This article is written by Neethi Pillai, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here she discusses “Legal issues in Franchising”.
Have you built up an interesting and valuable invention and wish to boost your profits from it? Do you have an alluring business framework to sell products or render services? Does your organization have a reputed brand or exceptional trademark?
On the off chance that you can answer any of the above inquiries in the affirmative, at that point, franchising is the system you can receive to gain overall popularity (and huge amounts of cash obviously!).
The idea of franchising has been existent for a few centuries now. franchising has its forerunners in feudalism and licenses conceded by rulers in the medieval times. The guild framework that was presented in the London in the twelfth century is one model. While franchising as an idea, has still not formed into an industry in India, it is a developing marvel of business association and services or sales distribution world over, particularly in the United States and United Kingdom.
This paper inspects the importance of franchising and furthermore dissects the different legal issues concerning to franchising of business in India.
What does Franchising Mean?
The Indian law does not set out a definition for franchising. Be that as it may, put simply, franchising is a strategy for distributing services or products. The Blacks Law Dictionary states that franchising means a license from the proprietor of a trademark or tradename allowing another to sell an item or service under that name and/or mark.
In a Franchise Agreement, there is a minimum of two parties involved:
- The Franchisor and
- The Franchisee.
The Franchisor is the proprietor of the trademark or the trade name and licenses such mark or name (or other related Intellectual Property) and the system of business, while the Franchisee pays royalty for using the Franchisor’s business system and such Intellectual Property.
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Features of Franchising
Considering the definition of franchising offered by the International Franchising Association, the British Franchise Association and the Federal Trade Commission of the United States, the features of franchising can be listed as below:
(a) A franchising arrangement is a relationship formed out of a Contract;
(b) The franchisor ought to have built up a business framework or arrangement, which is related to a brand name;
(c) The franchisee makes a significant introductory capital investment and ordinarily possesses the business activity;
(d) The franchisor ordinarily prepares the franchisee to guarantee that it is outfitted to adequately consent to the business framework;
(e) Once the franchisee’s business begins, the franchisor persistently underpins the franchisee in specific parts of the business activity;
(f) The franchisor likewise routinely oversees the franchisee’s business tasks so as to secure the franchisor’s altruism and brand name;
(g) Consideration is paid to the franchisor by the franchisee for the rights licensed and the services rendered.
Types of Franchising
The purpose of a franchising contract is to promote a business format or a product. The development of Franchise started as a method for distribution of products. Product franchising includes the franchisee focusing on one producer’s item, and in this manner securing the producer’s personality to some extent. Typical instances are Automobile businesses, gas service stations etc. Be that as it may, the 1950’s saw the beginning of another type of franchising, Business Format franchising, wherein the franchisee needs to follow exact rules and operational measures on product advancement and marketing. Examples include eateries, convenience stores, and individual and business services.
It would better serve the purpose of this article to consider the following kinds of Franchising and thereby understand Franchising in a better manner.
Invention Licensing Agreement
This sort of understanding is normal in cases when an individual has made an innovation and tries to multiply his profits by patenting the creation and exploiting it on a public platform. Such an understanding spotlights on the licensing of patent and rights of its marketing and the manufacturing and promoting of the new invention.
Trademark Licensing Agreement
For building brand value, the proprietor of a trademark can issue a license to someone else to utilize the trademark on such goods which are related with that specific trademark. This kind of an understanding might be for the assembling, planning, promoting, introduction, and sale of merchandise and would, for the most part, contain arrangements to save the standard of nature of the products and the goodwill and notoriety of the brand.
Character Merchandising Agreement
In such an understanding, the name of a renowned entertainment or sports character or presumably a graphical or fictional character is licensed to be utilized on specific items. This sort of understanding would essentially focus on arrangements to protect the notoriety and/or copyright related to such characters.
These are the most widely recognized franchising understanding whereas a rule the sellers or wholesalers receive a specific business framework or format of the franchisor. For the most part, these understandings are entered into with of vendors with automobile organizations, (with Hyundai and/or Maruti), food and consumer goods, (like McDonalds or Barista), gas stations and service stations, (like Hindustan Petroleum) et al.
Legal Issues with Franchising
While the idea of franchising appears to be intriguing and basic, there are a few issues that must be managed before starting a sound franchising game plan. In spite of the fact that there is no particular law relating to franchising in India, franchising as business addresses different business laws and industry explicit laws inside the nation.
It is essential to see how these various laws can influence a franchising business in India and what the issues are that could emerge thereunder.
Validity of franchising Agreements
Essentially, every Franchising arrangement is a relationship formed out of a Contract, which attracts the provisions of the Indian Contract Act, 1872. Under the Act, a “Contract” is an agreement enforceable at law and requires certain conditions to be fulfilled to be valid:
- an offer and an acceptance of the offer;
- lawful consideration;
- lawful object;
- free consent of both parties;
- capacity to enter into agreements.
