In commercial and business sense the word “Franchise” means permission granted by a manufacturer to a distributor or retailer to sell its products within a specified territory. A franchise can be equated with a license. A franchise may include a contract whereby the owner of a business grants to another person permission to carry on a particular business using the grantor’s know-how and trade mark as the grantee’s own business..
The grantor of such license is in modern terminology called “Franchisor” and the grantee as “Franchisee”. In some cases the Franchisee can carry on his existing business and take on the franchised business and both can be run at the same premises by the Franchisee. If required a Franchisee has to set up a factory and install plant and machinery to carry on the franchised business. By such franchise the Franchisor does not control his business but finds an additional outlet for sale of his products. The Franchise Agreement may require the Franchisee to deal exclusively with the franchised articles subject to any statute relating to Monopoly and Restrictive Trade Practices.
Franchising can be done within the same country by division of geographical area or Franchisor appointing the Franchisee in another country to expand its market share of the product. Franchising agreement may be in respect of construction business, automobile parts and services, petroleum products, business aids and services, education services, soft drinks, fast foods, restaurants, health, medical, beauty care, commercial and other miscellaneous matters.
To capture markets in other countries franchising is one of the methods, the other method may be establishing a subsidiary company or a joint venture or a new company in collaboration with the Franchisee Company. It is a pure commercial matter and profit motive is the main criteria for the Franchisor and the Franchisee. Along with it good faith and honesty of purpose will be essential in such an arrangement.
The advantages of a Franchise Agreement is that the Franchisor expands markets of his products and earns more profit and the advantage of the Franchisee is that it deals with a product already having a goodwill and reputation on its own right and thereby expecting a good turnover and consequently substantial profit. The Franchisee gets almost an assured share of the market for the product and as such he runs less risk of operating loss or loss of capital that he may invest for the franchised goods.. The Franchisor after giving the franchise will pass on the up-to-date technology to the Franchisee so that the products and services of the Franchisor may stand the competition of the market.
The Franchisor is to make sure that he will get payment by way of royalties and/or fees for the goods, services and/or technology transferred to enable the Franchisee to carryon the business in the franchised goods or services. The Franchisor may demand a lump sum payment in the beginning and thereafter royalties on the sale proceeds or on any other basis depending upon the nature of the transaction. If the Franchisee has no funds the Franchisor may help the Franchisee in raising loans from the Financial Institutions or by issue of shares.
The Franchise Agreement may contain all possible safeguards to avoid any misunderstanding at a later date. Both parties must see that the franchising business develops and remains prosperous. Unless the business is running well the Franchisee will not be able to pay the royalties or service charges and the Franchisor will not be able to recover its dues by way of royalties and service charges. Any litigation will damage the image of both the parties. A businessman will be reluctant to enter into any agreement with a Franchisor or a Franchisee who was involved in litigation in respect of its business transaction.
Franchise Agreement that provides professional, technical, accountancy or consultancy services being a self-financing unit within India will require RBI approval if any remittance to foreign country is involved.
The following is a list of the common laws relating to franchising in India:
THE INDIAN CONTRACT ACT
The Indian Contract Act of 1872 governs all aspects of franchise contracts including the franchise offering, acceptance, consideration, validity, breach and the termination of the franchise contract. The act also ensures that the parties consent freely and are competent to contract.
COMPETITION LAWS
The Competition Act was enacted by the Competition Commission of India in 2002 but did not come into full effect until 2009. The act aims to promote competition and freedom of trade, protect consumers and prevent anti-competitive agreements and activities that have an adverse effect on competition in India. In franchising The Completion Act aims to ensure that tie-in arrangements, exclusive supply and distribution agreements and resale price maintenance do not inhibit competition in the marketplace.
INTELLECTUAL PROPERTY LAWS
There are four acts covering intellectual property rights (IPRs) in India; The Copyright Act (1957), The Patents Act (1970), The Trademarks Act (1999) and the Designs Act (2000). These rights are essential to the survival of the franchise industry and provide protection for trademarks, patents and registered designs and allow legal actions to be brought against third parties for infringement of these rights.
CONSUMER PROTECTION LAWS
The Consumer Protection Act was initiated in 1986 to provide recourse for consumers who receive defective goods or experience unsatisfactory service. Under these laws consumers are encouraged to file complaints and could file an action against a franchisor, a franchisee or both depending on the nature of the franchise agreement.
THE FOREIGN EXCHANGE MANAGEMENT ACT
Established in 1999, this act governs payments in foreign currency and is generally applicable to cross-border franchise arrangement.
LABOUR LAWS
There are a host of labour laws in India that may be applicable to franchises therefore it is important that the franchisee and franchisor are aware of these and that responsibilities in relation to workforce are clearly delineated in the franchise agreement.
INCOME TAX ACT
The Income Tax Act of 1961governs the tax aspects of any franchise in India and also that a cross-border franchisor comply with local tax regulations with respect to any applicable tax treaties.
THE ARBITRATION AND CONCILIATION ACT
Enacted in 1996 The Arbitration and Conciliation Act governs the India law of domestic and international arbitration. This law may come in to effect in the case of franchisee-franchisor disputes.
PROVINCIAL INSOLVENCY ACT
The Provincial Insolvency Act of 1920 comes into effect in the case of individual franchise unit or franchise chain financial insolvency.
Franchise Asia recommend that all entrepreneurs considering investing in a franchise opportunity engage a franchise lawyer to guide them through the exciting and challenging process of buying a franchise.
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