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Dec, 07 2010

Legal Loop

A well-structured legal framework is the backbone of a company. However, lack of specific franchise laws in India has led to emergence of multiple laws for franchise transactions. Here is all you want to know about various laws that govern the entry and f

THE increasing impact of consumerism, huge market for every product, rapidly increasing service sectors, availability of a large number of competent professionals, absence of licences and various other factors allure foreign entrepreneurs to enter India and establish their brands here. Brands like Choice Hospitality International, Cinnabon, KFC, Jubilant FoodWorks Ltd (Dominos), adidas, Swensens, Baskin Robbins, Ed Hardy, RE/MAX, Aloha India, Sir Speedy and Thomas Cook have entered India through joint ventures, master franchise, area developer, company-owned outlets and direct franchising. However, in the absence of specific legal framework for franchising in India, the entry of international brands flow from Foreign Exchange Laws. Foreign Exchange Laws in India include Foreign Exchange Management Act, 1999 (FEMA), which replaced The Foreign Exchange Regulation Act, 1973, (FERA) in June 2000. This Act has simplified the requirements considerably and made the approvals for the entry of a foreign brand in India easier than under FERA. Besides this, the first and foremost franchise law that governs the franchise relationship and regulates business contracts in India is the Indian Contract Act, 1872. As per Andrew Terry, Professor at the University of Sydney and Special Counsel to DC Strategy, Australia, “The franchise relationship is established by the franchise agreement and it is the Indian Contract Act, 1872, which is the ultimate point of reference for determining the parties' rights and obligations, which are allocated in accordance with its terms. The contract is an exclusive statement of the parties' legal relationship.” Supporting Terry's point, Andreas Gellner, MD, adidas India, says, “The Contract Act does not stipulate anything, so it is advisable to have a formal and written franchising agreement to precisely lay down the rights and obligations of the franchisor and the franchisee. This would assist in resolving any future deadlocks and disputes.”

In addition to these Acts, there are Central statutes, regulations and other pertinent areas of law and Acts that are valid to the franchise agreement and can be used by both the parties to avoid conflicts or deceits. As Karnika Seth, Attorney at Law and Partner, Seth Associates, Advocates and Legal Consultants, mentions, “Besides, Indian Contract Act, 1872, the other applicable laws include Indian Competition Law, Consumer Protection Law, Indian law governing Intellectual Property Rights, Labour Laws and Insolvency Laws. These laws not only provide legal recognition to the franchise agreement but also help both the parties to secure their rights and enforce their legal obligations.” Here are those laws and Acts:

Indian Competition Law

In India, it was the MRTP Act (Monopolies and Restrictive Trade Practices Act), 1969, which states the laws to prevent monopolistic, provisional and unfair trade practices that hamper the carrying out of competitive practices in the market. With the widespread undertaking of the economic reforms, India chose to enact a new law called, the Competition Act, 2002. With the repeal of Monopolies and Restrictive Trade Practices with Competition Act, 2002, with effect from September 1, 2009, the focus has shifted from curbing monopolies to promoting healthy competition. Most of the provisions of the Competition Act, including the provisions with respect to anti-competitive agreements and abuse of dominant position, have been recently made effective.

In Director General (Investigations and Registration) Vs Sri Sarvarayay Sugars Ltd case, where the respondent company engaged in manufacturing, bottling and sale of beverages under various brand names required the dealer to keep for sale only the respondent company's products and was thus prevented to deal with similar products of the competitors. The MRTP Commission held that the respondent is not in any manner guilty of adoption of or indulgence in restrictive trade practices under the MRTP Act. The franchise mode of business could often come under the purview of such anti-competitive laws and therefore, it would be advisable to take into consideration such factors while finalising a franchise.

Consumer Protection Law

Consumers are largely becoming aware every now and then of their consumer rights and how they can exercise them. Consumer Protection Act 1986 is the most relevant in this case. Under the Consumer Protection Act, 1986, a consumer can file a complaint with the consumer forums for any defects/deficiencies in the goods or services supplied by the trader or if the goods being offered for sale are hazardous to life or do not confirm to certain provisions of the law. The people who may be liable to be covered under this Act include manufacturers, assemblers, distributors, wholesalers, retailers, packers and franchisor or franchisee of goods. As per Gellner, “Franchisor, being the brand owner, is held liable in addition to the franchisee. Provisions to minimise liabilities arising due to such risks should be properly documented in the franchise agreement.”

