Mater Franchising arrangements are the flavor with the day as it provides the franchisor the main benefit of the franchisee’s knowledge of the area environment; provides access to neighborhood sales and marketing expertise and also channels; reduces investment; requires negligible government approvals; provides freedom from recruitment of local workforce and consequently lowers the financial risk with the franchisor.
The current regulatory restrictions about retail trading by foreign companies along with sustained economic growth; ever expanding market using a thriving class of urban buyers; quality consciousness amongst India consumers are a number of the factors contribution to franchising being increasingly used being a model by foreign companies for entering India for initially. A typical master franchise set up enables the master franchisee to produce the business in a given territory beneath the franchisor’s brand name and trademark with or minus the right to manufacture the products relative to the franchisors’ operating guidelines along with assured financial returns to the particular franchisor.
There is a lots of discussion on the requirement regarding enacting a specialized law to modify this growing sector in Of india. Before I proceed with my thoughts on the subject, I would like to quote a couple of lines from a report presented from the International Institute for the Unification regarding Private Law (UNIDROIT, an unbiased intergovernmental organization of which India can be a member) which states that “the foundation of your successful franchising industry in any country lies in the existence of a “healthy commercial law environment” which includes been defined as one using a ‘general legislation on commercial deals, with an adequate company legislation, where there are sufficient ideas of joint ventures, where intellectual property rights come in place and enforced and where companies can count on ownership of trademarks and know-how along with on confidentiality agreements’. The Indian legal environment is seen as an all these key attributes, an undeniable fact established by ever expanding global franchise relationships with India.
To gauge the need for a fresh legislation, let us first understand a number of the keys issues/concerns involving a franchising arrangement that generally contributes to potential disputes or disconnects involving the parties and how they are protected or may be protected within the realm regarding current Indian legislation:
(1) Licensing and Usage of Intellectual Property Rights: IP rights are a fundamental piece of all franchising arrangements and each franchising agreement involves transfer of some kind of IP right, either as a license of your trademark/service mark/trade name, or any copyright, or a patent, innovation, design or a trade strategies. The manner of use with the IP rights and their protection against misuse is probably the most important concerns of the particular Franchisor. Some of the disputes that arise during implementation with the franchise agreement relate to the scope and intent behind the trademark license, exclusivity people and geographical scope, protection regarding confidentiality, extent of transfer with the know-how, misuse and damage caused for the brand and goodwill of the particular franchisor, etc. Similarly, post termination related issues include unauthorized usage of the trademarks post termination, limited directly to use the trademarks for the particular purposes of disposal of pending inventory (inside the absence of which the supply may go waste), devastation of stationary containing trademarks/trade brands, return and ceassation of usage of IP rights. India already features a host of IPR related laws like the Trademark Act of 1940, Copyright Act, 1957, the Patent Work, etc that provide for substantial protection and enforcement mechanism for your intellectual property rights including long lasting and mandatory injunctions against intrusion and passing off. India can be a signatory to the global conventions on intellectual property rights like the Agreement on Trade Related Areas of Intellectual Property Rights (EXCURSIONS), thereby offering protection to trademarks or manufacturers, as well as copyright and designs with the foreign franchisor. Recognition and protection can be extended to service marks inside India enabling the foreign franchisor to license its mark with a franchisee to provide the services synonymous with him for the consumers in India. IPR laws have also been recently amended to make these compliant with exclusive right commitments under TRIPS and accordingly, the particular laws meet international standards regarding IPR protection. Even the Indian courts can be sensitive and proactive pertaining to enforcement of infringement actions. Hence, it is evident it is not the absence of IPR laws or its enforcement that cause potential disputes but lack regarding carefully drafted and negotiated agreements involving the franchisor and the franchisee linked to IPR issues that lead to be able to potential IP related litigations.
(a couple of) Obligations of Franchisor and also Franchisee: Another crucial issue that cause potential disputes amongst the parties relate with implementation of the obligations of a franchisee including the duties and services to be rendered from the franchisee, the investment and infrastructure with the franchise, adherence to specific operating guidelines or manual to keep up uniformity, reporting requirements, quality maintenance with the product or services delivered; creation of your agency between franchisor and franchisee, appointment of sub-contractors to manufacture and sub-franchisee to offer the products and franchisor and franchisee’s liability due to their acts/omissions; meeting of twelve-monthly market penetration targets; minimum inventory purchase/import obligations; financial returns for the franchisor, including royalty and payment. Similarly, obligations of the franchisor related to periodic training regarding conduct of business, upgrading the particular franchisee with new methods and also technologies, ongoing support, recommendations about general operational, management, accounting and also administrative practices, joint marketing and advertising campaigns, sharing of advertising costs generally cause heart burns for the franchisee.
