Franchise Agreement – Definition, Types and Legal Provisions related to it in India
Nowadays, many business professionals are concerned about owning and running a franchise instead of starting a business of their own. The reason behind this is the trust that the franchise offers increased returns along with a lower risk factor. Moreover, the concept of Franchise brings brand awareness along with its name from day one. Therefore, customers will get to know about the products, which will directly result in sales increase. Hence, buying a franchise is much more beneficial than actually starting a start-up.
Further, for starting a franchise business first and foremost thing for a prospective franchisee is to enter into a legal contract with the franchisor. As franchise agreement legally allows the person or entity concerned to use a recognized trademarked business name and logo as part of their business plan. Lastly, in this learning blog, we will be studying in detail the concept of a Franchise Agreement.
Meaning of the term Franchise Agreement
Franchise Agreement is a contract entered between a franchisor and a franchisee. The content of the said contract can vary depending upon the franchise’s system, the franchisee, the state jurisdiction of the franchisor, and the arbitrator. Furthermore, this agreement offers the investor with a branded name, product, recognition, and lastly, a support system.
Normally, two parties are involved in making a Franchise Agreement. These two parties are known as the Franchisor and Franchisee. A Franchisor is the one who license his trademark and business system. In contrast, a franchisee is the one who pays royalty and often an initial fee for availing the right to do business under the concerned franchisor’s name and business system.
Advantages of a Franchise Agreement
Following listed are the advantages annexed with the concept of a Franchise Agreement –
- Business Privilege – A franchise agreement permits an individual or an entity to access the trademark business name, the products, logo, and all of the other marketing know-how that a franchise has to offer.
- Control of the Brand – The concerned franchiser after entering into the legal contract, shall be able to stipulate the terms and conditions regarding the brand usage, penalties. Moreover, it is pertinent to note that all the rules and regulations prescribed must be clearly defined.
Elements of a Franchise Agreement
Following listed are the essential elements of a Franchise Agreement –
- Details of both the Franchisor and Franchisee – The franchise agreement should include all the details and information of persons entering into the agreement, i.e., the franchisor and franchisee.
- Fee of the franchise and investment – A franchise agreement must stipulate about the franchise fee that a franchisee is required to pay to the franchisor. The agreement must also talk about the approximate investment needed to start its franchise business.
- Business Activities – The franchise agreement should contain information concerning the roles and responsibilities of the franchisee and the franchise operation. The information concerned should include details of the goods or services franchised, proper maintenance of accounts and other registers, standards of operations, and inspection of the said unit at regular intervals, etc.
- Payment of Royalty – The franchise agreement must also state the royalty fees along with the specific format in which it needs to be paid, i.e., the mode of payment, details of the concerned bank account, and the intervals of making payment (monthly, quarterly or annual payment).
- Training and Operational support – The retail franchise agreement should state the details regarding technical, training, and administrative support, which are to be provided by the franchisor to the franchisee. Further, it must also include the support and assistance to market the said franchisee. Moreover, the amount required to be paid by the franchisee for such support and assistance must also be mentioned.
- Intellectual Property Rights – The franchise agreement should include the way and the method in which the said franchisee can use the Copyright, Trademark, and Trade Secrets of the franchisor. It is pertinent to note that this clause specifies the Intellectual Property Rights (IPR) that the franchisee concerned gets to use, manufacture, sell, and distribute the goods or services in the name of the franchisor and use the Copyrighted creation of the franchisor.
- The Territory of franchisee’s operations – The Franchise agreement should clearly mention the location and the territory within which the said franchisee can conduct its business operation. This is a significant step as the franchisor may franchise its business to several franchises in different locations.
- Duration of Franchise – The agreement must specify the duration for which the franchise is lent or licensed to the franchisee. Further, it is noteworthy to state that the franchise agreement is subject to renewal or termination post this period.
- Renewal or Termination of Franchise Agreement – This agreement must mention whether the franchisor wants to renew the agreement post the tenure of a franchise or terminate it. Further, it should also state the terms and conditions for the renewal along with the grounds on which such a franchise may be declared cancelled by the franchisor during the period of the agreement.
- Resale of the franchise – The terms and conditions stated in the agreement must also specify whether any rights regarding the reselling the franchise is given to the franchisee or not.
