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

Mater Franchising arrangements would be the flavor of the day since it provides the franchisor the advantage of the franchisee’s knowledge from the local environment; provides use of local sales and advertising expertise and channels; decreases investment; requires negligible federal government approvals; provides freedom from recruitment of local workforce and therefore lowers the financial risk from the franchisor. The current regulatory limitations on retail trading by foreign companies in conjunction with sustained economic growth; ever expanding market having a thriving class of city consumers; quality consciousness amongst India consumers are a few of the factors contribution to franchising being increasingly used like a model by foreign businesses for entering India for the very first time. A typical master business arrangement enables the master franchisee to build up the business in confirmed territory under the franchisor’s brand and trademark with or with no right to manufacture the products prior to the franchisors’ operating guidelines in conjunction with assured financial returns towards the franchisor.

There is lots of discussion on the dependence on enacting a specialized law to manage this growing sector within India. Before I proceed with my thoughts about them, I would like to quote several lines from a report presented through the International Institute for the actual Unification of Private Regulation (UNIDROIT, an independent intergovernmental organization which India is a member) that states that “the foundation of the successful franchising industry in a country lies in the existence of the “healthy commercial law environment” that has been defined as one having a ‘general legislation on industrial contracts, with an sufficient company law, where you will find sufficient notions of combined ventures, where intellectual property rights have been in place and enforced as well as where companies can depend on ownership of trademarks and know-how in addition to on confidentiality agreements’. The Indian legal environment is seen as a all these key characteristics, a fact established through ever expanding international business relationships with India.

To judge the need for a brand new legislation, let us first understand a few of the keys issues/concerns involving the franchising arrangement that generally results in potential disputes or disconnects between your parties and how they’re protected or can be protected inside the realm of current Indian native legislation:

(1) Licensing and Utilization of Intellectual Property Rights: IP rights are a fundamental element of all franchising arrangements as well as every franchising agreement involves transfer of some type of IP right, either like a license of a trademark/service mark/trade title, or a copyright, or perhaps a patent, invention, design or perhaps a trade secrets. The manner of utilization of the IP rights as well as their protection against misuse is among the most important concerns from the Franchisor. Some of the conflicts that arise during implementation from the franchise agreement relate towards the scope and purpose from the trademark license, exclusivity useful and geographical scope, safety of confidentiality, extent of transfer from the know-how, misuse and damage caused towards the brand and goodwill from the franchisor, etc. Similarly, post termination related issues include unauthorized utilization of the trademarks post end of contract, limited right to make use of the trademarks for the reasons of disposal of impending inventory (in the lack of which the inventory might go waste), destruction associated with stationary containing trademarks/trade titles, return and ceassation useful of IP rights. India already includes a host of IPR related laws such as the Trademark Act of 1940, Copyright laws Act, 1957, the Obvious Act, etc that offer extensive protection and enforcement mechanism for that intellectual property rights such as permanent and mandatory injunctions towards infringement and passing away. India is also a signatory towards 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 brands, as well as copyright and designs from the foreign franchisor. Recognition and protection can also be extended to service represents in India enabling the actual foreign franchisor to license its mark to some franchisee to provide the actual services synonymous with him towards the consumers in India. IPR laws are also recently amended to make sure they are compliant with exclusive correct obligations under TRIPS as well as accordingly, the laws fulfill international standards for IPR safety. Even the Indian courts are very sensitive and proactive regarding enforcement of infringement measures. It is therefore evident it’s not the absence of IPR laws and regulations or its enforcement that result in potential disputes but insufficient carefully drafted and negotiated agreements between your franchisor and the franchisee associated with IPR issues that result in potential IP related litigations.

(2) Responsibilities of Franchisor and Franchisee: Another crucial issue that result in potential disputes amongst the parties connect with implementation of the responsibilities of a franchisee like the duties and services to become rendered by the franchisee, the investment and infrastructure from the franchise, adherence to specific working guidelines or manual to keep uniformity, reporting requirements, quality maintenance from the product or services shipped; creation of an company between franchisor and franchisee, appointment of sub-contractors in order to manufacture and sub-franchisee to market the products and franchisor and franchisee’s liability because of their acts/omissions; meeting associated with annual market penetration focuses on; minimum stock purchase/import responsibilities; financial returns to the actual franchisor, including royalty as well as fee. Similarly, obligations of the franchisor associated with periodic training regarding the conduct of business, improving the franchisee with brand new methods and technologies, continuing support, recommendations on common operational, management, accounting as well as administrative practices, joint advertising and marketing campaigns, sharing of advertising expenses generally cause heart burns towards the franchisee.

