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Jul, 01 2007

Legal Implications

SETTINGS up a business of your own, regardless of whether you start it from scratch or acquire a franchise, is a serious undertaking. It will have long-term consequences for you and your loved ones and should be carefully thought through. Buying a franchi

SETTINGS up a business of your own, regardless of whether you start it from scratch or acquire a franchise, is a serious undertaking. It will have long-term consequences for you and your loved ones and should be carefully thought through. Buying a franchise will have major short and long-term implications for you and your family.

Obviously, before entering into any franchise relationship, you should carefully consider the industry, the reputation of the franchisor, the nature of the business, legal and general business issues and skills required to succeed. What may appear simple can often end in financial and legal hardship. It is strongly recommended that advisers including accountants and lawyers are involved in the process, to ensure rights and obligations are respectively protected and honoured.

Check out the company

Company searches cost very little, and can be done on-line giving you the basic financial information about the franchisor. Doing this thoroughly will save legal and other fees and possible problems, later.

If the franchisor is new or the company is small, limited information may be published, so ask the franchisor to provide you with information. Do not be hesitant to ask, for this is a sign of prudence, thoroughness and care which all good franchisors will value in future members of their network.

Legal aspects

Franchising has been specifically regulated in only a very few countries. While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. As the relationship between a franchisor and a franchisee flows from a contract, in the absence of specific governing legislation, the law of contracts as embodied in the Indian Contract Act, 1872, and other allied Acts are applicable to franchise agreements.

The provision of the Contract Act plays a determinative role in defining the relationship between a franchisor and a franchisee. Therefore, 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.

Further, under the Contract Act, a franchisee or a franchisor can seek compensation and claim damages for breach of contract and for any losses incurred due to any fraudulent or deceptive practice in relation to the offer and sale of franchises. Some pertinent areas of the law which are applicable to franchise agreements are:

1. Competition Laws;
2. Consumer Protection Laws;
3. Intellectual Property Laws;
4. Labour Laws;
5. Insolvency Laws.
Elaborating on each of these points:
Competition Law or Anti-trust Law

The resources in the market place would best be allocated by free competition. It is believed that goods and services are provided at the lowest possible price by the rule of open market forces. Any conduct, which unreasonably restricts these market forces, must therefore be eliminated. Terms such as 'prevention, restriction or distortion of competition' hinder normal functioning of the market and distortion of normal play of competition are found in most competition regimes. When considering the expansion of their business through franchising, entrepreneurs should review their business practices and be mindful of their conduct in five main areas. These are:-

Horizontal restrictive agreements
Exclusive dealings
Tied sales
Territory or customer restrictions
Resale price maintenance
Consumer Protection Law

It is anticipated that consumer protection law could have a substantial impact on the development of franchising in India. One of the greatest strengths of franchising is that although the franchise network is comprised of independent entrepreneurs each having entered into a franchise agreement, they all present a common face to the public who is not able to distinguish between corporate or franchised outlets. The franchisee uses the franchisor's brand name or goodwill, in relation to the goods he sells or services he offers to the public, thereby representing that the goods or services are of the same quality or standard as that of the franchisor.

Intellectual Property Law

The protection of Intellectual Property Rights is of paramount importance to any international or domestic franchisor that is franchising into a new territory; since its goods can be copied and marketed by others or its brand name can be misused resulting in its goodwill being diluted. Further the know-how being transferred by the franchisor to the franchisee, in relation to the product or service, needs protection. In India, the Intellectual Property Laws have been in existence for long, but its implementation has been developing only in the recent years with considerable interaction with foreign businesses in relation to collaborations, technology transfers and trade.

Labour Law

Labour laws are very important for international and domestic franchisees especially in relation to various outlets, shops and offices in which persons are employed. No franchising contract can derogate from the applicability of the labour laws. The labour laws govern the day-to-day conditions of employment and are particularly relevant in the franchising context when an outlet is shut down or the business is sold, in relation to the amount of compensation payable by the master franchisee, franchisor or franchisee.

Insolvency Law

Although the general picture of franchising is one of success, there have been cases of insolvency among the franchisees and franchisors. Insolvency becomes an issue if either the franchisor or one of the franchisees becomes unable to pay debts as and when they fall due. Clearly, the risk of insolvency for both franchisor and franchisee in India will be greatly increased if the franchise concept is a foreign one and it has not been properly adopted for the Indian market.

Other legal aspects

There will be some other legal areas to deal with; you may need to form a limited company, hire employees, register for Data Protection Act purposes and take a lease of premises. Your legal advisor should be able to guide you on all of these areas which are common to starting out in small business, whether or not as a franchisee.


The acquisition of a franchise constitutes a significant investment and the implications of this step can be severe. It follows that the transaction should be based on a written contract, entered into after comprehensive investigation.

Entering into a franchise agreement can be challenging. While the advantages of setting up a business under an already established and recognised trade name are clear, the agreement itself may seem complex and difficult to understand. It is important to wade through the ins and outs of the various legal terms so that you have an understanding of the proposition before entering into such a contract.

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