- Applicable laws – Lastly, the Franchise Agreement must also prescribe the laws applicable over both the franchisor and franchisee together with the legal action that can be taken by either of the parties in the case of an infringement.
Types of Franchise Agreement in India
Following listed are the different types of franchise agreements available in India –
- Single Unit Franchise Agreement – This type of agreement is the most historical and traditional. Hence, this is the most common form of franchising. Further, as per this agreement, the franchisor grants the right and responsibilities to establish and operate one franchise to the franchisee. Also, the franchisees are required to invest capital on their own and also apply their management skills for enhancing their business.
- Multi-Unit Franchise Agreement – In this type of agreement, the concerned franchisor grants the right and the responsibilities to establish and operate more than one franchised unit to the franchisee. Further, the multi-unit franchisee should have both the financial and managerial capability in order to develop multiple units itself.
- Master Franchise Agreement – Lastly, in this type of agreement franchisor grants the right for a specific region, country, hence empowering the master franchisee to offer a full range of products and services of the franchisor. Further, the master franchisee also has the power to recruit other franchisees. In this way, the master franchisee turns into a franchisor to all those franchisees who have joined the system through its master franchise.
Different Laws governing the concept of Franchising
The Following listed are the laws governing the concept of Franchising –
- The Indian Contract Act, 1872 – The Indian Contract Act is the foremost law governing and regulating the fundamental facet of contractual obligations between a franchisor and a franchisee in a franchise business. This act helps in deciding the fundamental principles, such as the offer and acceptance, consideration, anticipatory breach of a contract, and other grass root level activities.
- The Competition Act, 2002 – The competition act prohibits arrangements concerning the production, storage, supply, distribution, acquisition, or the control of goods or services that can cause or are likely to cause a considerable adverse effect on the competition within India. Further, this law is made for the purpose of prohibiting big franchise from creating a monopoly in the market.
- The Income Tax Act, 1961 – The tax aspect of a franchise business is governed and regulated by the Income Tax Act, 1961. The income tax act makes it a point that the company acquiring advantage from the Indian soil pays the requisite taxes. Further, this statute regulates and administers the mechanism of international franchising as well. Lastly, all the royalties or the franchise fee must be taxed at applicable rates in India.
- The Consumer Protection Act, 1986 – This Act encourages the idea of consumer and consumer interest. Under this said Act, a consumer is eligible to file a complaint against both the franchisee and franchisor, if in case there is any defect in the goods or deficiency in services. Lastly, the Consumer Protection Act protects consumers against unfair trade practices.
- The Arbitration and Conciliation, 1996 – In India, Alternate Dispute Resolution (ADR) is promoted extensively. Indian courts are overloaded with the cases, and arbitration is a way out to the problem. The Arbitration and Conciliation Act, 1996 enlarges the concept of arbitration in order to resolve the issues wherever possible.
- The Foreign Exchange Management Act, 1999 – The provisions concerning FEMA steps in wherever there is the involvement of any foreign currency or assets. Further, the Big-time international brands, having their franchise in India, are controlled by this legislation. These global brands include KFC, Reebok, Subway. Furthermore, it governs and regulates the payment in foreign currency. Nowadays, the Indian government is working towards simplification of laws so that the international brands can easily open up their franchises in India without much of a hassle
- The Copyright Act 1957, Patent Act, 1970, Trademarks Act, 1999, Design Act, 2000 – These IPR laws govern and regulate the trademark, copyright, patent, design, facets involved in a franchise agreement.
A well-drafted franchise agreement plays a crucial role in avoiding any disputes that may arise between the franchisor and franchisee concerning the use of franchisor’s business and Intellectual Property Rights (IPR) or any other terms and condition of their agreement.
Further, a franchise agreement that is not properly drafted can leave both the franchisor and franchisee exposed to legal disputes that, too, without proper redressal procedure. Hence, a balanced approach that takes into consideration the rights and duties of franchisor and franchisee must be executed while drafting a brand franchise agreement.
Lastly, in India, mainly four types of franchise businesses prevail. These franchise businesses include Restaurant Franchise, Hotel Franchise, Gym Franchise, and Clinic Franchise.