Advisory Dec, 01 2009

Providing a conducive legal framework

By Ramanjit Kaur
Providing a conducive legal framework

With increasing preferences in franchise businesses, it is crucial to understand the legal aspects of franchising before taking up a franchise business. In an interview with FIHL, Dawn Stallwood, Partner and Notary Public for and on behalf of Thomas Eggar LLP, UK discussed a few legal issues of franchising.

Dawn Stallwood provides strategic commercial or corporate legal support in various countries like UK, Hong Kong, China, India, Asia-Pacific and Australia. She also offers advice for entrepreneurial and expanding businesses; covering routes to market; expansion strategies; exit; joint ventures and collaborations and procurement.

Ramanjit Kaur (RK): As India lacks a franchise law, so, is there any way to file a lawsuit against a fraudulent franchisor/ company?

Dawn Stallwood (DS): If a franchisor has got franchise agreement in place which later turns out to be fraudulent, then it is a breach. In such cases, a franchisee has a clause of action in Breach of Contract. The franchisee can use the Indian Court System or the alternative dispute resolution system to bring a client against a franchisor. But the problem as I understand is that it takes quite a long time under the Indian jurisdiction to bring claims through the court laws or through the course completion and even enforcement is often a problem. So, prevention is better than cure.

Therefore, a franchisee should be due diligent. Make sure you thoroughly check the franchisors background.  Keep a track of their property and other records, Try to talk to other franchisees within the network.

RK: In case of overlapping of territorial franchises, is there any legal action that a franchisee can take to protect his/her exclusive right?

DS: Misrepresentation in the franchise agreement and Breach of Contract can lead to legal action. If a franchisor promises his/her franchisees that they will get an area exclusively, then s/he has to make sure that no other franchisee operates in that area. Once a franchisor has offered that area to a franchisee and later the franchisee finds out that someone else is operating in that area, and then the obligation of the franchisor to the franchisees is breached. It leads to the course of action. Therefore, it is important for a franchisee to make sure that s/he should be very clear about the various provisions at the time of signing the franchise agreement.

RK: Is there any rule of assigning a limited number of franchises within a specific geographical area?

DS: No, there is no such rule or law. It is just a common sense. If a franchisor divides a territory too much and gives the franchisees too little to operate, then such limitation could be a hindrance in making profits. The franchisor needs to be realistic in terms of how s/he is going to divide the territory in order to increase the revenue.

RK: What is the legal way to terminate a franchise agreement before the completion of the franchise terms?

DS: A franchisor has a lot of options to terminate the franchise agreement. However, a franchisee enjoys a few facilities. The franchise agreement is often onerous contract which is weighted heavily in favour of the franchisor. The franchisor has the right in certain cases to terminate the franchise agreement without serving the notice period.

However, a franchisee can exit by following ways–

  • By mutual agreement, which is also called termination for convenience.
  • In case of any circumstances occurring beyond reasonable control.

My experience says that most of the franchisors are sensible about the exit or termination of the franchisees. They do not want to lock down the location, so within no less time they decree the exit of the under performing franchisees that are facing territory problems and in turn get someone else to run the franchise business efficiently.

Related: Happy franchisees attract fresh referrals

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