The Indian Contract Work, 1872 is applicable to every one of the franchise arrangements and provides regarding specific parameters for legally enforceable deals, lawful object and purpose of your agreement, lawful consideration for a great agreement, performance of an arrangement, statutory interventions in unfair or perhaps unconscionable transactions, consequences of fraudulence, misrepresentation and undue influence, voidability and also rescission/repudiation of agreement, contracts inside restraint of trade, contingent and also conditional contracts, performance of reciprocal claims, discharge and frustration of deals, consequences of breach and rights linked to liquidated damages, enforcement of indemnification legal rights, agents and principal relationship and also obligations thereto. It is not having less commercial law but lack regarding carefully drafted agreements that typically fail the parties. It is therefore important a franchisee tries to bridge almost all potential gaps by identifying and also analyzing “what if? ” scenarios keeping in perspective the franchisee’s economic, technical, manufacturing, marketing, human useful resource, sales and business planning features.
All of this does not demand a specialized law which is already in existence by means of the Indian Contract Act but a fairly detailed and well negotiated deal. In any case even any specialized law can only supply a broad frame work, the details and the nitty-gritty of the relationship must be always contractually agreed.
(3) Transaction Terms: Delay in payment or non-payment regarding license and/or royalty payments could possibly be another area of concern for your franchisor. Therefore the manner in which as well as the times at which such payments can be made must be carefully resolved. In the event the franchisor can be a foreign entity, applicability of prior approvals and stipulations for foreign remittance should be informed for the foreign party. The Foreign Swap Management Act, 1999 and the particular Regulations made there under especially address the outbound payment connected issues. For instance, an Indian franchisee can remit movie stars towards license of trademark upto how much 1% of domestic sales and also 2% of exports without preceding government approval. If the licensor also provides technical learn how to the Indian licensee, the Native indian company can remit royalty upto 5% regarding domestic sales and 8% regarding exports and lump sum transaction of upto US$ 2 thousand without prior government approval. Payment of royalty above the percentages specified above would require prior government approval. Detailed tax laws are already in place to manage the withholding tax liability on such payments that might get reduced depending upon the provisions inside the applicable double taxation avoidance arrangement. The key issue is that the franchisor and franchisee should be manufactured aware before hand on the particular payment and taxation related restrictions.
(4) Duration, Renewal and Termination and its particular Consequences: Another serious concern of your franchisee is the extendibility with the term of the franchising and also licensing agreement. Typically, extension with the term is within the sole discretion with the franchisor based on annual sales turnovers and performance with the franchisee. Quite often a franchisee struggles with all the franchisor for renewal of the definition of especially when the franchisor is prearranged with many other franchisees supplying higher royalties. The other possible scenario is each time a franchisee is suddenly informed of your abrupt termination of the operation agreement leaving the franchisee together with costs of salaries, infrastructure and interest on working capital as well as other debts. Now do we desire a law to tackle with this kind of abrupt termination or non-renewal scenarios. First of all, it needs to be clearly understood that all deals entered into between private celebrations (whether under franchise domain or any commercial arrangements) are terminable inside nature. This is regardless with the terms in the franchise agreement the contract is interminable. The Indian Contract Act 1872 as well as the Specific Relief Act, 1963 supported by various Substantial Court judgments are clear that even inside the absence of specific clause authorizing and enabling either party to be able to terminate the agreement, from ab muscles nature of the agreement, which can be private commercial transaction, the same could possibly be terminated even without assigning any reason by serving a fair notice.
Keeping this in point of view, it is advisable to negotiate with an open ended term (my partner and i. e., no fixed term) arrangement with suitable termination clauses about breach with adequate notice period of time for rectification of breach/default. Though non-provision with the agreed notice will render the franchisor accountable for damages under the Indian Deal Act, it is advisable to say liquidated damages or substantial termination fees payable from the franchisor on breach of communicate termination provisions. Suitable exit options must also be provided if both parties usually are not willing to continue. Some with the key post termination issues that cause potential dispute and are adequately protected from the existing Indian laws include:
(i) Misuse regarding IPR rights and Confidential Information post termination is normally a mater of concern for your franchisor. While there are adequate IPR defense laws against misuse and consequent infringement/passing off actions along with rights for permanent and mandatory injunctions beneath the Specific Relief Act, it is very important to provide provisions constraining the franchisee from while using the IP rights of the franchisor and return of most confidential information obtained during the definition of of the agreement.
(ii) Protection regarding franchisees against negative covenants particularly concerning non-competition post termination. It should be understood a negative covenant restraining the franchisee coming from directly or indirectly undertaking business competing with all the business of the franchisor through the subsistence of the agreement is probably not violative of section 27 with the Contract Act, but post termination negative covenants is probably not enforceable under Indian laws. As a result protects the franchisee against unreasonable negative covenants imposed from the franchisor post termination.