The Indian Agreement Act, 1872 is applicable to any or all the franchise arrangements and offers for specific parameters with regard to legally enforceable agreements, lawful object and reason for an agreement, lawful consideration to have an agreement, performance of a good agreement, statutory interventions within unfair or unconscionable dealings, consequences of fraud, misrepresentation as well as undue influence, voidability as well as rescission/repudiation of agreement, agreements in restraint of industry, contingent and conditional agreements, performance of reciprocal guarantees, discharge and frustration associated with contracts, consequences of breach and rights associated with liquidated damages, enforcement associated with indemnification rights, agents as well as principal relationship and responsibilities thereto. It is not the possible lack of commercial law but insufficient carefully drafted agreements which generally fail the events. It is therefore important that the franchisee tries to link all potential gaps through identifying and analyzing “what in the event that? ” situations keeping within perspective the franchisee’s monetary, technical, manufacturing, marketing, human being resource, sales and company planning capabilities.

All of this doesn’t require a specialized law that is already in existence as the Indian Contract Act but a reasonably detailed and well discussed contract. In any case a specialized law can only give a broad frame work, the details and the actual nitty-gritty of the relationship needs to be always contractually agreed.

(3) Repayment Terms: Delay in payment or even non-payment of license and/or royalty payments might be another area of concern for that franchisor. Therefore the way and the times where such payments should be made must be very carefully addressed. In the event the franchisor is really a foreign entity, applicability of prior approvals and conditions and terms for foreign remittance ought to be informed to the international party. The Foreign Trade Management Act, 1999 and also the Regulations made there below specifically address the outbound repayment related issues. For example, an Indian franchisee may remit royalty towards permit of trademark upto the quantity of 1% of domestic product sales and 2% of exports without having prior government approval. If the licensor also provides technical understand how to the Indian licensee, the actual Indian company can remit vips upto 5% of household sales and 8% associated with exports and lump amount payment of upto US$ two million without prior federal government approval. Payment of royalty over the percentages specified above would want prior government approval. Detailed tax laws happen to be in place to cope with the withholding tax legal responsibility on such payments which might get reduced depending upon the provisions within the applicable double taxation deterrence agreement. The key issue is that both franchisor and franchisee ought to be made aware before hand about the payment and taxation associated regulations.

(4) Duration, Renewal and Termination and it is Consequences: Another serious concern of the franchisee is the extendibility from the term of the franchising as well as licensing agreement. Typically, extension from the term is within the only discretion of the franchisor depending on annual sales turnovers and performance from the franchisee. Quite often a franchisee struggles using the franchisor for renewal from the term especially when the franchisor is arranged with many other franchisees providing higher royalties. The other possible scenario is whenever a franchisee is suddenly informed of the abrupt termination of the actual franchise agreement leaving the actual franchisee with costs associated with salaries, infrastructure and interest on working capital along with other debts. Now do we want a law to tackle with this particular abrupt termination or non-renewal circumstances. First of all, it ought to be clearly understood that just about all agreements entered into in between private parties (whether below franchise domain or every other commercial arrangements) are terminable within nature. This is whatever the terms in the franchise agreement how the contract is interminable. The Indian Contract Act 1872 and also the Specific Relief Act, 1963 supported by numerous Supreme Court judgments tend to be clear that even within the absence of specific terms authorizing and enabling possibly party to terminate the actual agreement, from the very nature from the agreement, which is personal commercial transaction, the same might be terminated even without determining any reason by serving an acceptable notice.

