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franchising aspects 2009-12-14

An insight into Franchise Agreement

Unavailability of franchise laws in India is viewed as a major drawback for people involved in the franchising business. With this article, we bring to you an insight into franchise agreement and recommend ways to shape your franchise business to achieve

By Editorail Co-ordinator
An insight into Franchise Agreement

India still has no specific franchise laws, but still franchising in India has to undergo through various legal propositions which affects the franchisor-franchisee relationship. Like intellectual property, taxation, labour, property and exchange control regulations. The absence of specific franchise agreements may pose problems to the parties entering franchise accord.

The franchise agreement is the basic contract governing the relationship between the franchisee and the franchisor. This agreement should confirm in detail the statements made in the disclosure document, and in case of any difference it should be brought to the attention of the attorney before a final commitment is made. Normally, the franchise agreement is drafted by the franchisor’s attorney. The drafting party should consult a competent attorney.

An aspiring franchisor wishing to delve into franchising should at the outset, make himself thoroughly aware of the concept of franchise. He should draw a blue print of his expectations from the franchisee and his obligations to the latter and vice-versa. Based on his perceptions, he should prepare a plan of agreement in accordance with his attorney to help him run his business well. Take note that, if franchisee fails, franchisor too fails. The franchisor should provide constant support to strengthen his franchisee in the interest of successful conduct of his franchisee business. While drafting the agreement, he should consider the following aspects:- 

  • Construct a workable franchise agreement with franchisee.
  • Understand franchisee’s expectations and what you expect from him.
  • Plan how to provide ongoing support to the franchisee.
  • Ensure how much money is needed to capitalise the franchise venture.
  • Decide how much to charge as an initial franchise fee and the ongoing royalty.

A comprehensively drafted franchisee agreement is the best tool to protect the interest of both the franchisor and the franchisee. A well drafted franchise agreement should include the following points:

  • A clear background section featuring the grant of rights given to the franchisee
    with comprehensive definitions and interpretation sections.
  • The key clause granting franchise rights and limitation of the rights.
  • Provisions for the term and renewal.
  • Detailed obligations of the franchisor.
  • Detailed general obligations of the franchisee.
  • Key performance measures/minimum performance requirements.
  • A payments section including requirements for payment of GST and other taxes.
  • A provision for security of payments. 
  • A section dealing with the protection of premises.
  • A marketing and advertising section, including reference to a group marketing fund.
  • A clause referring to the franchise manual, its use and protection.
  • General operational clauses including requirements for health, safety, and insurance.
  • A financial record section, with minimum book-keeping, inspection and audit.
  • A detailed intellectual property section.
  • A clause dealing with assignments of the interest of the franchisors and the franchisees including sudden occurrence of death or disability.
  • Termination provisions.
  • Restraints of trade.
  • Dispute resolution section.
  • Provision for personal guarantees by key participants. 

Franchisees should understand the possible implications of the document that they are signing. Franchise disputes are generally resolved through proper mediation as a franchise lawyer plays an important supporting role in mediation. But in adverse situation courts may invoke. Apart from this, injunctions for breach of terms and conditions of the agreement are also common in the franchise arena.

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