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Jan, 16 2010

Legal framework

Franchise laws refer to that a collection of legislation and case law which govern and affect the franchise system and franchise relationship. Some laws are specific to franchising, others more generic and relate to parts of the franchise operation, like

Franchise laws refer to that a collection of legislation and case law which govern and affect the franchise system and franchise relationship. Some laws are specific to franchising, others more generic and relate to parts of the franchise operation, like intellectual property, licensing, health and safety, environmental issues, e-trading, employment and anti-competitive behaviour. There is no ‘official’ franchise law in India (as with some western countries); instead there is a combination of legislation, regulation and case law which determines how a franchising relationship and business operation is conducted.

Some countries have developed franchise legislation, particularly around matters of disclosure, regulation and conduct. For example, Australia has specific legislation for franchised business, including in respect of disclosure and a mandatory code of conduct. Others countries have used a voluntary code of conduct approach.

Code of Ethics

In the UK, there is a Code of Ethics developed by the British Franchise Association which is expected to be adhered to by BFA members. In a sense, membership of the BFA operates almost as a ‘quality mark’ for franchisors and seeks to provide a level playing field and consistent approach to franchise agreements. The BFA also provides support for dispute resolution. If code of ethics in franchising would be developed in India, it would support the developing Indian franchise community and set benchmark standards for franchise conduct and operation.

The most important matter to protect in franchising is the intellectual property right (IPR) or ‘know-how’ that makes up the system. It is very important to take advice on how to structure IPR ownership and how best to protect it is essential. However, arguably, even more important for protection is the business relationship between franchisor/master franchisee/franchisees’.  The franchise agreement and franchise manual can be used to great effect in documenting, managing and supporting these relationships.

Franchise agreement

Franchising is a series of contractual relationships; as between franchisor and master franchisee, franchisees, employment and supplier contracts; and customer contracts. The franchise agreement, therefore, is crucial for franchisors and franchisees, alike. It is this document that a judge or arbitrator will look at initially to ascertain what has been agreed between the parties, who is responsible for what and so on. The franchise agreement is there to police performance and the business activities of the franchisee during the term of the franchise; it is not really designed to be used to extract a franchisee from the system who should not have been appointed in the first place. Using the agreement for this expensive and potentially damaging to the rest of the franchise system.

Franchisees equate to revenue for the franchisor. An effective franchise system should result in profitability for all concerned. Franchisees represent a distribution channel to the end user of the franchisor’s products or services. They are the key to revenue generation and profitability. They are of vital importance. It is a long term relationship where the franchisor’s success is very dependent on the attitude, business acumen and actions of its franchisees, besides legal framework of the business.

Blame game

Franchise owners are entrepreneurs in their own right; they are not employees of the franchisor/master franchisee. This is important. There are numerous instances of franchisees not realising what was required of them to make the franchise they bought being a success and then seeking to blame the franchisor when things are a challenge.  There are also some franchisors who take too much from the franchisee and not allowing enough to enjoy the opportunities.

Franchisors and masters who realise the importance of their franchisees and provide the right level of support and guidance often have more successful and robust franchise networks. In turbulent economic times, investing in your people i.e. your franchisees, is the key to your brand and to try to reduce trading risks.

An area to be very clear on in the franchise agreement is what happens when a franchisee wishes to sell his business. Understandably, the franchisor is keen to make sure the new owner is fit for the purpose, but there is a balance with everything. The franchise agreement should be clear on the procedure for approval and process of business handover and specifically any training or assessment requirements of the incoming franchisee.

Prevention is better than cure

The franchise agreement should be clear on who is responsible for what; both on franchise set up and ongoing support. It is better to offer a detail agreement. If the marketing material or correspondence between franchisor/franchisee is inconsistent, the franchisor/master are laying himself open to criticism and relationship tension.

Most franchise agreements include an ‘entire agreement clause’. This is the clause which confirms that no communications prior to the franchise agreement being executed are considered part of the legal contract struck between the parties. Although this might be the legal position, in reality, franchisees can and do get very upset when they feel they have had the franchise opportunity/level of franchisor support and so on ‘misrepresented’ to them.

It is always recommended that the franchisee specifically should confirm via a questionnaire that they understand the franchise agreement is the definitive agreement.

What support exactly means

The franchisee expects support and guidance from the franchisor. How much they expect is emotive and differs between franchisees. So, the franchisor/master should have clear concept about his working and set out any conditions or requirements of the franchisee.  A franchisor/master should be prepared to invest in the franchisees who take the decision to invest in the franchise. The franchise systems also fail or get damaged due to the franchisors not investing enough or providing sufficient support. Instead, they chase those initial franchise fees and royalty, marketing contribution as if it were revenue.

What the franchise agreement contains needs to be consistent with what happens in the system in practice. The approach to all franchisees in a system should be consistent to avoid claims of inequality. A template of franchise agreement does not capture how the franchise relationship is to be developed and managed. It will not serve you well and will not be an investment. It will be contentious. The franchisor should take out some time to explain his business model and the franchisee relationship to the lawyer so an appropriate legally binding document can be drawn up. As the system develops and grows in size, getting correct and business effective documentation in place is vital, especially if expansion finance is sought or a trade sale/flotation is likely.

If you are a franchisee and you are concerned that the franchise agreement is silent of matters you consider important or are unclear, please raise this with the franchisor/master. Changes and updates to the franchise agreement to accommodate day to day custom and practice are necessary from time to time. But, as a franchisee, do not expect preferred or different treatment…as that is not how franchise systems work.  Consistency of approach protects the system and preserves franchisee relations.

All countries with developing franchise systems have their own challenges and nuances.  If an international company is planning to foray into the Indian market, the company should take advice on Indian specific issues and build solutions into their business model or adapt accordingly. Partnering with a professional and talented Indian master franchisee is crucial for international brands entering India.

International franchising

Indian franchisors with ambition to expand beyond India need to bear in mind those different countries have different approaches to franchising and business practices. For this reason, taking advice from a specialist in the country being developed is an investment, not an expense.

Indian franchisors should, in order to avoid the hindrances in international franchising: 

  • Understand the laws of the countries to be expanded into, particularly as regards licensing, employment, health and safety, internet trading, competition and intellectual property.
  • Ensure all relevant intellectual property is secured and protected in the chosen country;
  • Make sure the franchise agreement is enforceable in such countries and takes into account ‘local laws’ where mandatory.
  • Ensure the franchise agreement has provisions dealing with choice of law and forum (court) selection (known as a jurisdiction clause).

A word of caution

Indian franchisors and master franchisees need to be careful and consistent in their approach when granting exclusive territories for franchising. Granting insufficient territorial extent to franchisees is problematic. Inadequate policing of territories granted can also create imbalance in the system.

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