This article is written by Shreya Patil, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “Corporate Insolvency and Resolution Process.”

Introduction

Without a proper legal document in terms of any business, jumpstarting a legitimate transaction can be risky. One of the most important legal documents concerning a franchise is – Franchising Agreement. This “holy” document for franchise parties not only legally binds the parties involved together but protects them from any threats, mishaps and breaches which have been committed irrespective of the intention of the parties involved. Hence, it’s important for both the parties- the franchisor and the franchisee to carefully enter into the franchise agreement to abstain from potentially entering into a dispute. Generally, a franchisor is a party authorized to draft the Franchising agreement, however, the franchisee can review as well as add its inputs in agreement to the parties involved in the Franchise Agreement. Additionally, there are no direct statutes that govern the franchisees, hence holding a well-advised legal agreement for the franchisees as well as the franchisors becomes of utmost importance. Considering India as a hub of beverage franchisees, it becomes prudent for entrepreneurs to gauge through essential clauses in a beverage franchise agreement. However, before understanding what essential clauses are included in the beverage franchise agreements, becoming commercially aware of why opening a franchise of a beverage can be beneficial, and is equally important. 

The beverage market in India

The Indian beverage industry contributes around 230 million USD. Gone were the days when the only major segment of Beverage consisted of tea and coffee. Due to health awareness amongst the masses, other beverages such as fruit juices, fruit pulp, dairy beverages, health drinks are performing exponentially in India for the past few years. Today, India represents an important and one of the fastest-growing markets globally, in order to build a strong beverage brand. Home to one of the fastest-growing middle-class populations, the innovations towards product packaging has enhanced product affordability. Despite the non-alcoholic beverages/soft drinks facing their own challenges to penetrate the rural markets of India, few big brands have achieved these new highs all over the country to acquire and dominate the market. Nonetheless, the circumstances for alcoholic beverages are extremely different compared to non-alcoholic beverages. With other driving factors such as social acceptance of consumption of alcohol. Change in lifestyle and due to the growing demand for alcoholic beverages amongst the young base population with over 50% population under the age of 25 and 65% population under the age of 35 in India, the alcoholic beverage sector is flourishing in India and is known to be one of the highest producers of beverages and is still extensively evolving. What do you think is the ultimate reason? Yes! It’s the influence of franchising of these beverage products.  

Benefits of beverage franchising in India

The growing interest in the beverage industry due to the increase in consumer demand has moulded the beverage industry to become one of the largest food processing sectors. Many international companies try to expand aggressively through foreign direct investments and it is an undeniable fact that our lives are incomplete without these. Brands like Coca Cola, Pepsi, Nescafe, old monk and McDowell’s have been ruling the Indian Beverage markets for decades now.  

It cannot be everyone’s cup of tea to naturally enable yourself to run a successful business. Planning of marketing, branding, sales can be extremely exhaustive. Not to mention the raising of capital to execute your business plan is another headache. If you desire to start a business and cannot afford to fail, starting a franchise of an already established Beverage company can potentially be the best fit for you considering the above mentioned “Driving factors”. Franchising, on one hand, allows the bigger businesses or brands to flourish and dominate the market whereas on the other hand it also helps aspiring entrepreneurs to run their own business which has a proven calculated formula for success. However, in spite of being less risky, opening a franchise is no cakewalk. Let’s further understand what are the types of franchising.  

Types of franchisees

The International Franchise Association defines the format of business franchising as follows: 

“A franchise operation is a contractual relationship between the franchisor and franchisee in which the franchisor offers or is obligated to maintain a continuing interest in the business of the franchisee in such areas as knowhow and training; wherein the franchisee operates under a common trade name, format and or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources (Mendelsohn 1979).

On the basis of the franchising system, there are various types of franchises as to how different franchisors allow their franchisees to use their name. There are three different types of franchise: 

• Business format franchises 
• Product franchises 
• Manufacturing franchises 

The beverage franchises generally come under the category of manufacturing franchises. A franchiser grants a manufacturer the right to produce and sell its beverages under its trademark and name. The beverage bottlers obtain franchise rights from their official company to produce, bottle and distribute it in exchange for royalty payments. A manufacturing franchise is a manufacturing company that produces the raw or finished products that a franchisor sells. The franchisor in agreement with any manufacturing beverage franchisee sells its formulated syrup which is certainly bottled with water and carbonation and is ultimately distributed by the manufacturing franchisee. 

