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Mar, 01 2009

India needs franchising laws

In a slackened economy, where the absence of laws, specific to the franchising industry in India, is slowing down the fervour of enterprise and entrepreneurship, the establishment of franchising laws will definitely be a catalyst in the expansion of this

The franchising industry in India is firmly and rapidly heading towards a `business wave`. While franchising encourages a spirit of entrepreneurship, its essence lies in an agreement - termed as the `franchise agreement` - between two parties, wherein certain rights by one party (the franchisor) are granted to another (the franchisee) in return for a sum of money (or the fee). In the absence of any specific legislative enactment with regard to governing franchising in India, the business format of franchising is defined as the `contractual licence` granted by one person - the franchisor, to the other - the franchisee and the details governing the rights of either of these parties are documented in the franchise agreement. It is essential that the franchise is structured in such a manner that it fits around the rules and regulations which best protect the interests of both the parties.

Laws at present
Presently, in any dispute between the parties, the law under which the aggrieved is granted respite comes under the purview of the Indian Contract Act 1872, which governs contracts in India. A franchise agreement will be governed by the Indian Contract Act, 1872 and the Specific Relief Act, 1963, which provides for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract. If a party to the franchise agreement commits a breach of contract, the aggrieved party has the option to initiate a suit for specific performance in Indian courts and apply for relief in the form of a temporary or permanent injunction, which may be granted at the discretion of the court considering the balance of convenience and the interests of justice. An order granting or rejecting an injunction may be appealed by an aggrieved party.
A healthy legal environment is of great importance for franchising and should include provisions pertaining to all areas that fall within the ambit of franchising. This includes, inter alia, Commercial Law, Law of Contracts relating to contracts, Company Law pertaining to joint ventures and Intellectual Property Law for protection of trade marks, etc. However, at present, there are no laws enacted solely for the purpose of regulating the growing business of franchising in India, even though many nations across the world have enacted such laws. To foster the rapid and sustained growth that this channel brings, it is critical that laws to regulate the franchising business exist.

Overseas legislation
A well-defined legal structure is indispensable for the effective functioning of any business operation. The international franchising business which is now flourishing in India needs an environment which demands a well-defined suitable legislation that is complete in all respects of franchising. The lack of a comprehensive legislation on franchising in India leads to the application of multiple laws to a franchise transaction which poses problems and complexities for the parties to a contract and consumes a lot of time. As a result of this, such unnecessary and avoidable complexities become detrimental to the smooth functioning of the franchising operations in India.
According to the federal law of the US, while sending franchise prospectus to a prospective franchisee, the franchisor is legally bound to provide and disclose certain critical information through a disclosure statement. This must contain a brochure of information about the general operations of franchise, recently termed as Franchise Disclosure Document (FDD), which was earlier the Uniform Franchising offer Circular (UFOC). As yet, no such legal binding applies to a franchisor in India. Under such conditions, in the absence of effective disclosure norms, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures that might prejudice the interests of a franchisee or make a franchisee reconsider the business proposition on offer. The lack of proper disclosure requirements potentially provides a golden opportunity to a franchisor to abuse his position of importance as he is virtually under no statutory obligation to make the requisite disclosure. Also, the absence of franchise laws enables foreign franchisors to make the laws of their own country applicable to the agreements entered into with the franchisees in India.
The same is the case with franchisors that enter into franchising agreements with franchisees from other countries. This places additional burden on the parties, particularly the franchisee. Consequently, due to lack of a specific format, franchisors from other countries draft agreements which are in the same format as is approved or followed in their countries. Such one sided agreements are made to suit the specific environment of their respective countries and hence, are not suitable for the Indian business environment.

Matter of urgency
In view of the above, it is essential, as a matter of urgency, that a comprehensive legislative enactment is promulgated in India, covering all aspects of the multiple forms of legislation which might govern franchising. The Central Government is currently considering a franchise law aimed at fast resolution of disputes; the proposal is expected to be placed before a sub-committee of the National Development Council. A special franchise law would greatly provide a strong basis for ethical and regulated business transactions, protect the interests of all parties involved, including, most importantly, the consumer, and help to accelerate dispute resolutions and fortify the rapidly growing and thriving Indian retail industry.

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