Mater Franchising arrangements are the flavor of the day as it gives the franchisor the gain of the franchisee's information of the neighborhood surroundings; presents get right of entry to to neighborhood sales and advertising and marketing know-how and channels; reduces investment; requires negligible government approvals; affords freedom from recruitment of local body of workers and consequently lowers the financial risk of the franchisor. The contemporary regulatory regulations on retail trading via foreign groups coupled with sustained financial increase; ever increasing market with a thriving magnificence of city customers; first-rate recognition among India clients are some of the elements contribution to franchising being an increasing number of used as a version by way of foreign companies for coming into India for the primary time. A common grasp franchise association permits the grasp franchisee to develop the business in a given territory under the franchisor's emblem call and trademark with or without the proper to fabricate the goods in accordance with the franchisors' running tips coupled with assured monetary returns to the franchisor.
There is a lot of dialogue on the requirement of enacting a specialised regulation to alter this developing area in India. Before I proceed with my mind on the challenge, I would love to quote a few lines from a document presented via the International Institute for the Unification of Private Law (UNIDROIT, an independent intergovernmental organisation of which India is a member) which states that "the muse of a a hit franchising enterprise in any usa lies within the lifestyles of a "healthy industrial law surroundings" which has been described as one with a 'trendy legislation on business contracts, with an ok organisation law, where there are enough notions of joint ventures, wherein intellectual assets rights are in vicinity and enforced and wherein groups can rely on possession of trademarks and knowledge as well as on confidentiality agreements'. The Indian felony environment is characterised via a lot of these key attributes, a truth mounted by means of ever increasing global franchise relationships with India.
To evaluate the need for a new regulation, let us first recognize some of the keys problems/worries related to a franchising association that usually leads to ability disputes or disconnects between the events and the way they may be covered or can be protected within the realm of contemporary Indian rules:
(1) Licensing and Use of Intellectual Property Rights: IP rights are an necessary part of all franchising arrangements and each franchising agreement entails transfer of a few shape of IP proper, both as a license of a hallmark/provider mark/change call, or a copyright, or a patent, invention, design or a alternate secrets. The manner of use of the IP rights and their protection against misuse is one of the maximum essential concerns of the Franchisor. Some of the disputes that stand up for the duration of implementation of the franchise settlement relate to the scope and motive of the trademark license, exclusivity of use and geographical scope, protection of confidentiality, quantity of switch of the expertise, misuse and damage prompted to the logo and goodwill of the franchisor, and so on. Similarly, submit termination related issues consist of unauthorized use of the logos submit termination, constrained proper to use the emblems for the purposes of disposal of pending inventory (in the absence of which the inventory may work waste), destruction of stationary containing trademarks/exchange names, go back and ceassation of use of IP rights. India already has a bunch of IPR related laws including the Trademark Act of 1940, Copyright Act, 1957, the Patent Act, and so on that offer for good sized safety and enforcement mechanism for the intellectual assets rights along with everlasting and mandatory injunctions against infringement and passing off. India is also a signatory to the international conventions on highbrow property rights together with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), thereby presenting protection to emblems or brand names, in addition to copyright and designs of the foreign franchisor. Recognition and safety is also extended to provider marks in India permitting the foreign franchisor to license its mark to a franchisee to provide the services synonymous with him to the consumers in India. IPR legal guidelines have also been recently amended to cause them to compliant with exceptional proper obligations beneath TRIPS and thus, the laws meet worldwide standards for IPR protection. Even the Indian courts are pretty sensitive and proactive with regard to enforcement of infringement movements. It is consequently evident it isn't always the absence of IPR laws or its enforcement that lead to capability disputes however loss of cautiously drafted and negotiated agreements between the franchisor and the franchisee related to IPR issues that lead to capability IP related litigations.
(2) Obligations of Franchisor and Franchisee: Another essential problem that result in capability disputes among the events relate to implementation of the obligations of a franchisee inclusive of the responsibilities and offerings to be rendered by using the franchisee, the investment and infrastructure of the franchise, adherence to precise operating tips or manual to hold uniformity, reporting requirements, nice maintenance of the product or offerings delivered; creation of an employer among franchisor and franchisee, appointment of sub-contractors to fabricate and sub-franchisee to sell the goods and franchisor and franchisee's legal responsibility because of their acts/omissions; assembly of annual market penetration goals; minimum stock buy/import duties; monetary returns to the franchisor, including royalty and rate. Similarly, duties of the franchisor associated with periodic schooling as to the conduct of enterprise, upgrading the franchisee with new methods and technology, ongoing help, pointers on trendy operational, control, accounting and administrative practices, joint marketing and advertising campaigns, sharing of advertising and marketing charges commonly reason heart burns to the franchisee.
