherein the franchisors should provide complete disclosures to every potential franchisee so that every potential franchise can make a well knowledgeable selection. For e.G., the Uniform Franchise Offering Circular (UFOC) format within the USA, approved by way of the Federal Trade Commission includes 23 categories of information that should be furnished by means of the franchisor to a potential franchisee at least 10 commercial enterprise days before it makes any charge to the franchisor or signs the settlement. As stated above, this doesn’t require regulation of a brand new law however implementation of a code of conduct via Franchising Association of India. The Association can prepare and require Franchisors to mandatory provide information inclusive of company history and monetary statements of the franchisor, the litigation it faces, intellectual property and proprietary facts, etc. Similarly, individuals of FAI ought to be capable of guide the small franchisees approximately the capability publicity within the given franchise arrangement and if required negotiate on behalf of the franchise.

If you’re looking from the patron stand factor, we’ve got client safety legal guidelines that allow a client to file proceedings with the purchaser boards for unfair or restrictive exchange practices followed by way of the franchise in the supply of products or services by way of the franchise. Similarly, antitrust or restrictive change practices promoted via the franchise association may be addressed through Monopolies and Restrictive Trade Practices Act, 1969 and to be carried out proposed Competition Act. The franchisor and the franchise could want to ensure that their practices do now not classify as monopolistic or restrictive otherwise the Commission below the MRTP Act can furnish injunction to prevent such change practices and can award reimbursement for any losses or harm suffered thereby. Tortious liability could also rise up out a franchise relationship on the occasion of negligence leading to loss or damages to third parties or in the event of the most important-agent relationship between the franchisor and the franchise. In such instances, the franchisor might be held answerable for any torts dedicated by way of the franchisee at some point of the direction of his commercial enterprise.

Cons of a New Law: Having a host of laws, I, in my opinion, feel that advent of specialized law at this degree will as an alternative have a negative effect at the boom at the franchise industry:

– Most advanced international locations do not have franchise specific law or changed into brought lots later: The United States of America which is the inventor of all varieties of franchise arrangements did no longer have any franchise specific law for true 50 years. Since the time of improvement of the concept at some point of 1938 till 1993, there was no try made to adjust franchising inside the U.S. It becomes simplest in 1993 that the Uniform Franchising Offering Circular (“UFOC”) Guidelines were adopted in the USA as the endorsed layout for franchise disclosure documents on the State degree. By 1995, the brand new UFOC Guidelines had been adopted by every of the state franchise regulatory government that required registration of franchise offerings.

The United Kingdom does no longer have any specific rules or law, which regulates franchising or foreign franchising organizations. The European Franchise Federation has however prescribed “European Code of Ethics for Franchising” that enables prospective franchisee to go into any binding franchise courting with full prior knowledge. Similarly, UNIDROIT has in September 2002 followed a Model Franchise Disclosure Law requiring the franchisors to provide largely written disclosures to prospective franchisees at a pre-contractual degree.

Even Singapore that’s domestic to many franchises from around the sector, there does now not exist any specific rules on franchising in Singapore.

Even inside the international locations wherein there are franchise particular legal guidelines, the reason is to require considerable disclosures to the prospective franchisees which in my opinion can be delivered via an affiliation like Franchising Association of India, wherein the franchisor and franchisee adhere to the code of conduct certain by using the Association.

– Will impede the boom of the industry: Given the truth that the franchising area continues to be inside the nascent stage of evolution and improvement, we are nevertheless no longer ceased with a maximum of the realistic troubles concerned in implementing and dealing with a franchise relationship. Therefore, the creation of a specific regulation may not most effective fail to address all of the issues but may actually have an unfavorable effect by way of unnecessarily burdening the franchisor and franchises with regulatory and reporting compliance/requirements and may additionally deter the potential worldwide franchisor to return to India. It may also prove a very theoretical law with none realistic implementation heritage of the conditions and might want common modifications and amendments.

– Most problems may be contractually negotiated and taken care off by contractual arrangement: As already mentioned, most of the issues of the parties can be together discussed and agreed to a negotiated agreement. Even in any other case, no single regulation can deal with the complex nature of issues involved in a franchise association which ranges from the safety of IP rights to product liability, trade manage issues, labor laws, enforcement of contractual rights, and so on. Further, enforcement problems among the events to the settlement i.E. The franchisor and the franchise could be ruled via the noticeable law of the territory and dispute resolution mechanism agreed between the parties, might contend with the enforcement of such rights. The compulsory decision in dispute via a self-imposed regulator may not be wholesome for a speedy boom of this quarter. I experience that the day and time for a specialized franchise law are but to come and it could also be premature to enact this sort of law.

O Conclusion

In view of the foregoing, the time has as yet no longer arrived to have a franchise unique regulation. It would be within the hobby of the franchise industry, which is still evolving and is miles away from achieving its highest capability, that instead of advocating a want for a new law to modify the franchise enterprise, it would be really useful to permit the industry breadth, experience, research, develop and develop in an environment of freedom and competitiveness (though regulated via the prevailing regulation).