Mater Franchising arrangements would be the flavor of the day since it provides the franchisor the benefit of the franchisee's knowledge of 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 risk of the franchisor. The current 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 consumers are some of the factors contribution to franchising being increasingly used as a type by foreign companies for entering India for the very first time. A normal master franchise arrangement enables the master franchisee to develop the company in confirmed territory under the franchisor's manufacturer and trademark with or without the best to manufacture the products in respect 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 want to quote several lines from a report presented by the International Institute for the Unification of Private Law (UNIDROIT, an unbiased intergovernmental organization that India is just a member) which states that "the building blocks of a successful franchising industry in just about 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 depend on ownership of trademarks and know-how as well as on confidentiality agreements' ;.The Indian legal environment is characterized by all these key attributes, a fact established by ever expanding international franchise relationships with India.
To judge the requirement for a fresh legislation, let us first understand some of the keys issues/concerns involving a franchising arrangement that generally contributes to potential disputes or disconnects involving the parties and how they're protected or may be protected within the realm of current Indian legislation:
(1) Licensing and Utilization of Intellectual Property Rights: IP rights are an important 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 perhaps a copyright, or perhaps a patent, invention, design or perhaps 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 few of the disputes that arise during implementation of the franchise agreement relate solely 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 host of IPR related laws like 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 like the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), thereby offering protection to trademarks or manufacturers, 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 offer the services synonymous with him to the consumers in India. IPR laws have already 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 regarding enforcement of infringement actions. It is therefore evident it's not the absence of IPR laws or its enforcement that lead to potential disputes but not enough carefully drafted and negotiated agreements involving the franchisor and the franchisee linked to IPR conditions 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 solely 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 market the 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 as to 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 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 not enough carefully drafted agreements that generally fail the parties. It is therefore important a 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.
All of this does not require a specialized law which can be already available in the shape of the Indian Contract Act but a fairly detailed and well negotiated contract. Whatever the case a good specialized law can just only provide a broad frame work, the important points and the nitty-gritty of the relationship has to be always contractually agreed.
(3) Payment Terms: Delay in payment or non-payment of license and/or royalty payments could be another part of concern for the franchisor. Therefore the manner in which and the times at which such payments are to be made must certanly be carefully addressed. In the event the franchisor is just a foreign entity, applicability of prior approvals and terms and conditions for foreign remittance ought to 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 would require prior government approval. Detailed tax laws happen to be in position to cope with the withholding tax liability on such payments that might get reduced depending upon the provisions in the applicable double taxation avoidance agreement. The key issue is that the franchisor and franchisee should be made aware beforehand 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 word of the franchising and licensing agreement. Typically, extension of the word is the only 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 word especially when the franchisor is arranged with many 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 particular abrupt termination or non-renewal situations. To begin with, it ought to be clearly understood that agreements entered into between private parties (whether under franchise domain or any other commercial arrangements) are terminable in nature. That 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, which can be private commercial transaction, exactly the same could be terminated even without assigning any reason by serving a fair 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 under 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 aren't ready to continue. A few of the key post termination conditions that lead to 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 under the Specific Relief Act, it is important to offer provisions constraining the franchisee from utilising the IP rights of the franchisor and return of confidential information obtained during the word of the agreement. Divorce
(ii) Protection of franchisees against negative covenants particularly associated with non-competition post termination. It should be understood a negative covenant restraining the franchisee from directly or indirectly undertaking business competing with the company of the franchisor through 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. As a result protects the franchisee against unreasonable negative covenants imposed by the franchisor post termination.
