Franchise rightly claims to be the wave of future business in India. A huge consumer base of over a billion people, including a burgeoning class of urban consumers who have substantial disposable income with quality and brand awareness, coupled with the pull of the Indian economy in terms of its human resources, has been essential to attract foreign companies to the country. Although the franchise business in India has experienced an impressive growth of around 30-35% in the last 4-5 years with an estimated annual turnover of US$4 billion, this is a mere fraction of the potential that India can offer. The Indian Franchise Association estimates that in the next five years there will be at least 50,000 franchises in the Indian market.
Franchising is a way of doing business and involves the use by one person (“Franchisee”), pursuant to a license, of the business model, name, likeness, image and business identity of another person (“Franchisor”) together with with your confidential information. know-how to exploit its intangible assets in a particular territory during a specific period with or without guaranteed financial returns for the Franchisor.
A typical franchise agreement provides the franchisor with the benefit of the franchisee’s knowledge of the territory; access to local sales channels and marketing expertise; minimum capital outlay; minimal government approvals; fewer personal problems; accelerated network growth and possibly profitability.
There are three different models of franchises: Product distribution franchises that involve a cooperation for the distribution of goods, mainly in retail businesses; Business name franchise where the franchisee uses the franchisor’s trademark/trade name to sell its own products or services and business format franchise, a combination of the other two types of franchise, using the franchisor’s trademark/trade name to distribute the goods or services of the franchisor. Today, Business Format is a preferred model with more than 1150 national and international franchise systems in India.
LEGAL FRAMEWORK
India does not have specific consolidated franchise legislation. Some key laws affecting franchising in India include the Indian Contracts Act 1872, Competition Act 2002, Trade Marks Act 1999, Copyright Act 1957, Copyright Act 1986 Consumer, Labor Laws, Tax Laws and Foreign Exchange Law Administration Law, 1999. Important contractual and legal issues that may affect a potential franchise relationship are:
(a) Execution of the non-compete agreement. An important issue that arises in this regard is the franchisee’s non-compete obligation, either during the franchise relationship or after the relationship is terminated. A non-compete obligation falls under the purview of restraint of trade under the Indian Contract Act, 1872.
Under Indian law, a contract that restricts trade is unenforceable unless (i) it is reasonable between the parties; and (ii) is compatible with the public interest. While non-compete during the franchise relationship is generally enforceable, negative post-termination non-compete agreements that restrict the franchisee from entering into similar agreements for similar goods and services are generally deemed unenforceable unless the reasonableness test is met. .
(b) Terms of payment and taxes. Remittances to a foreign entity are regulated by the Foreign Exchange Management Act 1999 and the Regulations made under it. An Indian franchisee can remit royalties to license trademark or know-how without any restriction on the percentage or duration of royalty payments.
The payment made to the Franchisor is subject to a withholding tax obligation of 10% of the total royalty or fee in terms of the Agreement for the Avoidance of Double Taxation between India and Germany. Services provided by a franchisor to a franchisee would also be subject to a service tax in India of 10.30% of the gross fee payable to the franchisor. When the franchisor is a foreign entity, the recipient of the service in India is treated as the service provider for the payment of service tax.
(c) Duration, Renewal and Termination. Under Indian laws, all agreements entered into between private parties are terminable in nature, regardless of the never-ending nature of the agreement. However, immediate termination of a contract without giving any reason may expose the breaching party to a claim for damages for wrongful termination.
Therefore, it is advisable for the franchisor to negotiate a fixed-term contract (rather than an indefinite term) with adequate termination clauses for convenience and with a maximum cap on liability for damages under the contract.
(d) Agency issues. It is also best to avoid the principal-agent relationship between the Franchisor and the Franchisee to avoid tortuous liability for damages resulting from the negligence of third parties.
(e) Post-Termination Matters. Some issues that give rise to disputes and that are adequately protected by existing Indian laws include misuse and possible infringement of intellectual property rights and confidential information after the termination of the franchise relationship. Post-termination inventory management must also be addressed to allow the franchisee to successfully manage unsold inventory/raw materials.
(f) Applicable laws and implementation of laws. Often, jurisdictional difficulties deter parties from taking legal action against the breach. Therefore, it is necessary to provide clarity on the applicable law and jurisdiction for adjudication of disputes under international franchise agreements (which may be a neutral foreign forum). Indian courts recognize that “the chosen court may be a court in the country of one or both parties, and may be a neutral forum…”.
(g) Consumer Protection and Anti-Competition. Indian consumer protection laws allow a consumer to file complaints with consumer forums for faulty or substandard goods or services provided by the franchisee. Similarly, restrictive or anti-competitive business practices promoted by the franchise agreement may be challenged under the Competition Law.
LICENSES AND USE OF INTELLECTUAL PROPERTY RIGHTS
The form of use of intellectual property rights (“IPR”) and its protection against misuse is one of the most important concerns of the Franchisor. Issues related to the scope (including geographic) of the trademark license, exclusivity of use, scope of transfer of know-how, misuse/unauthorized use and consequential damages caused to the trademark are some of the important aspects that a license agreement should address. .
India already has a large number of laws related to IPRs, including Trademark Law, Copyright Law, Patent Law, etc., which provide extensive protection and enforcement of IPRs. . These include permanent and mandatory precautionary measures against infringement and usurpation. India is also a signatory to international conventions on intellectual property rights, including the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which offers protection for trademarks, copyrights, service marks and the designs of the foreign franchisor. IPR laws have also been amended to comply with exclusive rights obligations under TRIPS and as a result, Indian laws comply with international standards for IPR protection. Indian courts are also proactive in enforcing infringement actions.
Where the trademark is a registered trademark of the franchisor and such trademark is intended for use by the franchisee in India, it is recommended to register the franchisee as a registered user of the same to enable the franchisor to freely claim the benefit of using the trademark. Commercial brand. through the franchisee. In addition, under trademark law, the scope of the term “permitted user” has been expanded by allowing unregistered users of a registered trademark with the written consent of the registered owner to fall within the scope of such term and such use increased to the benefit of the owner (Franchisor).
In the event of misuse of the brand by a third party, the Franchisor and the Franchisee may file a joint action and in cases where the Franchisee is a registered user of the brand, it may file an action in its own right. Post-termination covenants for the protection of the franchisor’s vested intellectual property continue to apply even after the termination of the franchise agreement.
Conclusion
India, a multi-ethnic country with the second largest business population in the world that has enough exposure to the international standard of services with a healthy business law environment, is poised to grow phenomenally in the franchise sector in the coming years.