Essential clauses while reviewing or drafting a beverage franchise agreement

While entering into an agreement for a franchise of a beverage company, the legal documents which are needed to be signed by the involved parties are generally titled as “Bottler’s Agreement” whereas the bottlers are franchisees of beverage corporations who are responsible to distribute the beverage in a geographical region. Though all beverage companies have a standard format of their franchise agreements, containing rights and obligations, it’s important to not sign any agreement without clarifying all the Clauses. Hence, understanding the essential clauses gets extremely important especially for the franchisees before entering into any Bottler’s Agreement. Before proceeding further to understand the essential clauses, it is important to know that a legal agreement consists of clauses that protect the interests of all the parties involved and also obligate their duties and rights respectively of the parties involved in the agreement. 

The most important clauses in a Bottler’s agreement 

1. Title of the Bottler’s Agreement

The title of the agreement is prominently placed on the top of the cover page. The beverage franchise agreement is titled Bottler’s Agreement. Though the title generally has the term ‘Agreement’ and not contract, it shall make no difference and is commonly practised. This helps to understand the overview of the Transaction. 

Definition and interpretation

Either party in this clause is a company or an individual firm where the must-include details in this clause are- 

1. Official details of the franchisee and the franchisor. 
2. Commencement date of the franchise.
3. Territory under which the franchisor has rights to distribute.

Recitals

A recital in any agreement always starts with the word “whereas”, where the business activity between the parties and the intention of this agreement is discussed briefly as the background. 

Term and termination of the agreement

Term and termination of the bottler’s agreement are generally linked together. The term of the bottler’s agreement shall be in force unless it is terminated by both parties on mutual consent. During the termination of commercial contracts, it might depict as the position of the termination is equal for all the parties, however desirable thought should be given while agreeing to this. The earlier termination as per the agreement shall have different clauses. 

Obligations of the franchisor

As a franchisor, irrespective of small scale or large-scale company, the primary responsibility of any franchisor is to support the operations of the franchisee and add valuable suggestions to develop and monitor the business. Providing finances, communicating changes, providing required training and manual for the successful operation of a franchise, assisting in sales and marketing when necessary are a few of the important obligations/responsibilities a franchisor must undertake and are deemed necessary to include this in the agreement. A franchisor must realise that franchisee are budding entrepreneurs and providing such assistance will not contribute to the successful running of the brand but can be torch bearers to the franchisees. This clause can help the franchisor to abide by the responsibilities.  

Obligations of the franchisee

The obligations of the franchisee are to use all the rights, manuals and intellectual property of all the trademarks solely for the operation of the business. Not to maintain the high standards of the business but it is also the responsibility of the franchisee to fit the property according to the requirements of the franchise. The points which are generally eliminated and are missed in this clause are the requirements of insurance. It is an obligation of the franchisor to insure with a reputable insurance company as well. Keeping the franchisor fully informed about the matters of the franchise comply with all the relevant laws. These are a few of the obligations of the franchisees that they need to comply with. 

Licencing

When a franchise of any beverage opens, they are generally opened out of the state. Hence, it becomes extremely crucial for the bottlers to obtain a licence to open the beverage franchise from the bottler’s country statutes prevalent in the country. Especially when the franchisee intends to start an alcohol beverage franchise. This clause should explicitly mention that the beverage franchisee should hold all the required and valid licence after the application of franchise by the franchisee is reviewed and accepted.  

Quality control and storage

The quality of any product is the primary ground on why a franchise starts. Hence, a franchisor and a franchisee or parties to this agreement collectively must take utmost caution to maintain the quality of the product deeming it necessary to include this clause in the agreement for the successful running of the franchise. Quality is not determined only by the quality of the product but the packaging of the same which are established by the company. 

Confidentiality

The product formula is the ultimate example of a trade secret. Distinctive product in a beverage helps the beverage to stand out in the market and is extremely confidential which projects the product in the market. Underestimating this economic value formula and their other intellectual properties cannot be protected by national registries of trademarks and patents sometimes and that’s when the confidentiality clause holds valuable importance. All the essences or syrups that are added to the beverage, provided to the franchisee by the franchisor are extremely confidential information. A detailed, precise and structured confidentiality clause shall not only protect the trade secrets and parties to this agreement but also accelerate the successful running of the business. Confidentiality is a special clause that is applicable even after the termination of the agreement. 