Each franchising agreement, therefore, would need to essentially meet the above five criteria so as to be legitimately enforceable. For instance, if the franchising understanding is executed for appropriating arms and weapons in India, such an understanding may not be for a legitimate object and consequently invalid.
While the Contract Act doesn’t stipulate that an agreement must be recorded in writing, it is prudent to have a formal and written franchising consent to decisively set out the rights and commitments of the franchisor and the franchisee. This would help with settling any future gridlocks and questions.
Another issue that could emerge is of rivaling the franchisor’s business during the term of the franchising relationship. In the landmark judgment of Gujarat Bottling Co. Ltd. and others v. Coca Cola Co. and, others, the Coca Cola Co. had forced a limitation on Gujarat Bottling Co. Ltd from getting into an agreement with any other beverage company during the term of their agreement.
When the case came up before the Supreme Court as being in restraint of trade under Section 27 of the Contract Act, the Court held as follows:
“There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.”
While typically franchisors and franchisees plan to create an independent contractor relationship, sometimes, contingent on the idea of the agreement, the relationship between them could be viewed as an Agency. For instance, if the franchisee is given the position to enter into contracts with outsiders in the interest of the franchisor, the relationship could be said to be an Agency. Another instance could be of a distributor’s contract, where a distributer enters into contracts with a few retailers to advertise and distribute the products to final end-clients. In cases where the Franchising agreement creating an Agency, the Franchisor would be held liable for the acts of the Franchisee, conducted during the ordinary course of business.
Therefore, it becomes necessary to explicitly state the relationship between the Franchisor and Franchisee, under an Agreement.
Intellectual Property Rights
All franchising understandings include the exchange of some type of intellectual property, an invention or a patent for the creation of a design, a trademark or trade name (example- Bata shoes) or a business format, know-hows, trade secrets, (example- Mcdonalds or Barista espresso) or copyright. Since intellectual property licenses lie at the center of a franchise, the laws relating to licensing of IPR establish the heart and ARTERIES of franchise laws. A comprehension of issues that could ARISE in this field is essential for any franchising business.
Objections and legal action by customers is a potential issue that both gatherings must remember. Such claims are normal in the United States and can emerge in the Indian setting.
Under the Consumer Protection Act, 1986, a Consumer can lodge a grievance with the consume forums for restrictive or unfair trade practices embraced by a merchant or for any deficiency /defects in the services or products offered by the dealer or if the products being offered is hazardous to life or don’t meet the specific requirements of the law. In a franchise, the franchiser and the franchisee could be held liable for any defect in the products or services provided by the franchisee.
Provisions to limit liabilities arising out of such probabilities ought to be appropriately reported in the Franchise Agreement.
A Tort is a civil wrong, the remedy for which is an action for unliquidated damages. Tortuous liability may arise out of a Franchise Agreement in the following cases:
- Vicarious Liability: in a principal-agent relationship between the Franchisor and the Franchisee, any tort committed by the Franchisee during the course of business, can bind the Franchisor and cause him to be liable for the same, but not when the Franchisee willfully acts outside the authority granted to him by the Franchisor and would entitle the Franchisor to recover damages from the Franchisee.
- Negligence: a breach of duty by the Franchisor and/or the Franchisee due to any act or omission. In a franchising contract, any breach of duty by the Franchisor or the Franchising which causes nay damage or loss to the other party or a third party is a good ground for civil litigation.
Despite the fact that the business and business laws in India can ensure and administer a franchise plan, there is a developing need to improve this administrative and lawful structure. In 1999, a firm advance was taken towards solidifying the franchising business in India, by setting up the Franchising Association of India (“FAI”), through the endeavors of the Indo-American Chamber of Commerce. FAI speaks to the interests of franchisors, franchisees, merchants, specialists and other interested people and bodies.
Following the economic liberalisation of 1991, many foreign businesses with solid brand names have built up their presence in India through franchising. In the hospitality and service businesses, this has been the favored technique for beginning operations in India. Worldwide businesses that work through franchises include Kentucky Fried Chicken, Domino’s Pizza, Thank God it’s Friday (TGIF) for food, Hertz, Avis and Budget for vehicle rental; Radisson, Best Western and Quality Inns for inns. Pizza Hut has opened its few outlets and McDonald’s has been open for business since 1996. So also, Indian organizations with solid brand acknowledgement are likewise utilizing the franchising course to grow business volumes. MRF for car tires, NIIT for Computer training and Apollo Hospitals for medicinal services are a few models. In 2000, the franchise business in India was evaluated at US$ 2 billion, with a development pace of about 40% per annum. A few measurements express that franchising represents about 4% of India’s Gross Domestic Product! With the influx of globalization and progression having hit the Indian markets, franchising is by all accounts a charming and alluring choice, for domestic businesses and also for the foreign undertakings.
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