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Franchise Laws: Help or Hindrance?

Having no legislation in India that deals specifically with franchising has made the situation for the franchisors and franchisees more complex. What are the shortcomings in franchising due to lack of franchise laws?? Let us find out about it..

By Abha Garyali Sub Editor

In the 1990’s, foreign franchises started coming in gradually, since then there has been a progressive entry of international franchises in India. The Government has liberalised the rules and regulations in relation to the retail industry and a boom in this sector is on its way. More and more entrepreneurs are adopting franchising as a business model to spread their business across the country.

Need for Franchise Law

Some laws related to contract, agency, distribution, leasing, assignment, securities, financial investments, intellectual and industrial property, competition etc have been enacted but still there are no laws enacted solely for the purpose of regulating the growing business of franchising in India. The result is that the franchise system is governed by a number of different statutes and codes rather than a single comprehensive enactment and which further leads to.

Complexities: The parties prefer agreements with a simple approach and those encompassing all the required law procedures and rules to make the relationship easier to understand. However the application of different laws to one agreement makes it complex for the franchisee and the franchisor.

Ambiguities: Due to the necessary application of multiple legislations, ambiguities are created regarding certain issues. This can lead to misunderstandings between both the parties.

Time-Consuming: Referring to multiple laws consumes a lot of time at the initial stages of a transaction. Well defined laws can benefit both the franchisor as well as the franchisee but they can be more helpful for the franchisee. The franchisee being a newcomer does not know much about the business, the franchisor and the franchise agreement. He signs the agreement without getting any information about it. The franchisee can loose his investment plus his business if the franchisor does not find him apt for the business or due to any other valid reasons. Therefore franchise laws are a must to safeguard the franchisee.

Flaws

Due to unavailability of franchise laws there are some flaws in franchising in India. They are as discussed below:

Deficiency in Franchise agreement: The franchise agreement which is a great help in franchising is a contract between the franchisor and franchisee. The first thing that comes into the picture in the agreement is the contract Act 1872. According to the contract act if any party violates the rules of the contract, the aggrieved party has the option to go to the Indian courts and apply for relief. This agreement will only be helpful when it is made by speacilised franchise lawyers who have all the knowledge about franchising. The franchisee who is a novice in business may not know about all the clauses. Therefore it is required that the franchisee also keeps a lawyer to understand the agreement. There is another major shortcoming in the franchise agreements. The contract act was made in 1872 and now it is too old for the modern franchise businesses. There is a need for more well tuned and contemporary laws.

Absence of Disclosures: The "Uniform Franchise Offering Circular" (UFOC), a legal process in USA provides extensive information regarding the franchisor. The franchisee comes to know everything about the franchisor’s litigation history, bankruptcy (if any), number of franchises he has, fee and expenses, initial investments etc. Therefore it is of a great help to the franchisee. In India, in the absence of effective disclosure norms, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.

Use of laws of other countries: Sometimes in the absence of franchise laws in India foreign franchisors make the laws of their own country applicable to the agreements with the franchisees in India. This proves to be an additional burden on both the parties, particularly the franchisee. Such agreements are made to suit the specific environment of their respective countries and hence are not suitable for the Indian environment and franchisees. The Central Government is currently considering the franchise law. The proposal is expected to be placed before a sub-committee of the National Development Council.

The problems surrounding franchising in India necessitate the enactment of a specific legislation pertaining to franchising in India. A special franchise law would greatly accelerate dispute resolutions and strengthen the Indian retail industry.

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