The Indian Contract Act, 1872 is applicable to all the franchise preparations and provides for specific parameters for legally enforceable agreements, lawful item and cause of an settlement, lawful attention for an agreement, overall performance of an agreement, statutory interventions in unfair or unconscionable transactions, effects of fraud, misrepresentation and undue impact, voidability and rescission/repudiation of settlement, contracts in restraint of change, contingent and conditional contracts, overall performance of reciprocal guarantees, discharge and frustration of contracts, consequences of breach and rights related to liquidated damages, enforcement of indemnification rights, marketers and foremost courting and responsibilities thereto. It isn't the lack of industrial regulation but loss of carefully drafted agreements that generally fail the events. It is therefore vital that a franchisee attempts to bridge all potential gaps via identifying and studying "what if?" situations maintaining in perspective the franchisee's monetary, technical, production, advertising, human aid, sales and commercial enterprise planning abilties.
All of this does not require a specialized regulation that is already in life inside the shape of the Indian Contract Act however a fairly specified and well negotiated agreement. In any case even a specialized law can simplest offer a extensive frame work, the info and the nitty-gritty of the relationship has to be constantly contractually agreed.
(3) Payment Terms: Delay in fee or non-payment of license and/or royalty payments will be every other location of challenge for the franchisor. Therefore the way in which and the instances at which such bills are to be made need to be cautiously addressed. In the occasion the franchisor is a foreign entity, applicability of previous approvals and terms and conditions for overseas remittance have to be informed to the overseas celebration. The Foreign Exchange Management Act, 1999 and the Regulations made there below in particular cope with the outbound price related problems. For example, an Indian franchisee can remit royalty closer to license of trademark upto the quantity of 1% of domestic sales and 2% of exports with out previous authorities approval. If the licensor also affords technical realize the way to the Indian licensee, the Indian organisation can remit royalty upto five% of domestic sales and 8% of exports and lump sum price of upto US$ 2 million without earlier authorities approval. Payment of royalty above the percentages unique above would need prior authorities approval. Detailed tax legal guidelines are already in vicinity to address the withholding tax liability on such payments which may additionally get reduced depending upon the provisions inside the relevant double taxation avoidance settlement. The key trouble is that both the franchisor and franchisee must be made aware before hand at the fee and taxation related guidelines.
(four) Duration, Renewal and Termination and its Consequences: Another extreme issue of a franchisee is the extendibility of the term of the franchising and licensing settlement. Typically, extension of the time period is within the only discretion of the franchisor primarily based on annual sales turnovers and overall performance of the franchisee. Quite frequently a franchisee struggles with the franchisor for renewal of the term particularly whilst the franchisor is lined up with many different franchisees imparting better royalties. The different feasible scenario is when a franchisee is all of sudden informed of an abrupt termination of the franchise agreement leaving the franchisee with fees of salaries, infrastructure and interest on operating capital and different money owed. Now can we want a law to address with this abrupt termination or non-renewal conditions. First of all, it should be definitely understood that each one agreements entered into among personal events (whether or not under franchise domain or every other business arrangements) are terminable in nature. This is no matter the phrases in the franchise agreement that the agreement is interminable. The Indian Contract Act 1872 and the Specific Relief Act, 1963 supported by various Supreme Court judgments are clear that even inside the absence of particular clause authorizing and allowing both birthday party to terminate the agreement, from the very nature of the agreement, that is private commercial transaction, the equal can be terminated even with out assigning any reason by way of serving an inexpensive observe.