Keeping this within perspective, it is advisable to negotiate to have an open ended term (i. at the., no fixed term) contract with suitable termination clauses upon breach with adequate discover period for rectification associated with breach/default. Though non-provision from the agreed notice will render the franchisor responsible for damages under the Indian native Contract Act, it is advisable in order to stipulate liquidated damages or even substantial termination fees payable through the franchisor on breach associated with express termination provisions. Suitable exit options also needs to be provided if both parties aren’t willing to continue. A few of the key post termination problems that lead to potential dispute and therefore are adequately protected by the present Indian laws include:

(i) Misuse of IPR privileges and Confidential Information post termination is usually a mater of concern for that franchisor. While there are sufficient IPR protection laws towards misuse and consequent infringement/passing off actions in conjunction with rights for permanent and mandatory injunctions underneath the Specific Relief Act, you should provide provisions constraining the franchisee from while using IP rights of the actual franchisor and return of confidential information obtained throughout the term of the contract.

(ii) Protection of franchisees towards negative covenants particularly associated with non-competition post termination. It ought to be understood that a damaging covenant restraining the franchisee through directly or indirectly undertaking business competing using the business of the franchisor throughout the subsistence of the agreement might not be violative of section 27 from the Contract Act, but post termination negative covenants might not be enforceable under Indian laws and regulations. This in turn safeguards the franchisee against uncommon negative covenants imposed through the franchisor post termination.

(iii) Stock handling: Inventory handling is really a definite pain area concern post termination. Provisions associated with re-purchase of the unsold inventory/raw materials post termination, destruction of sub-standard products or extension from the trade mark license make it possible for the franchisee sell these products with in an agreed period of time are essential. Vague clauses such as inventory will be disposed as per mutually agreed conditions and terms should be strictly prevented.

(5) Governing laws as well as implementation of laws: Choice of governing law and host to jurisdiction is another crucial issue that needs to be carefully thought upon prior to being documented. Often jurisdictional hardships prevent the parties from getting corrective actions against breach from the franchisee agreement. Indian Code of Municipal Procedure confers authority to some court to adjudicate on a dispute either depending on territorial jurisdiction; personal legal system; subject-matter jurisdiction, etc. Detailed provisions supported by judicial precedents happen to be available to correctly guide the parties to cope with the jurisdiction issues which is pointless to consolidate all of the available laws under the specialized law.

In nutshell, the majority of the crucial issues that tend to be matter of concern towards the franchisee and franchisor could be dealt under a very carefully drafted and negotiated business agreement.

I am aware that there will be certain concerns regarding the bargaining power from the franchisee to firmly work out the agreement against a recognised franchisor. In this respect, associations such as Franchising Organization of India can play an essential role. For example, FAI may prepare and introduce the code of conduct with regard to franchise arrangement wherein the actual franchisors should provide thorough disclosures to each potential franchisee, so that each prospective franchise could make a well informed choice. For e. g., the Uniform Franchise Providing Circular (UFOC) format in the united states, approved by the Government Trade Commission includes twenty three categories of information that must definitely be provided by the franchisor to some prospective franchisee at minimum 10 business days prior to it makes any payment towards the franchisor or signs the actual contract. As stated over, this does not require legislation of the new law but implementation of the code of conduct through Franchising Association of Indian. The Association can put together and require Franchisors in order to mandatory provide information for example corporate history and financial statements from the franchisor, the litigation this faces, intellectual property as well as proprietary information, etc. Likewise, members of FAI will be able to guide the small franchisees concerning the potential exposure in the actual given franchise arrangement and when required negotiate with respect to the franchisee.

If you’re looking from the consumer remain point, we have consumer safety laws that enable the consumer to file complaints using the consumer forums for unjust or restrictive trade methods adopted by franchisee in way to obtain goods or services through the franchisee. Similarly, antitrust or restrictive trade practices promoted through the franchise arrangement can end up being addressed through Monopolies as well as Restrictive Trade Practices Behave, 1969 and to end up being implemented proposed Competition Behave. The franchisor and the franchisee will have to ensure that their practices don’t classify as monopolistic or restrictive otherwise the Commission under the actual MRTP Act can grant injunction to avoid such trade practices and could award compensation for any kind of losses or damage experienced thereby. Tortious liability could additionally arise out a franchise relationship in case of negligence leading to reduction or damages to third parties or in case of principal-agent relationship between the franchisor and also the franchisee. In such cases the franchisor might be held liable for any kind of torts committed by the franchisee throughout his business.

