Mater Franchising arrangements will be the flavor of your day because it offers the franchisor the benefit of the franchisee's knowledge of the local environment; provides use 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 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 people are a few of the factors contribution to franchising being increasingly used as a product by foreign companies for entering India for the very first time. An average master franchise arrangement enables the master franchisee to produce the company in confirmed territory under the franchisor's manufacturer and trademark with or without the right to manufacture the merchandise relating with the franchisors' operating guidelines coupled with assured financial returns to the franchisor.
There will be 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 a few lines from a report presented by the International Institute for the Unification of Private Law (UNIDROIT, an independent intergovernmental organization which India is a member) which states that "the building blocks of a fruitful franchising industry in any country lies in the existence of a "healthy commercial law environment" which has 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 have been in place and enforced and where companies can rely on ownership of trademarks and know-how as well as on confidentiality agreements' ;.The Indian legal environment is characterized by all these key attributes, an undeniable fact established by ever expanding international franchise relationships with India.
To gauge the necessity for a new legislation, let us first understand a few of the keys issues/concerns involving a franchising arrangement that generally leads to potential disputes or disconnects between the parties and how they are protected or could be protected within the realm of current Indian legislation:
(1) Licensing and Usage of Intellectual Property Rights: IP rights are an integrated part of all franchising arrangements and every franchising agreement involves transfer of some type 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 use of the IP rights and their protection against misuse is certainly one of the most important concerns of the Franchisor. A number of the disputes that arise during implementation of the franchise agreement relate genuinely 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 directly to utilize 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 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 such as the Agreement on Trade Related Facets of Intellectual Property Rights (TRIPS), thereby offering protection to trademarks or brand names, as well as 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 produce 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's therefore evident it is not the absence of IPR laws or its enforcement that lead to potential disputes but not enough carefully drafted and negotiated agreements between the franchisor and the franchisee related to IPR issues that lead to potential IP related litigations.
(2) Obligations of Franchisor and Franchisee: Another crucial issue that lead to potential disputes amongst the parties relate genuinely 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 merchandise or services delivered; creation of an agency between franchisor and franchisee, appointment of sub-contractors to manufacture and sub-franchisee to market the merchandise and franchisor and franchisee's liability owing with 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 offers up 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's not the lack of commercial law but not enough 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 will be already available in the form of the Indian Contract Act but a fairly detailed and well negotiated contract. Regardless a specialized law can only provide a wide frame work, the facts and the nitty-gritty of the connection has to be always contractually agreed.
(3) Payment Terms: Delay in payment or non-payment of license and/or royalty payments could possibly be another area of concern for the franchisor. Which means way and the days at which such payments can be made should be carefully addressed. In case the franchisor is a foreign entity, applicability of prior approvals and terms and conditions for foreign remittance must 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 quantity 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 will need prior government approval. Detailed tax laws already are set up to deal with the withholding tax liability on such payments which can get reduced based upon the provisions in the applicable double taxation avoidance agreement. The key issue is that both the franchisor and franchisee should be produced aware in advance 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 word of the franchising and licensing agreement. Typically, extension of the word is within the only real discretion of the franchisor centered on annual sales turnovers and performance of the franchisee. Quite often a franchisee struggles with the franchisor for renewal of the word especially when the franchisor is prearranged with 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. To begin with, it ought to 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 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 in the absence of specific clause authorizing and enabling either party to terminate the agreement, from the very nature of the agreement, which will be private commercial transaction, the exact same could possibly be terminated even without assigning any reason by serving an acceptable 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 should also be provided if both parties are not ready to continue. DUI A number of the key post termination issues that lead to potential dispute and are adequately protected by the prevailing 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 coupled with rights for permanent and mandatory injunctions under the Specific Relief Act, it is essential to supply provisions constraining the franchisee from utilizing the IP rights of the franchisor and return of all confidential information obtained during the word 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 company of the franchisor during 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.