Keeping this in angle, it is really useful to negotiate for an open ended time period (i.E., no constant term) agreement with appropriate termination clauses on breach with adequate notice length for rectification of breach/default. Though non-provision of the agreed word will render the franchisor accountable for damages beneath the Indian Contract Act, it's miles really helpful to outline liquidated damages or sizable termination fees payable through the franchisor on breach of express termination provisions. Suitable go out alternatives have to also be provided if each parties aren't inclined to keep. Some of the key post termination troubles that result in capability dispute and are safely covered with the aid of the present Indian laws include:
(i) Misuse of IPR rights and Confidential Information post termination is normally a mater of challenge for the franchisor. While there are good enough IPR protection laws in opposition to misuse and consequent infringement/passing off actions coupled with rights for everlasting and mandatory injunctions below the Specific Relief Act, it's miles critical to provide provisions constraining the franchisee from using the IP rights of the franchisor and return of all personal information received throughout the term of the settlement.
(ii) Protection of franchisees towards negative covenants specially referring to non-opposition submit termination. It should be understood that a terrible covenant restraining the franchisee from directly or indirectly task enterprise competing with the enterprise of the franchisor at some stage in the subsistence of the settlement might not be violative of segment 27 of the Contract Act, however submit termination bad covenants might not be enforceable beneath Indian legal guidelines. This in turn protects the franchisee towards unreasonable terrible covenants imposed by using the franchisor put up termination.
(iii) Inventory handling: Inventory managing is a specific pain vicinity trouble put up termination. Provisions associated with re-purchase of the unsold stock/uncooked fabric put up termination, destruction of sub-standard merchandise or extension of the exchange mark license to permit the franchisee sell the goods with in an agreed term are essential. Vague clauses which includes stock shall be disposed as according to collectively agreed phrases and situations need to be strictly prevented.
(5) Governing laws and implementation of laws: Choice of governing law and place of jurisdiction is some other critical trouble that ought to be cautiously idea upon earlier than being documented. Often jurisdictional hardships deter the events from taking corrective moves in opposition to breach of the franchisee agreement. Indian Code of Civil Procedure confers authority to a court docket to adjudicate upon a dispute both primarily based on territorial jurisdiction; private jurisdiction; challenge-count jurisdiction, and many others. Detailed provisions supported by means of judicial precedents are already available to properly manual the parties to address the jurisdiction troubles and it is pointless to consolidate all of the available legal guidelines under a specialized law.
In nutshell, maximum of the essential troubles that are count of situation to the franchisee and franchisor may be dealt below a cautiously drafted and negotiated franchise agreement.
I am conscious that there would be certain concerns in regards to the bargaining energy of the franchisee to firmly negotiate the agreement towards a longtime franchisor. In this regard, associations including Franchising Association of India can play an important role. For example, FAI can put together and introduce a code of conduct for franchise arrangement in which the franchisors need to provide complete disclosures to each potential franchisee, in order that every prospective franchise can make a well knowledgeable choice. For e.G., the Uniform Franchise Offering Circular (UFOC) layout in the USA, permitted with the aid of the Federal Trade Commission includes 23 categories of information that need to be provided by the franchisor to a prospective franchisee at the least 10 business days before it makes any payment to the franchisor or symptoms the agreement. As said above, this doesn't require legislation of a brand new regulation however implementation of a code of behavior by means of Franchising Association of India. The Association can prepare and require Franchisors to mandatory offer data such as company history and financial statements of the franchisor, the litigation it faces, highbrow assets and proprietary information, and so forth. Similarly, participants of FAI should be capable of manual the small franchisees about the ability publicity inside the given franchise arrangement and if required negotiate on behalf of the franchisee.
If you're looking from the consumer stand point, we've got customer protection legal guidelines that permit a patron to file complaints with the purchaser forums for unfair or restrictive change practices adopted via franchisee in supply of goods or offerings with the aid of the franchisee. Similarly, antitrust or restrictive alternate practices promoted by using the franchise association may be addressed via Monopolies and Restrictive Trade Practices Act, 1969 and to be implemented proposed Competition Act. The franchisor and the franchisee would want to make sure that their practices do not classify as monopolistic or restrictive or else the Commission underneath the MRTP Act can grant injunction to save you such change practices and may award compensation for any losses or damage suffered thereby. Tortious liability could also get up out a franchise relationship inside the event of negligence leading to loss or damages to 0.33 parties or within the occasion of important-agent relationship among the franchisor and the franchisee. In such instances the franchisor could be held accountable for any torts devoted by the franchisee in the course of the direction of his enterprise.