Intellectual Property

Copyrights, Trademark and Patents are the prominent Intellectual Property Rights for a beverage company to be aware of and have. Since it may not be possible for the brands to always protect their IP rights internationally, it becomes important for the franchisors to mandatorily include this clause in the agreement. These IP terms are often used interchangeably and are misused by the public; however, adding this clause in the agreement will make these rights aware to the franchisee, as well as protect the interests of the company and the brand. Each of the above mentioned Intellectual Property is particular to some kind of legal protection for the beverage. 

• Copyright

The logos, advertisements, script design or any artistic creation of the beverage which is original, are protected under the copyright laws. 

• Trademark

Trademark protection gives the beverage a distinctive mark used by the company to identify its goods and services. Ex; the shape of the bottle. The purpose of this Intellectual Property is to prohibit the customers from getting confused in the marketplace. 

• Patents

Patents are granted for the ‘inventions’ by any person or company. However, certain companies hold unique inventions which are patented for and have exclusive rights to the containers of the beverage.  

These IP rights are granted to the franchisee in exchange for royalty payments. Adequate protection and caution must be taken while including this clause as with business expansion also comes the highest possible risks to the beverage company while granting such rights to the franchisee. 

 Bottling, packaging and distribution by the franchise

Packaging is an important factor in determining brand success which connects the customers and the company. To stay ahead in terms of mindshare, it is important for the company to lead in packaging as well. Every country has its own statutes and it shall be the bottler’s responsibility to use the containers/packaging materials which are approved by the competent authorities. It is to be noted that, it’s absolutely alright to modify the packaging which can stimulate and satisfy every demand for the beverage constituted under the geographical territory. It is an obligation on the part of the bottler to violate any laws (environmental, safety management standards, anti-bribery, etc.) while packaging the beverage. 

Fees, charges and payments

The most apparent clause this agreement should be consisted of, is the fees, charges, payments/royalties. This clause should include all the necessary details concerning types of fees, charges and payments the franchisee is supposed to pay as per the negotiations between the Parties. Amplifying clearly on the manner and the time the payments need to be executed and should be inevitable. Generally, when such transactions take place outside the territory of India, proper schedules, regulatory and statutory provisions should be clear and not ambiguous. The charges of the beverage should not exceed the value settled and arranged by the franchisor while distribution, by the franchisee. The records of all invoices, production fee and taxes should be maintained for the franchisor if he demands.  

 Property

For setting up multiple outlets at different locations of a franchise, a property where all the process can take place is a foremost primary factor. So, who is in charge of holding such property? Yes! It’s the franchisee. Since the franchisor is authorised only to allow the use of its brand, it’s in no way bound to any sort of issue that may arise concerning the property of the business. This clause is usually drafted in a way that the franchisee is the only authorised person to carry out the business of the franchise on this property and all the matters/issues arising out of it. This clause protects the franchisor from an unauthorised change in the location. The mode of obtaining the property should also be mentioned under this clause. 

Liability

A franchising agreement comes with several liabilities, defaults, infringements, negligence, etc. This clause outlines the events under which the franchisee would be held liable and provide indemnification arising out of any breach as per the agreement. The purpose of the liability clause is to protect the party against any malicious acts of another party.  However, it should be taken into consideration that franchises offer limited liability for the franchisee from any legal suits brought by the customers or employees. This suggests that the owner’s personal debts cannot be affected by the outstanding debts of the franchise.  

 Governing law and jurisdiction

If the country India is concerned, there are no statutes that come under the ambit to govern the franchises. However, there are ranges of laws that govern the franchise industry. The Indian Contract Act, Competition Laws, Intellectual Property Laws, Consumer Protection Laws, The FEM Act are few statutes that contribute to governing such agreements. Hence, to avoid any disputes later, it is always favourable to include a clause of governing laws in such franchise agreements.   

Boilerplate provisions

Boilerplate clauses are a group of provisions routinely used in legal agreements. They are generally grouped together however do not have a lot in common. They cover the settling of disagreements and interpretation of contracts in the court. Omitting boilerplate provisions can certainly make the performance of handling any disputes impossible in case of violation. Some of the boilerplate provisions are: 

• Waiver 
• Severability 
• Notices 
• Attorney fees 
• Relationships 
• Assignments 
• Force majeure.

(Quick Tip: It is always advisable to keep multiple copies of signed agreements)   

References

• https://www.sec.gov/Archives/edgar/data/1491675/000119312510223971/dex102.ht
• https://www.sec.gov/Archives/edgar/data/317540/000095010903001827/dex102.htm

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