FRANCHISING IN INDIA: AN OVERVIEW OF LAWS AND OBSTACLES

This blog is authored by Aiswariya Pratap Jena a fourth year student at School of Law, K.I.I.T. University




Introduction


India is one of the fastest growing economies in the world. The observable rise in the GDP, coherent to the onset of globalization has been attracting international brands to the Indian soil. Hence, the need for standing apart and making the brands manifestly recognizable requires the registration of the franchise in a new market. It ensures that brands like McDonald’s, KFC, Nike, etc. are easily set apart from each other.


What is franchising?


Although there are no laws which strictly regulate franchising in any statute, it has been defined as an agreement by which the franchisee is given legal representation to sell goods or provide service or undertake any process identified with the franchisor under the Finance Act, 1999. The Black’s Law Dictionary defines a franchise as a license from the owner of a trademark or trade name permitting another to sell a product or service under that name or mark.


To register the franchise, a brand (or Franchisor) has to enter into a licensing agreement with the Franchisee, who pays a hefty fee for carrying out business under the name of the brand/franchisor.


Types of Franchise Agreements


Broadly, there are two types of franchising agreements:

1. Product Franchising: The franchisee sells the product that is manufactured by the franchisor, to the customer. For eg., A Nike store branch in Delhi (franchisee) sells the brand’s shoes that has been manufactured by the franchisor.


2. Business Franchising: The franchisee is provided with essential raw ingredients and ultimately, manufactures and distributes the product under the brand name. For eg., A McDonalds franchise store in Mumbai produces and sells food from a standardised menu and from raw ingredients that is provided by the franchisor.


Other than this broad distinction, there are various other types of franchising agreements, such as Trademark Licensing agreement, dealer/distributer arrangements among many others.


An overview of laws


Since there is no clear legislation governing franchising agreements in India, the same is executed under several corporate laws.

Indian Contract Act, 1872

A franchise agreement, being contractual in nature, is understandably governed by the Indian Contract Act, 1872. A contract is an agreement enforceable by law, and should constitute the following elements in order to constitute a contract:

(a) an agreement, i.e. an offer and an acceptance of the offer

(b) lawful consideration for the agreement

(c) lawful object and purpose of the agreement

(d) free consent of the parties to the agreement and

(e) capacity of the parties to enter into an agreement.

In order to have legal enforceability as per the Act, a contract must comply with these elements. At times, the nature of the contract can be such that the franchisor delegates some authority to the franchisee to carry out business transaction on their behalf. This is said to be an agency. In such cases, the franchisor (also called the principal) would be answerable for acts performed by the franchisee (the agent).


Laws safeguarding the protection of Intellectual Property Rights