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Jan, 04 2013

Laws impacting franchising in India

In the absence of a specific law solely meant for regulating the business of franchising in India, franchisors are governed by a number of statutes and codes rather than a single comprehensive enactment.

TO put it in layman's words, franchising is a method of marketing goods and services for getting and sustaining customers. The word 'franchise' comes from old French meaning a privilege or freedom. Essentially a marketing concept, franchising is an innovative method of distributing goods and services.

Legal definition of 'franchise'

Black's Law Dictionary, seventh edition, 1999, defines 'franchise' as, “the sole right granted by the owner of a trademark or trade name to engage in business or to sell a good or service in certain area.”  In India, chapter 5 of the Finance Act defines 'franchise' as “an agreement by which the franchisee is granted representational rights to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved.” The most dominant form of franchising, which is Business Format Franchising, includes a franchise relationship based on a formal contract, a successful business format of the franchisor, which is identified with a brand name, trademark, service mark and/or trade name, formal training to franchisee, support of franchisor in operation of the business, franchisee's ownership of business, payment to franchisor, etc. Franchising of foreign brands evolved in India as an unregulated method of introducing foreign brands in India.

Diverse laws & their effect

However, there are no laws solely for regulating the growing business of franchising in India. Therefore, franchisors are governed by a number of different statutes rather than a single comprehensive enactment. Primarily, a franchise agreement is a contract between the franchisor and the franchisee. The first law which comes into the picture is the 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 provide for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract. Laws relating to intellectual property, (includes Copyright, Trademark Act, Patent, etc) Taxation, Sale of Goods, Property Laws, Insurance Law and Labour Laws also apply to franchise transactions. Additionally, laws applying to specific sectors of goods and services will also apply depending on the franchise.

Judiciary's role in franchising

A well-defined legal structure is indispensable for the effective functioning of any business. The Indian judiciary is also playing a vital role in impacting franchising. Some of the judgments impacting franchising were regarding reasonableness of non-compete clause. One of the judgments was in the case of Gujarat Bottling Co (GBC) & Ors Vs Coca Cola Co & Ors, where an agreement was signed and franchise granted by Coca Cola to GBC to manufacture, bottle, sell and distribute various beverages for which trademarks were acquired by Coca Cola. The agreement's negative stipulation required GBC to work diligently to promote sales of beverages produced under the trademarks owned by Coca Cola Co. However, the shares of GBC were transferred to Pepsi, a rival of Coca Cola. Coca Cola obtained an order of injunction from the High Court restraining the transfer of shares from GBC to Pepsi.

Another case was on protection of confidential information between V.V. Sivaram & Ors. Vs. Foseco India Ltd. (FIL) where defendants 1 & 2 were ex-employees of FIL & had access to confidential and detailed info about “Turbostop” (T), a patented product of FIL. FIL bound them with contractual obligation of non-use of confidential information acquired in course of employment and by a non-compete obligation. Defendant 3, a contractor of FIL, had access to confidential information about T and was bound by a confidentiality and non-compete contract. All three violated contractual obligations. The court granted an order of temporary injunction against them.

The standard operating procedures of franchising cover all aspects of business, including staff training, quality checks, surprise audits, customer feedback and care for the environment.

Future of franchising in India

India's vast geographical spreads, diversity, growing economy, purchase power, a young population and acceptance of Western concepts are huge enablers for franchising. For the last several years, franchising is growing in India at a steady rate of 25-30%. So, a special franchise law would greatly accelerate dispute resolutions and fortify the Indian retail industry.

Alok Sanghi, Serena Satheesan, FranLegal

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