This article has been written by HariPriya Epuri.

Introduction

In the entrepreneurial era, a plethora of businesses have flourished and expanded their businesses across the continent. Franchise has been one of the business models. The franchise agreements have been playing an important role in such business expansions.

A franchise is a type of business model where a parent company gives the right to another third party to use its name as well as its business model. All the terms and conditions that would govern the franchise are enlisted in a franchise agreement, which would include the franchise fee, which the third party pays to the parent company in order to use its business model and name, the duration of the franchise, the territorial extent of the franchise, the extent of accessibility of the intellectual property rights of the parent company and other terms and conditions that govern the franchise.

In India, the legal landscape governing franchise agreements is a complex patchwork of various laws and regulations. While there is no specific legislation solely dedicated to franchise agreements, several existing laws and acts play a crucial role in regulating and shaping the terms and conditions of these agreements.

One of the primary laws that govern franchise agreements in India is the Indian Contract Act, 1872. This act provides a broad framework for contractual agreements, including franchise agreements. It establishes the essential elements of a valid contract, such as offer, acceptance, consideration, and legality of purpose. The Indian Contract Act ensures that franchise agreements are legally binding and enforceable, outlining the rights and obligations of both the franchisor and the franchisee.

In addition to the Indian Contract Act, franchise agreements are also influenced by ancillary acts related to intellectual property rights. These acts include the Copyright Act (1957), the Patents Act (1970), the Trade Marks Act (1999), the Designs Act (2000), and the Foreign Exchange Management Act (FEMA).

• The Copyright Act, enacted to protect the intellectual property rights of authors, artists, and musicians, extends its safeguarding umbrella to franchise agreements. It ensures that the franchisor’s original works, including trademarks, logos, and copyrighted materials, are shielded from unauthorised use or reproduction by the franchisee. This act safeguards the franchisor’s creative contributions and prevents infringement, ensuring the integrity and uniqueness of the franchise’s brand identity.
• The Patents Act, recognising the significance of innovation and invention, grants exclusive rights to inventors for their creations. In franchise agreements involving patented technologies or products, this act plays a pivotal role in protecting the franchisor’s intellectual property rights. It ensures that the franchisee complies with the terms of the agreement regarding the usage and protection of patented technologies. By safeguarding the franchisor’s inventions, the Patents Act fosters a culture of innovation and encourages the development of groundbreaking products and services within the franchise system.
• The Trade Marks Act, recognising the importance of brand identity in a competitive market, protects trademarks and service marks. For franchise agreements, this act ensures that the franchisee uses the franchisor’s trademarks in accordance with the agreement. It prevents the franchisee from engaging in activities that may infringe upon the franchisor’s trademark rights, such as unauthorised use or imitation. By safeguarding the franchisor’s trademarks, the Trade Marks Act helps maintain the franchise’s reputation and distinctiveness in the marketplace.
• The Designs Act, acknowledging the aesthetic appeal and uniqueness of product designs, protects the aesthetic designs of products and articles. In franchise agreements, this act ensures that the franchisee complies with the agreed-upon design standards. It prevents the franchisee from making unauthorised modifications to the franchisor’s designs, preserving the visual integrity and consistency of the franchise’s brand. By safeguarding the franchisor’s designs, the Designs Act protects the franchise’s visual identity and contributes to its overall appeal and recognition.
• The Foreign Exchange Management Act (FEMA), recognising the need for regulation in international financial transactions, governs the exchange of foreign currency and foreign investment in India. For franchise agreements involving cross-border transactions, FEMA plays a crucial role in ensuring compliance with foreign exchange regulations. It governs the repatriation of profits, royalties, and other payments between the franchisor and the franchisee. By providing a framework for managing foreign exchange transactions, FEMA facilitates the smooth flow of funds and promotes ethical and transparent business practices in international franchise agreements.

In addition to these primary laws, the Competition Act also plays a role in regulating franchise agreements. The Competition Act aims to prevent anti-competitive practices and promote fair competition in the market. It ensures that franchise agreements do not contain provisions that restrict competition, such as exclusive dealing arrangements or resale price maintenance.

These laws and acts collectively provide a framework for franchise agreements in India. While there is no specific law exclusively governing franchise agreements, the existing laws and regulations ensure that these agreements are legally valid and enforceable, protect intellectual property rights, and promote fair competition in the market.

What are franchise agreements

Franchise agreements are legal contracts between a franchisor and a franchisee. The agreement provides authorisation and legal enforcement by granting the rights to use parent company intellectual property or produce its products of royalty, conduct business, or offer, sell, or distribute goods and services to the franchisee, as well as to use trademarks, branding, resources of suppliers, and its parent company’s business model, permitting the operations to open an independent branch.