Cons of the New Law: Having a number of laws, I personally feel which introduction of specialized law at this time will rather have an adverse impact on the growth about the franchise industry:

– Most developed countries don’t have franchise specific law or even was introduced much later on: The United States of America that is the inventor of all sorts of franchise arrangements did have no franchise specific law permanently 50 years. Since time of development of the idea during 1938 till 1993, there is no attempt made to manage franchising in the Ough. S. It was only in 1993 how the Uniform Franchising Offering Round (“UFOC”) Guidelines were adopted in USA since the recommended format for franchise disclosure documents in the State level. By 1995, the new UFOC Recommendations were adopted by each one of the state franchise regulatory government bodies that required registration associated with franchise offerings.

United Kingdom doesn’t have any specific legislation or even regulation, which regulates franchising or even foreign franchising companies. The European Franchise Federation offers however prescribed “European Signal of Ethics for Franchising” which facilitates prospective franchisee to enter any binding franchise romantic relationship with full prior understanding. Similarly, UNIDROIT has in Sept 2002 adopted a Design Franchise Disclosure Law requiring the franchisors to supply extensive written disclosures to prospective franchisees in a pre-contractual stage.

Even Singapore which hosts many franchises from all over the world, there does not can be found any specific legislation upon franchising in Singapore.

Even within the countries where there tend to be franchise specific laws, the purpose is in order to require extensive disclosures towards the prospective franchisees which for me can be introduced with an association like Franchising Organization of India, whereby the franchisor and franchisee stick to the code of conduct specified through the Association.

– Will hamper the growth from the industry: Given the proven fact that the franchising sector continues to be in the nascent phase of evolution and improvement, we are still not ceased with the majority of the practical issues involved in implementing and building a franchise relationship. Therefore, introduction of the specific law may not just fail to address all of the issues but may have an adverse effect through unnecessarily burdening the franchisor as well as franchises with regulatory and reporting compliance/requirements and could also deter the prospective international franchisor in the future to India. It may prove an extremely theoretical legislation without any kind of practical implementation background from the situations and may require frequent modifications and changes.

– Most issues could be contractually negotiated and used care off by contractual agreement: As already discussed, the majority of the concerns of the parties could be mutually discussed and decided a negotiated contract. Actually otherwise, no single law can cope with the complex nature of issues involved with a franchise arrangement that ranges from protection associated with IP rights to item liability, exchange control problems, labour laws, enforcement associated with contractual rights, etc. Additional, enforcement issues between the parties towards the agreement i. e. the franchisor and also the franchisee would be governed through the substantive law of the actual territory and dispute resolution mechanism agreed between your parties, would take care from the enforcement of such privileges. Compulsory resolution of dispute via a self imposed regulator might not be healthy for rapid growth of the sector. I feel how the day and time for any specialized franchise law is yet in the future and it may actually be pre-mature to enact this type of law.

o Conclusion

Because of the foregoing, the time has up to now not arrived to possess a franchise specific legislation. It might be in the interest from the franchise industry, which continues to be evolving and is miles from reaching its highest possible, that instead of advocating a requirement for a new legislation to manage the franchise industry, it might be advisable to let the breath, feel, learn, grow and develop within an environment of freedom as well as competitiveness (though regulated through the present legislation).

Seema Jhingan is really a partner at LexCounsel, Regulation Offices. LexCounsel is headquartered within Delhi and advises used areas including Mergers as well as Acquisitions, Private Equity and Investment capital, Projects, Telecommunications, Software/Information Technologies, Media & Entertainment, Taxation, List, Licensing and Franchising, Insurance coverage, General Corporate and Industrial and International Arbitration. Seema Jhingan could be reached at sjhingan@lexcounsel. within

Areas of Practice:

National infrastructure, Telecommunications, Power, Mergers/Acquisition, Software/Information Technologies, Business Process Outsourcing, Press & Entertainment, Private Equity and Investment capital, General Corporate and Industrial, International Arbitration.

Professional Overview:

Seema Ahluwalia Jhingan’s exercise spans over fourteen years where she has acquired considerable expertise in representing designers, sponsors/lenders, venture capital traders, international corporations, financial establishments, and other strategic investors active in the establishment, development and financing of major infrastructure also it projects in India.

Seema is really a Partner with a Delhi Based Lawyer LexCounsel Law Offices and regularly plays a role in journals and publications and frequently takes up speaking events.



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