A detailed guide to franchising law in India: Understanding the legal framework and key considerations

The franchise business model is now emerging as an appealing business option for prospective entrepreneurs, whether for its profitability, the variety of options available, or the reputation that comes with the brand chosen. As readers may be aware, franchising is the process by which an entity (also known as a franchisor in this context) allows existing or would-be entrepreneurs to use the franchisor's business model in another location for a set period of time. This article looks at the franchising laws in India.

Legal Definition and Scope

The term franchise has not been defined in the Indian legal framework. The Finance Act of 1999, however, provides that a 'franchise' is an agreement that authorizes the 'franchisee' (the term is explained below) to sell or manufacture goods, provide services, or pursue businesses identified with the franchisor.

A franchise agreement typically involves a franchisor and a franchisee. While the former refers to an entity that lends its trademark, trade name, or any other form of intellectual property rights along with the business system, the latter refers to a person who undertakes the former's business by paying a royalty and an initial fee.

Regulatory Framework

Franchise agreements in India aren’t governed by any franchise-specific legislation but by various applicable statutory enactments of the country. A few of them includes the

• Indian Contract Act 1872;
• Consumer Protection Act, 1986
• Trade Marks Act, 1999;
• Copyright Act,1957;
• Patents Act, 1970;
• Design Act, 2000;
• Specific Relief Act,1963;
• Foreign Exchange Management Act, 1999;
• Transfer of Property Act,1882;
• Indian Stamp Act, 1899;
• Income Tax Act, 1961;
• Arbitration and Conciliation Act, 1996; and
• Information Technology Act, 2000.

Registration of Franchisors is Required

Before entering into an agreement for this purpose, Indian law does not require the franchisor to be registered with any professional or regulatory body. On the other hand, the Indian Trademark Act makes it easier to record a registered user of a mark.

Disclosure Norms

Certain countries have disclosure laws that require franchisors to provide franchisees with the necessary information prior to signing any contract. The applicability of pre-disclosure obligations in India is determined based on the franchise agreement, which explicitly captures detailed disclosure requirements. In this context, readers should be aware that "consensus ad idem," as defined by the Contract Act of 1857, applies.

The franchise agreement also determines the applicability of this mandate to sub-franchisees. It is worth noting that the proposed contractual relations are governed by common law principles.

There are no specific formats or obligations associated with continuing disclosures in the absence of any disclosure requirements.

Membership with Associations

Membership in a national franchise association is not required for a franchise, but doing so may help to protect the interests of franchise owners.

Franchise Agreement

A franchise agreement is the foundation of a franchise, aside from the obvious requirements of finance, infrastructure, and other necessities. The format, control, type of franchisor, and other factors influence the type of agreement used for this purpose.
Franchise agreements must be in accordance with the Indian Contract Act of 1872. Franchisees may include disclosure requirements in their contracts, subject to this condition. In this case, the franchisor's misrepresentation allows the franchisee to file civil damages claims as well as criminal charges for misrepresentation of facts and criminal breach of trust.

Translation Requirements

Unless otherwise specified in the franchise document, franchise documents are not required to be translated into the local vernacular of the respective jurisdiction.

Restrictions Imposable

If such provisions are included in the agreement, the franchisor may impose reasonable restrictions on the franchisee regarding the sale, transfer, assignment, or disposal of the franchised business. On the same note, these restrictions should not impede either party's ability to conduct business.

The Question of Liability

Except in the case of a principal-agent relationship between the parties or if the agreement expressly states the relationship between the parties, franchisors could be held liable for the acts or omissions of a franchisee's employees in the performance of the franchisee's franchised business.

Cause for Termination

A franchise could only be revoked for reasonable reasons. Defaults such as a criminal conviction, abandonment, or insolvency do not warrant a second chance.

Duty of Franchisee

The franchisee's responsibilities are defined, and they are expected to maintain high and consistent operating standards. The clause includes duties such as,

• To keep the franchised unit's premises in compliance with the standards. Equipment, signs, fixtures, furniture, and other infrastructure are included.
• It is your responsibility to protect the brand's reputation and goodwill.
• It is the franchise's responsibility and obligation to meet and maintain the highest standards and ratings applicable to the operation of the Franchised Business.
• A duty to ensure that goods are available at all times.
• To use the Franchised Unit's premises solely for the purpose of conducting the franchised business.
• It is your responsibility to promote the brand.

Duty of Franchisor

Among the various duties that the franchisor owes to a franchisee are the following:

• The franchisor will provide ongoing advisory assistance to franchisees in the operation of the Franchised Business.
• It is the franchisor's responsibility to make standard plans and specifications available to Franchisees for use only in the construction of the franchised unit.
• The franchisor will continue to make efforts to maintain high and consistent quality, cleanliness, appearance, and service standards across all franchised units.

FAQ on Franchise Law in India

Here are some potential frequently asked questions (FAQs) about franchise law in India:

1. What is a franchise?

• A franchise is a business arrangement in which a company (the franchisor) licenses its business model, trademarks, and other intellectual property to a third party (the franchisee) in exchange for a fee and ongoing royalties. The franchisee is then able to use the franchisor's established brand and business model to operate their own business.

2. What are the legal requirements for franchising in India?

• The legal requirements for franchising in India may vary depending on the type of business and the specific franchise agreement. In general, however, a franchisor must register their trademark and any other relevant intellectual property with the appropriate government agency, and must also comply with any relevant laws and regulations regarding the business sector in which they operate.

3. Are there any specific laws or regulations governing franchising in India?

• In India, the legal framework for franchising is primarily governed by the Indian Contract Act of 1872, which sets out the general principles and rules for entering into and enforcing contracts. Additionally, there may be specific laws and regulations governing franchising in certain sectors, such as the food and beverage industry or the retail sector. It is important to consult with a legal professional to understand the specific requirements and regulations applicable to your business.

4. What are the key elements of a franchise agreement in India?

• A franchise agreement in India typically includes the following key elements:
• An overview of the business and the franchisor's intellectual property being licensed to the franchisee
• The rights and obligations of the franchisor and franchisee
• The duration of the franchise agreement and any renewal provisions
• The fees and royalties payable by the franchisee to the franchisor
• The territory in which the franchisee is permitted to operate
• The training and support provided by the franchisor to the franchisee
• The standards and requirements for maintaining the quality and consistency of the franchised business
• Any dispute resolution provisions

5. What are the potential advantages and disadvantages of franchising in India?

• Franchising in India can provide a number of potential advantages, such as access to an established brand and business model, support and training from the franchisor, and reduced risk and uncertainty compared to starting a new business from scratch. However, there may also be disadvantages, such as the need to pay ongoing royalties to the franchisor and the potential loss of control over certain aspects of the business. It is important to carefully consider the potential advantages and disadvantages of franchising before entering into a franchise agreement.

Conclusion

Since 1991, India has remained on the path of leadership established by successive governments. The government has continued to work on its plan to boost India's economic competitiveness by implementing social and agricultural production reforms by 2020. In addition to these reforms, the Prime Minister has announced the 'Vocal for Local' and 'Make for the World' strategies, which aim to increase India's share of the global economy and promote Indian manufacturing.

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