franchising aspects Dec, 08 2010

Laws Governing International Franchisors In India

Franchising in India, as in most other countries, is a significant commercial relationship with significant social and economic benefits - not only to the parties themselves but to the wider community as well. It is also of course a legal association gove

By Andrew Terry
Professor of Business Regulation at the University of Sydney and Special Co
Laws Governing International Franchisors In India

In India, there is no specific franchising regulation, and the relationship is regulated only under the underlying laws of general application to all business operations. The franchisor/ franchisee relationship is established by an agreement, and it is the contract, which is the ultimate point of reference for determining the parties’ rights and obligations, which are allocated in accordance with its terms. The contract is an exclusive statement of the parties’ legal relationship and it is the contract law, in India the Indian Contract Act 1872, which governs the relationship. In the regulated sectors, the contract is of course also the basis of the relationship but freedom of contract will be to some extent constrained by franchise specific laws enacted to address the information imbalance and the power imbalance, which typically characterizes franchise business relationships.

The business format franchise model is a unique and proven method for exploiting the synergy created by marrying the entrepreneurial spirit and commitment of the franchisee with the proven business systems and management expertise of the franchisor. However, franchisees are damaged and franchising is diminished, by the in appropriate practices of those who trade off the reputation of franchising business without the ability to deliver on their promise. The search for an appropriate form of regulation which protects the interest of both parties in a manner that does not curtail the entrepreneurial nature of franchising or threaten its development is difficult but important. The accompanying debate is always vigorous and passionate, in whichever country it takes place. The Indian government has been considering for some time the enactment of specific legislation regulation franchising. If India so acted, it would join more than 30 countries, which have determined that the unique nature of the franchisor/franchisee relationship requires a specific regulation regime tailored to franchising. The philosophy underlying franchise regulation has been expressed in the following terms in the context of Australia, but is equally applicable to India or any other country considering regulation:

“Entrepreneurship and business creation in a free enterprise society such as ours necessarily includes an element of risk and it should certainly not be the role of Government to remove risk. Nevertheless, in the particular circumstances of franchising there are elements quite different to normal business development because of the control of the franchisor which can be an overriding risk for other than purely business or commercial reasons. Those special additional risks arising in part because of the balance of power in the franchising relationship should be minimised, while leaving the commercial risks and decision to be handled by the parties concerned.”

Among the 30 regulated countries, the most common strategy is mandatory prior disclosure imposed to address the ’information imbalance’ through providing the prospective franchisee with information to facilitate informed due diligence in making the decision to acquire a franchise. Such regulation is relatively uncontroversial today. More controversial are initiatives aimed at redressing the ’power imbalance’ which address ’fairness’ issues and interfere more directly with notions of ’freedom of contract.’ Provisions such as those under Australia’s mandatory Franchising Code of Conduct which provides the franchisee with an opportunity to remedy breaches prior to termination and  allow the franchisee to transfer the franchise on reasonable grounds nevertheless have wide support and contribute to a strong franchise sector in which franchisees are protected from arbitrary conduct on the part of unreasonable franchisors.

For a franchisor considering its international expansion options, it is of course not merely the existence or otherwise of specific franchising that is influential in the decision to enter a country. It is the entire regulatory infrastructure that is relevant. Intellectual property protection and enforcement, competition law, business organisation laws, labour laws, tax and tariff laws—in fact the entire spectrum of laws, which impact on business operation are  relevant and important considerations. The decision is most unlikely to be made on the single issue of whether the host country has franchise specific laws or not. Franchisors in leading franchising sectors such as the US, Japan, and Australia are in any event familiar with operating under a regulated regime. There is an increasing recognition that for many countries–China and Vietnam are good examples-a dedicated franchising regime is in effect a pre requisite to the development of a viable franchise sector. The international experience is that balanced and appropriate franchising laws facilitate rather than impede the development of a strong franchise business sector.

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