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Apr, 01 2008

Provisions governing contract law

Laws administer the liaison between a franchisor and a franchisee. The knowledge about laws is a must prior to entering an agreement. Though no specified laws are present, there are some laws governing the process of franchising. On an average two to fiv

The growth and development of franchising is governed by the often complex relationship between a franchisor and a franchisee. If this relationship is strained then the whole project of expansion would be a failure. To help solve disputes between the franchisor and the franchisee there are laws prevalent. However, there are no laws that have been enacted exclusively for the purpose of carrying out the franchise business in India, even though many countries across the globe have incorporated such laws. USA, Canada, France, and Australia are some countries that have specific legislations or code of conduct for regulating franchising in their respective countries. A contract to perform a promise could arise in one of the following ways:

  • By agreement and contract
  • By standard form contract and
  • By promissory estoppel

The most common way of entering a contract with someone is through an agreement. Both the parties may agree to terms of the agreement through mutual negotiations. When one party makes an offer and the other party accepts it, there arises an agreement, which may be enforceable by law. Under the promissory estoppel there may be no contract or agreement in the strict sense of the term, but a person making a promise is bound to fulfill it because of the application of the equitable doctrine of estoppel. As a general rule, standard form contracts are as much valid as those entered through due to negotiations.

Standard contracts

The provisions of all appropriate and related laws should be adequately abided by at every stage beginning from entering into a franchise agreement to the setting up of the franchise business and for carrying out the day-to-day operations. Karnika Seth, Attorney-at-law & Partner, Seth Associates says, “Understanding the franchise agreement is a must as it formalises the rights and obligations of both the parties.” Due to increase in the complexities and volume of business, it is advisable to enter into contract with the franchisees. A standard form of contract may be used, as the franchisor has to get into contracts with numerous franchisees. The contracts with standard terms may be drafted for one franchisee and on the same terms with all the other franchisees. The draft of the agreement is prepared by the franchisor, which the franchisee is enabled to agree to.

When the terms of the contract are prepared beforehand by the franchisor then the franchisees do not have much say in the matter and he/she therefore enters into the contract with those pre-drafted terms. If the contract has been properly entered into with the free consent of both the franchisor and the franchisee, there is full understanding of the terms of the contract, and there is no attempt on the part of either of the two to take undue advantage at the cost of the other, there would arise a valid contract. Srijoy Das, Partner, Archer & Angel opines, “Our experience shows that most disputes relate to the franchise agreements.” Kaviraj Singh, Attorney, Trustman & Co further adds, “Generally, all agreements are governed by Indian Contract Act”. Here we have mentioned the considerations to be kept in mind while signing of a contract between the franchisor and the franchisee.

Limitations of liability

Since most of the franchisors use a standard contract with pre-drafted terms the franchisees not having the time or opportunity to get the terms changed have to sign the contract. The franchisor being in a condition at a greater bargaining position generally drafts the terms, which suit him best, and tries to limit his liabilities without caring for the interests of the weaker bargaining position of the franchisees. In view of this, there are certain rules prevalent to safeguard their interests. These are:

Contractual document a must:

The franchisor and the franchisee are bound only if the terms are contained in a contractual document. It should be checked that the document is not just a receipt, as the terms contained in it would not be binding.

Misrepresentations should be checked:

Even if a franchisee signs a document containing terms but there is found to be a different oral misinterpretation about the contents of the document, the document would not be a binding one.

Reasonable notice of the contractual terms:

In order that the terms of a contract become binding, all that is necessary to draw the attention of the franchisee to those terms should be done by the franchisor who has pre drafted the terms of the contract. If the attention of the franchisee has been drawn to the terms of the contract by a sufficient notice then there arises a binding contract as regards to the terms mentioned. If on the other hand sufficient notice on the terms has not been given then the terms of the contract may not be binding.

Notice should be contemporaneous with the contract:

If the franchisor or the franchisee wants to have an exemption from liability, he must give a notice about it while the contract is being entered and not thereafter. If the contract has already been entered into without the exemption clause, any successive notice about the exemption from liability will be ineffective.

Terms should be reasonable:

It is not enough that the terms of the contract are brought to the knowledge of the franchisee a considerable time before entering the contract. It is also necessary that the terms of the contract are reasonable enough. If the terms of the agreement are unreasonable and opposed to by the franchisee then they will not be agreed upon.

Strict interpretation of exemption clause:

Courts may resort to the use of the device of strict construction of the contract to give protection to the franchisees in cases where the franchisee may not have the bargaining equality or when the franchisor is likely to have an undue advantage at the cost of the franchisee.

Fundamental breach of contract:

Also, enforcing the terms of the contract does not result in the fundamental breach of contract. It is likely that the franchisor will include an exemption clause in the contract so that, his duty to perform that main contractual obligation is thereby negatived. But the main obligation in the contract is not allowed to be negatived by any term of the contract. No objection clause is allowed to permit the non- compliance of the basic contractual obligation.

Non-contractual liability:

In cases where more than one kind of liability arises, exclusion of contractual liability may not be negative to any other kind of liability.

Liability towards third party:

If the franchisor and the franchisee enter a contract under which the franchisee tries to exclude his liability by an exemption clause, such a clause would not exempt another party from liability because of the rule, that the third person is a stranger to the contract and he cannot take advantage of the contract between the franchisor and the franchisee.

Thus, if the franchisee, by an exemption clause, excluded his liability, that does not mean that his employees will be able to avoid their liability. However, there is no specific legislation in India concerning the question of exclusion of contractual liability. Though there is a possibility of striking down bargains.

Das says, “It is prudent to have a thorough compliance with regard to the laws. It is advisable to undertake due diligence process before implementing the model.” Therefore it is advised to work with reputed law firms with a credible background for the formation of contracts and agreements.

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