Mater Franchising arrangements will be the flavor of the afternoon since it offers the franchisor the main benefit of the franchisee's knowledge of the local 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 threat of the franchisor. The existing regulatory restrictions on retail trading by foreign companies along 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 style by foreign companies for entering India for the initial time. A typical master franchise arrangement enables the master franchisee to produce the company in certain territory beneath the franchisor's brand and trademark with or without the proper to manufacture these products relating with the franchisors' operating guidelines along 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 about them, I want to quote several lines from a written report presented by the International Institute for the Unification of Private Law (UNIDROIT, an independent intergovernmental organization of which India is just a member) which states that "the inspiration of an effective franchising industry in virtually any country lies in the existence of a "healthy commercial law environment" that has been defined together with a 'general legislation on commercial contracts, with an adequate company law, where there are sufficient notions of joint ventures, where intellectual property rights come in place and enforced and where companies can rely on ownership of trademarks and know-how in addition to on confidentiality agreements' ;.The Indian legal environment is characterized by each one of these key attributes, a fact established by ever expanding international franchise relationships with India.
To gauge the requirement for a brand new legislation, let's 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're protected or could be protected within the realm of current Indian legislation:
(1) Licensing and Utilization of Intellectual Property Rights: IP rights are an integral 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 one of the most important concerns of the Franchisor. Some of the disputes that arise during implementation of the franchise agreement relate genuinely to the scope and intent behind the trademark license, exclusivity useful 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 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 like 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 is also 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, in addition to copyright and designs of the foreign franchisor. Recognition and protection is also 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 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 very sensitive and proactive regarding enforcement of infringement actions. It is therefore evident it's not the absence of IPR laws or its enforcement that result in potential disputes but insufficient carefully drafted and negotiated agreements between the franchisor and the franchisee related to IPR conditions that result in potential IP related litigations.
(2) Obligations of Franchisor and Franchisee: Another crucial issue that result in potential disputes between the parties relate genuinely to implementation of the obligations of a franchisee such as 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 keep up uniformity, reporting requirements, quality maintenance of the item or services delivered; creation of an agency between franchisor and franchisee, appointment of sub-contractors to manufacture and sub-franchisee to market 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 offers up specific parameters for legally enforceable agreements, lawful object and intent behind 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 possible lack of commercial law but insufficient 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.
This doesn't require a specialized law that will be already available in the proper execution of the Indian Contract Act but a reasonably detailed and well negotiated contract. Regardless even a specialized law can just only provide a broad frame work, the important points 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 could be another part of concern for the franchisor. Which means way and the changing times of which such payments can be made should be carefully addressed. In case 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. For instance, an Indian franchisee can remit royalty towards license of trademark upto the total 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 need prior government approval. Detailed tax laws are already in position to manage the withholding tax liability on such payments which might get reduced dependant on the provisions in the applicable double taxation avoidance agreement. The main element issue is that both the franchisor and franchisee should be produced aware before hand on the payment and taxation related regulations. DUI
(4) Duration, Renewal and Termination and its Consequences: Another serious concern of a franchisee is the extendibility of the word of the franchising and licensing agreement. Typically, extension of the word is the only 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 once the franchisor is set up with a number of other franchisees offering higher royalties. One other possible scenario is each time 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 want a law to tackle with this particular abrupt termination or non-renewal situations. To start with, it should be clearly understood that all 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 in the absence of specific clause authorizing and enabling either party to terminate the agreement, from the very nature of the agreement, that will be private commercial transaction, the same could be terminated even without assigning any reason by serving a reasonable 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 beneath 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 willing to continue. Some of the key post termination conditions that result in 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 there are adequate IPR protection laws against misuse and consequent infringement/passing off actions along with rights for permanent and mandatory injunctions beneath the Specific Relief Act, it is important to offer provisions constraining the franchisee from utilising 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 should be understood a negative covenant restraining the franchisee from directly or indirectly undertaking business competing with the company 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.
