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Nov, 01 2006

A MOVE TOWARDS FRANCHISING LAWS

A number of developed countries, like the US, most European nations, Australia and some S-E Asian countries, have promulgated specific laws governing the business of franchising.

A number of developed countries, like the US, most European nations, Australia and some S-E Asian countries, have promulgated specific laws governing the business of franchising. Though India witnessed an impressive growth in the recent past it does not have any such arrangement, and, as a result, the business of franchising in India is regulated by the provisions of such Acts and policies as the Contract Act, 1872, various commercial and taxation legislations, the Foreign Direct Investment (FDI) policy of the government, and guidelines laid out by the Reserve Bank of India (RBI).

Interestingly, the absence of such laws has not hampered the expansion of franchising business in India, though there was teething trouble in early 2000 when the concept was blatantly misused by some fly-by-night operators to make quick profits.

The most important part of the franchise business is the partnership agreement which lays down all the essentials and other commitments, under which the business shall be run, At present, all franchise agreements are subject to the Indian Contract Act and in the event of any disputes they go through the Indian Arbitration Act or the International Arbitration Act, which may take a lot of time, energy and money.

Since 100 percent FDI in the retail sector is not allowed as yet, most international franchisors opt for the franchise route into the country, and appoint master franchisees (consisting of an Indian company) to sell their brands in India in lieu of franchisee fee and royalty. The master franchisees, in turn, appoint local counterparts across the country who own and operate stores. Although, most international brands are run on the franchisee model, there are no specific laws governing it in India, let alone laws to quickly resolve disputes.

New law under consideration

Taking cognizance of the ground situation the Centre is considering a franchise law aimed at fast resolution of disputes between foreign brands and their domestic partners.

The proposal is likely to be put before the empowered sub-committee of National Development Council, headed by Prime Minister Manmohan Singh. According to reports, the committee is expected to finalise the proposal before the NDC meeting, which is expected soon.

Though, ever since its introduction into the Indian business format, no serious disputes has been reported from among the franchising partners, the government's initiation to understand the issues of the sector and have a dispute resolution mechanism in place, is a welcome step forward. The enactment of a franchise law will certainly strengthen organised retail in India. However, major retail players, who have lately diversified into retailing, are waiting for FDI in retail to be allowed.

Laws applicable in franchising

In addition to the Contract Act, the other important laws that deal with various facets and dimensions of franchising include Foreign Exchange Management Act, 1999 (FEMA), Trade Marks Act, 1999, Patents Act, 1970 and shops and Establishment Act, 1988. Since the provisions of the Contract Act play a determinative role in defining the relationship between a franchisor and a franchisee, the franchise agreement becomes an all-important document. All the rights and liabilities arising out of and relating to a franchise agreement are determined on the basis of the terms and conditions contained in the agreement. The basic requirements of a valid franchise agreement are that is should be made by free consent of parties competent to contract, for a lawful consideration, and with a lawful object.

Subsequently, common law also imposes a general legal obligation on the parties to the contract to deal with each other in good faith and not to withhold any critical information which may influence any material decision of the other party. No legal proceedings will lie against any person in respect of anything done in good faith. The duty of good faith can be imposed in common law even in the absence of a contract stating the existence of the duty.

The FDI Policy allows foreign companies to establish retail operations in India provided the FDI is limited to 51 per cent of the enterprise's equity and the business pertains to retail trading of 'single brand products'. In view of the government's 2005 change in policy concerning FDI in the single brand retail sector, foreign investment is likely to increase manifold. Foreign investment in multi-brand retail sector should also witness a boost. The bulk of such investments will be made through the franchise route.

By enacting a law to deal exclusively with franchising, the government could greatly expedite the growth of franchise business. It would have a direct influence on strengthening the relationship between a franchisor and a franchisee. Simultaneously, it would clarify specific issues like pre-sale disclosures, royalties, sub franchising liabilities, exemptions and exclusions from responsibilities and liabilities.

With inputs from The Economic Times and The Financial Express

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