As the business model replicates, the franchise agreement legally protects the company to expand without risk of debt and cost of equity. The franchise agreement, being a legal document, includes training support, franchisor fees, intellectual property rights, and territorial rights, along with obligations such as termination, renewal, and dispute resolution clauses, which provide consistency, clarity, protection, and growth in the business.

How important are franchise agreements in business

The importance of franchise agreements is to protect the intellectual property of the franchisor and outline the rights, obligations, terms, and conditions of both parties in the agreement, which is legally binding. A franchise agreement gives limitations for the threshold of operations that can be done, including the financial targets and commitments agreed with the franchisor. There are mandatory aspects and prohibited actions included in the franchise agreement, which gives an overview of the aspects for the franchisor and safeguards the franchisor’s intellectual property rights and investment made for the expansion through a franchise.

In order to legally protect the franchisee and franchisor, a franchise agreement includes the elements of franchise offer, acceptance, consideration, validity, breach, and termination. This legal step for the expansion of business through franchising protects the financial health and legal constraints for the business to sustain and prosper.

What are the essentials for a simple franchise agreement

Including intellectual property rights

By including intellectual property rights, the franchise agreement encompasses the provisions for protecting and managing the trademarks, services, products (logo, packaging, etc.) and patents owned by the franchisor. As the franchisee expands the business and duplicates, it may be necessary to include the crucial elements of intellectual property rights in the franchise agreement.

Obligations and duties of the parties

The franchise agreement includes the obligations and duties and establishes such procedures and systems for smooth operations. The franchisor owns distinctive rights, adheres to the franchisor’s rights to ensure compliance and has the authority to terminate the agreement if the conditions are not met by the franchisee.

The franchisee, on the other hand, also has outlined rights to receive training, setting territorial assistance, accessing business systems, and required support from the franchisor and utilising the franchisor’s intellectual property rights. The franchisor and the franchisee agree on the confidentiality clause for the confidentiality of information and intellectual property rights.

Franchise fee

Financial commitments such as royalty fees and franchise fees are essential for operating the finances of the business, under which the review of particular documents ensures the commitment between both parties.

The franchise fee is an initial financial payment and commitment to enter into the franchise agreement for using the intellectual property rights of the franchisor, such as logos, training and support, royalty fee, and trademark.

Term and renewal of the franchise

In the franchise agreement, a specific duration is mentioned as the franchisee allowed to use the provided intellectual property rights. The term, such as the right to operate business, use the trademarks, services, and products for a specific duration and renewal, is an additional or optional term, yet the franchisee needs to look out for the renewal notice period and extend the period of agreement.

Default, cure period and termination

On providing an agreed notice for the termination, including the clauses such as breach of agreement, weak fiscal records, non compete clause, non solicit clause, and ill maintenance of business model. Allowing the party in order to rectify the breach of agreement, cure provisions are crucial to be included in the agreement.

Termination is a vital clause that defines the conditions for ending the agreement between both parties. Either of the parties is allowed to initiate the termination with a notice period under specific circumstances.

Essential clauses for franchise agreement

1. Grant of franchise: This clause outlines the franchisor’s authority to grant to the franchisee the right to operate the franchised business and use the franchisor’s trademark and proprietary systems. It should clearly define the scope of the franchisee’s rights and the duration of these rights.
2. Franchisee fee and payments: Franchise fee and payments are crucial components of the franchise agreement. This section should detail the initial franchise fee, ongoing royalties, marketing fees, and other payments the franchisee must make. The payment schedule and method should also be clearly outlined.
3. Territory:The territory clause defines the geographic area in which the franchisee is authorised to operate. This can be an exclusive territory ,where no other franchisees can operate. This clause helps prevent conflicts between franchisees and ensure market coverage through advertisements and other marketing strategies.
4. Training and support: Franchisors typically provide initial training to franchisees and their staff to ensure they understand the business operations. Ongoing support may include field support, access to a support hotline and regular updates to the business model. This clause should outline the specifics of the training and support provided.
5. Operational guidelines: Operational guidelines ensure that all franchise locations maintain a consistent level of quality and service. This clause should cover the franchisor’s standards and procedures that the franchisee must follow, including product or service offerings, quality control measures, and customer service protocols.
6. Marketing and advertising: The franchisor often coordinates national or regional marketing campaigns to promote the brand or its parent company. The franchisee may be required to contribute to a marketing fund. This clause should specify the franchisor’s marketing obligations and the franchisee’s responsibilities for the local advertising.
7. Duration and renewal: The duration clause specifies the term of the franchise agreement, typically ranging from 5 to 10 years. The renewal clause outlines the conditions under which the franchisee can renew the agreement, including any renewal fee and performance criteria.
8. Termination: The termination clause outlines the circumstances under which the franchise agreement can be terminated by either party. This may include breaches of contract, bankruptcy, or failure to meet performance standards. The clause should also detail the consequences of termination such as the return of proprietary materials and noncompeting obligations.
9. Dispute resolution: Dispute resolution clauses provide mechanisms for resolving conflicts between the franchisor and franchisee. Common methods include arbitration and mediation, which can be less costly and time consuming than litigation.This clause should outline the procedures for initiating dispute resolution and governing laws.
10. Protecting intellectual property: Protecting specifications of the brand, product, etc. that belong to the franchisor as granted to a franchisee as a temporary licence, by including confidentiality, protecting trade secrets, and the data from the franchisor. This protects and limits intellectual property rights owned by the franchisor.
11. Quality maintenance: A quality control check will be added to the franchise agreement in order to make sure that the franchisee maintains the standards of the franchisor company and indemnifies the quality standards that are promised during the operational phase.
12. Legal compliance: The legal compliance clause ensures that both parties agree to comply with all applicable laws and regulations in the operations of the franchise. This includes adherence to local, state, and national laws governing business operations, employment, and consumer protection.

