Mater Franchising arrangements would be the flavor of your day as it supplies the franchisor the main benefit of the franchisee's familiarity with the neighborhood environment; provides access to 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 existing regulatory restrictions on retail trading by foreign companies coupled 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 very first time. An average master franchise arrangement enables the master franchisee to develop the business in confirmed territory underneath the franchisor's brand and trademark with or without the proper to manufacture these products in respect with the franchisors' operating guidelines coupled with assured financial returns to the franchisor.
There is 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 want to quote a couple of lines from a report presented by the International Institute for the Unification of Private Law (UNIDROIT, an unbiased intergovernmental organization that India is a member) which states that "the foundation of a fruitful franchising industry in virtually any country lies in the existence of a "healthy commercial law environment" which includes been defined together with a 'general legislation on commercial contracts, with a satisfactory company law, where you will find sufficient notions of joint ventures, where intellectual property rights come in place and enforced and where companies can depend on ownership of trademarks and know-how along with 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 gauge the requirement for a brand new legislation, let's first understand a number 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 Usage of Intellectual Property Rights: IP rights are an integral part of most 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 perhaps a copyright, or perhaps a patent, invention, design or perhaps a trade secrets. The method of use of the IP rights and their protection against misuse is among the most important concerns of the Franchisor. A number of the disputes that arise during implementation of the franchise agreement relate to the scope and purpose of 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 right 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 such as 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 such as the Agreement on Trade Related Facets of Intellectual Property Rights (TRIPS), thereby offering protection to trademarks or manufacturers, 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 supply the services synonymous with him to the consumers in India. IPR laws have also 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 very sensitive and proactive pertaining to enforcement of infringement actions. It is therefore evident it is not the absence of IPR laws or its enforcement that result in potential disputes but insufficient carefully drafted and negotiated agreements involving the franchisor and the franchisee related to IPR issues that result in potential IP related litigations.
(2) Obligations of Franchisor and Franchisee: Another crucial issue that result in potential disputes amongst the parties relate to implementation of the obligations of a franchisee like 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 steadfastly keep up uniformity, reporting requirements, quality maintenance of the merchandise or services delivered; creation of an agency between franchisor and franchisee, appointment of sub-contractors to manufacture and sub-franchisee to offer these products and franchisor and franchisee's liability owing for 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 related to periodic training regarding the 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 any or all the franchise arrangements and provides for specific parameters for legally enforceable agreements, lawful object and purpose of 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 related to liquidated damages, enforcement of indemnification rights, agents and principal relationship and obligations thereto. It is not the lack of commercial law but insufficient carefully drafted agreements that generally fail the parties. It is therefore important that 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 this does not demand a specialized law that is already in existence in the shape of the Indian Contract Act but a reasonably detailed and well negotiated contract. In any case even a specialized law can just only provide a broad frame work, the facts and the nitty-gritty of the relationship needs to be always contractually agreed.
(3) Payment Terms: Delay in payment or non-payment of license and/or royalty payments might be another part of concern for the franchisor. Which means way and the days at which such payments are to be made must be carefully addressed. In the case the franchisor is 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 amount of 1% of domestic sales and 2% of exports without prior government approval. If the licensor also provides technical understand 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 want prior government approval. Detailed tax laws are actually set up to deal with the withholding tax liability on such payments that might get reduced based upon the provisions in the applicable double taxation avoidance agreement. The key issue is that both franchisor and franchisee should be produced aware in advance on the payment and taxation related regulations. DUI
(4) Duration, Renewal and Termination and its Consequences: Another serious concern of a franchisee could be the extendibility of the word of the franchising and licensing agreement. Typically, extension of the word is within the sole 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 word especially when the franchisor is set up with a number of other franchisees offering higher royalties. Another possible scenario is when 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 truly need a law to tackle with this specific abrupt termination or non-renewal situations. To begin with, it should 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 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 yet in the absence of specific clause authorizing and enabling either party to terminate the agreement, from the very nature of the agreement, that is private commercial transaction, the 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 underneath 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 should also be provided if both parties aren't prepared to continue. A number of the key post termination issues 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 will find adequate IPR protection laws against misuse and consequent infringement/passing off actions coupled with rights for permanent and mandatory injunctions underneath the Specific Relief Act, it is very important to supply provisions constraining the franchisee from using the IP rights of the franchisor and return of most confidential information obtained during the word of the agreement.
(ii) Protection of franchisees against negative covenants particularly concerning non-competition post termination. It must be understood that a negative covenant restraining the franchisee from directly or indirectly undertaking business competing with the business of the franchisor throughout the subsistence of the agreement may possibly not be violative of section 27 of the Contract Act, but post termination negative covenants may possibly not be enforceable under Indian laws. This in turn protects the franchisee against unreasonable negative covenants imposed by the franchisor post termination.