Cons of a New Law: Having a host of laws, I individually feel that advent of specialised law at this stage will instead have a negative impact on the boom on the franchise industry:
- Most evolved international locations do no longer have franchise unique regulation or was introduced tons later: The United States of America which is the inventor of all forms of franchise arrangements did no longer have any franchise specific regulation for suitable 50 years. Since the time of improvement of the idea for the duration of 1938 till 1993, there has been no attempt made to alter franchising inside the U.S. It become only in 1993 that the Uniform Franchising Offering Circular ("UFOC") Guidelines have been adopted in USA as the encouraged layout for franchise disclosure files on the State degree. By 1995, the new UFOC Guidelines have been followed through each of the state franchise regulatory government that required registration of franchise offerings.
United Kingdom does no longer have any particular law or regulation, which regulates franchising or foreign franchising organizations. The European Franchise Federation has but prescribed "European Code of Ethics for Franchising" that helps prospective franchisee to enter into any binding franchise dating with full previous knowledge. Similarly, UNIDROIT has in September 2002 followed a Model Franchise Disclosure Law requiring the franchisors to offer huge written disclosures to prospective franchisees at a pre-contractual stage.
Even Singapore that's domestic to many franchises from round the world, there does now not exist any unique regulation on franchising in Singapore.
Even inside the international locations wherein there are franchise precise legal guidelines, the motive is to require massive disclosures to the possible franchisees which in my opinion may be introduced through an affiliation like Franchising Association of India, wherein the franchisor and franchisee adhere to the code of behavior exact by means of the Association.
- Will hamper the boom of the enterprise: Given the reality that the franchising area is still in the nascent degree of evolution and improvement, we are nonetheless no longer ceased with most of the practical troubles concerned in implementing and coping with a franchise dating. Therefore, introduction of a particular regulation won't most effective fail to cope with all of the troubles however may additionally even have an destructive effect through unnecessarily burdening the franchisor and franchises with regulatory and reporting compliance/requirements and might also deter the potential worldwide franchisor to come to India. It might also prove a very theoretical rules with none realistic implementation historical past of the conditions and might need frequent adjustments and amendments.
- Most troubles may be contractually negotiated and brought care off by way of contractual arrangement: As already mentioned, maximum of the issues of the parties can be collectively mentioned and agreed upon a negotiated contract. Even otherwise, no single regulation can cope with the complex nature of troubles concerned in a franchise association which ranges from protection of IP rights to product legal responsibility, exchange control problems, labour legal guidelines, enforcement of contractual rights, etc. Further, enforcement problems between the parties to the settlement i.E. The franchisor and the franchisee would be ruled by way of the considerable law of the territory and dispute decision mechanism agreed among the parties, might take care of the enforcement of such rights. Compulsory decision of dispute thru a self imposed regulator won't be wholesome for fast boom of this zone. I feel that the day and time for a specialized franchise regulation is yet to return and it is able to also be pre-mature to enact this type of law.
O Conclusion
In view of the foregoing, the time has as yet no longer arrived to have a franchise particular regulation. It might be in the hobby of the franchise industry, which continues to be evolving and is miles faraway from reaching its maximum capability, that in place of advocating a want for a brand new law to modify the franchise enterprise, it might be recommended to permit the industry breath, sense, examine, grow and increase in an environment of freedom and competitiveness (though regulated by way of the existing regulation).
Seema Jhingan is a partner at LexCounsel, Law Offices. LexCounsel is centered in Delhi and advises in practice areas consisting of Mergers and Acquisitions, Private Equity and Venture Capital, Projects, Telecommunications, Software/Information Technology, Media & Entertainment, Taxation, Retail, Licensing and Franchising, Insurance, General Corporate and Commercial and International Arbitration. Seema Jhingan may be reached at sjhingan@lexcounsel.In
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Infrastructure, Telecommunications, Power, Mergers/Acquisition, Software/Information Technology, Business Process Outsourcing, Media & Entertainment, Private Equity and Venture Capital, General Corporate and Commercial, International Arbitration.
Professional Summary:
Seema Ahluwalia Jhingan's practice spans over fourteen years for the duration of which she has acquired significant understanding in representing developers, sponsors/creditors, assignment capital traders, international organizations, economic establishments, and other strategic buyers worried within the established order, development and financing of foremost infrastructure and IT projects in India.
Seema is a Partner with a Delhi Based Law Firm LexCounsel Law Offices and frequently contributes to journals and courses and often takes up talking engagements.
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