Here are few drafting tips for franchise agreement

• Clarity and precision: Using clear and precise language to avoid any ambiguity. Each clause should be straightforward and easy to understand to prevent misunderstandings.
• Legal compliance: Ensuring the agreement complies with applicable laws and regulations, including Indian contracts act,1872. This includes adhering to franchise disclosure laws and other legal requirements in the jurisdiction where the franchise operates.
• Customisation: Tailor the agreement to the specific needs of the franchise. While templates can be helpful, customisation ensures that the unique aspects of the franchisor’s business model and the franchisee situation are adequately addressed.
• Balance: Strive for a balance between protecting the franchisor’s interests and providing fair terms for the franchisee. This helps foster a positive and cooperative franchising relationship.
• Future proofing: Anticipate the potential future developments and include provisions that allow for flexibility and adaptation. This may include clauses for updating operational guidelines and adjusting fees.

Here is a sample of the Franchise Agreement Template.

Types of franchise agreement

A franchise agreement is a legally binding contract between a franchisor and a franchisee that outlines the terms and conditions of their business relationship. The franchisor is the company that owns the brand and business system, while the franchisee is the individual or company that purchases the right to operate a franchise of the franchisor’s business.

There are many different types of franchise agreements, each with its own unique set of features. The most common types of franchise agreements include:

Product distribution agreements

A product distribution agreement is the simplest type of franchise agreement. In this type of agreement, the franchisor grants the franchisee the right to sell the franchisor’s products in a specific territory. The franchisee is responsible for all aspects of the sales process, including marketing, distribution, and customer service. The franchisor typically provides the franchisee with training and support, but the franchisee is not required to follow the franchisor’s business system.

Business format franchises

A business format franchise is a more comprehensive type of franchise agreement. In this type of agreement, the franchisor provides the franchisee with a complete business system, including products, services, marketing strategies, and operational procedures. The franchisee is required to follow the franchisor’s system in all aspects of their business. The franchisor typically provides the franchisee with training and ongoing support.

Area development agreements

An area development agreement is a type of franchise agreement that grants the franchisee the right to develop multiple franchise units in a specific territory. The franchisee is responsible for finding and developing the locations for the new franchise units, as well as for recruiting and training the franchisees who will operate them. The franchisor typically provides the franchisee with training and ongoing support.

Master franchise agreements

A master franchise agreement is a type of franchise agreement that grants the franchisee the right to develop and operate franchise units in an entire country or region. The master franchisee is responsible for recruiting and training sub-franchisees, as well as for providing them with ongoing support. The franchisor typically provides the master franchisee with training and ongoing support.

The choice of which type of franchise agreement is right for you will depend on a number of factors, including your business goals, financial resources, and risk tolerance.

Here are some additional factors to consider when choosing a franchise agreement:

• The length of the agreement
• The fees associated with the agreement
• The level of training and support provided by the franchisor
• The restrictions on the franchisee’s business
• The termination provisions of the agreement

It is important to carefully review and understand all of the terms and conditions of a franchise agreement before you sign it. You should also consult with an attorney to ensure that you understand your rights and obligations under the agreement.

Conclusion

By considering and adhering to these guidelines, drafting a franchise agreement gets familiarised, and one can draft a robust and legally compliant franchise agreement that protects the interests of both the franchisor and the franchisee while fostering a successful business relationship. It is crucial to ensure that the agreement complies with the legal framework established by Indian statutes and regulations.

References

• https://www.franchise.org/faqs/what-are-the-most-important-sections-in-the-franchise-agreement
• https://www.indiacode.nic.in/handle/123456789/2114?view_type=search&col=123456789/1362
• https://www.thehindu.com/business/mcdonalds-terminates-franchise-agreement-with-cprl/article19533530.ece
• https://blog.ipleaders.in/wp-admin/post-new.php