However, at present, there is no provision for disputes arising specifically out of franchising in relation to consumer protection. If such a case happens, general law and statutes present can offer a degree of respite to the consumer.

Laws governing Intellectual Property Rights

All franchising agreements involve the transfer of some form of intellectual property, either an invention or a patent for the invention or a design or a trademark or trade name know-how/trade secret or copyright. Intellectual Property Rights (IPR) are the most valuable asset for a franchisor and he has to protect these important assets in order to maintain and retain its originality. A franchisor not only has to carefully draft the franchise agreement but also avail various remedies under the Indian law. As Gellner says, “While licensing an intellectual property right, the licence should be in writing, signed by both the parties, specifying the rights for royalty payable, if any, the term of the licence and the territory for the rights. The licence must always specify the exact nature of rights granted and the extent to which such rights are granted.”

The Statute and Common Law in relation to trademark, design and copyright are particularly effective against infringement and trafficking in trademarks. The IPR can be covered under major Acts namely the Trademarks Act, 1999, Designs Act, 1911 and Copyrights Act, 1957. The Trademarks Act, 1999, deals with the registration and the better protection of the trademark. It also prevents usage of fraudulent marks on merchandise. Whereas protection of the original designs, franchising manuals, data related to advertising and so on can be dealt under the Designs Act, 1911 and Copyrights Act, 1957.

Labour Laws

Labour Laws are essential in franchising in relation to the number of outlets or offices where employees are recruited. Even the franchise agreement cannot derogate the applicability of the labour laws, whether it is mentioned or not. The Labour Laws comprise a number of Acts, which a domestic or foreign franchisor must know before taking up the franchise route to expand the business. Some of the Acts are listed below:

  • Apprentices Act, 1961
  • Contract Labour (Regulation and Abolition) Act, 1970
  • Employees Provident Funds and Miscellaneous Provisions Act, 1952
  • Employees State Insurance Act, 1948
  • Equal Remuneration Act, 1976
  • Factories Act, 1948
  • Industrial Disputes Act, 1947
  • Minimum Wages Act, 1948
  • Payment of Bonus Act, 1965
  • Workmen's Compensation Act, 1923
  • Payment of Gratuity Act, 1972
  • Payment of Wages Act, 1936

Insolvency Laws

In the Indian law, insolvency is a proceeding under which the court takes possession of the property of a debtor, who is unable to pay his debts, release his liabilities and distribute them equally among his creditors. In today's economic scenario, the insolvency and ultimate bankruptcy of the franchisees is an increasing reality. The franchise agreement should also include a clear provision that states that in case of material defaults (which includes events such as the franchisee committing or threatening to commit an act of bankruptcy; the franchisee becoming insolvent; the declaration by a court that the franchisee is bankrupt or insolvent; the appointing of a receiver, a receiver manager, trustee, liquidator or other custodian for the franchisee or any material portion of the franchisee's assets), the franchise agreement would be terminated upon written notice with no opportunity to cure. As Gellner says, “In ounce of prevention….! The franchise agreement should have provisions regarding the possible bankruptcy of the franchisee. It should list insolvency events as 'material defaults', which would trigger the termination of the agreement.”

In spite of the absence of stringent laws, the franchisor and franchisees in India have enough laws and Acts to regulate franchise operations and secure their franchise relationships. As Seth opines, “These laws not only provide legal recognition to the franchise agreement but also help both the parties to secure their rights and enforce their legal obligations. At present, there is no separate law that recognises or defines the franchise model of business in India. Hence for the time being, these laws are regulating the business framework of franchising business in India.”

Today, India provides highest returns on FDI than any other country in the world, making it the most preferable destination for many international brands. So, it is essential for the Indian government to develop clear and specific franchise laws and implement guidelines to regulate the business.

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