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Legal issues in franchising


Authored by Harsh Raj


Abstract

The franchising in India is playing a big role in Indian economy and has a growth rate of 40% per annum. The idea of franchising is an attractive system to maximize the profit for inventors. There are people who doesn't have much knowledge of business but they can make something unique which others can't. The franchise system provides the same stage to these two people to earn money while working in their own field of interest. The franchising in India has several legal issues which is dealt in this article.

Introduction

The concept of franchising is several centuries old. We can find the roots of franchising from the guild system of England from the 12th century. The concept of franchising is still not developed in our country. In this age of globalisation, we can observe the increase of franchise business in India e.g pizza hut, KFC, Subway etc. The Indian law does not define franchise. Blacks Law Dictionary defines a franchise as a license given by the owner of a trademark or trade name permitting another person to sell that product or service under that trade name or mark. In a normal franchise agreement, there are two parties involved; the franchisor and the franchisee;The franchisor is the person who lend his trade name, goodwill and business system to the franchisee in the lieu of royalty or some initial money to do business under franchisor's trade name and business system.

Characteristics of franchising

The franchising agreement is based on contractual agreement. The franchisor must have a developed business system having some goodwill under his trade name. The franchisee makes an initial investment in starting the business using the franchisor goodwill and is basically the owner of the business however he is bound by the terms and conditions of the contractual agreement of the franchising. The duty of the franchisor is to ensure the effectiveness of the business by providing necessary training and knowledge to the staff and once the business is in operation, the franchisor just has to supervise the franchisee business to protect its own goodwill. For this service, the franchisee pays some consideration to the franchisor for the license and services rendered.

Legal issues in franchising

In India, there is not a single law to deal with franchising but it does mean that franchising in India is unregulated. The franchising in India is regulated by the provisions of several laws like The Indian Contract Act 1872, The Competition Act 2002, Income Tax Act 1961, Consumer Protection Act 1986, Arbitration and Conciliation Act 1996, The Foreign Exchange Management Act 1999, The Trademarks Act 1999, Patent Act 1970, Design Act 2000, Copyright Act 1957. These all Acts coextensively regulate franchising in India.

  1. Valid franchising agreement: Every franchising arrangement is a result of agreement under Indian contract Act,1872. Each agreement shall fulfil all the conditions under section 2 to be a valid contract. Contract of any illegal things will not be considered as contract and hence no franchising is possible. The contract Act does not impose any obligations on contracting parties to make the contract in writing, but it would be prudent to make it in writing, incase any conflict arises between franchisor and franchisee in future. There is a trend to regulate distribution of services and goods through franchising contracts. There is often a condition in agreements not to deal with competing goods. Once this issue emerged, as rivaling the franchisor’s business during the term of the franchising relationship in the case of Gujarat Bottling Co. Ltd. and others vs. Coca Cola Co. and, others[1], it was held by the supreme court that restraining the franchisee not to deal with competing goods is not in violation of restraint of trade under section 27 of Indian Contract Act, 1872.

  2. Agency: It is crucial to determine the relation between franchisee and franchisor before finalizing the agreement because there are cases when franchisee needs to enter into a contract with a third party to carry out the business. In this case franchisee is acting as an agent for franchisor and if any liability arises due to such contracts, franchisor will be liable for the same. Similarly, franchisee will also be liable to compensate the franchisor for the acts done by franchisee outside the course of business. That's' why contract between franchisor and franchisee must be made with very caution to avoid any unnecessary liabilities.

  3. protection of IPR: The concept of franchising is based on transferring one's idea, goodwill, invention, copyright, patent to the franchisee to carry out businesses. Since Intellectual Property license is the core of the franchise system, the law governing the Intellectual property rights are the heart of the franchise system. An understanding of Intellectual property is very vital in the arena of franchise business.

  4. Protection of consumer: Since the modern laws are based on the maxim caveat venditor which puts liability on the seller. Under the consumer protection Act 1986, a consumer can file complaints for any restrictive trade practices of the trader or for any defects in goods and services supplied to him or for goods supplied to him which is hazardous for life. In case of franchisee, the consumer can sue both franchisor and franchisee for the damages. To avoid such cases, it is important to frame franchisee agreement in such a way to to minimize their liabilities.

  5. Tortious liability: Tort is civil wrong and damages are unliquidated and appropriate remedies are provided to the aggrieved on the basis of the amount of damage assessed by the court. The tortious liability arises in the franchise system in two cases.

a. Negligence: Any act or omission by franchisee or franchisor on the part of a third party may lead to negligence.

b. Vicarious liability: If there is a principal agent relationship between franchisor and franchisee, the franchisor could be liable for any tort committed by franchisee during the course of business. However if franchisee has acted outside the course of business the franchisor can claim damages.


Apart from these legal issues there are several other issues in franchising system like corporate issues, taxation issues, property issues, labour issues etc which needed to be dealt in franchise system.

Conclusion

The franchise system in India is still very complex and is regulated through various other laws. There are no laws in India which separately deal with franchising in India. After the economic liberalization in 1991, India opened its door to the foreign companies to enter in Indian markets and the best possible way is to enter India through opening its franchisee in India but there are several legal issues which makes the process little bit complex the various reports provides that franchisee in India accounts for 4% of gdp, if the laws are made somewhat easier there is a high chances of boom of franchise system in our country which will contribute in growth of our economy.

References

1. https://iclg.com/practice-areas/franchise-laws-and-regulations/india#:~:text=Liability,-5.1%20What%20are&text=There%20are%20no%20mandatory%20disclosure,as%20part%20of%20the%20contract.

2. https://www.google.com/amp/s/blog.ipleaders.in/franchise-agreement-legal-issues/amp/.

3. https://indiankanoon.org/doc/104935066/.

4. https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Legal_issues_in_Franchising.pdf&ved=2ahUKEwj99pWL5vXrAhUsCqYKHVt9C1IQFjACegQIARAB&usg=AOvVaw0zteY6UCctzRgnEN9NIDE4.

Foot Notes:

[1] 1995 SCC (5) 545