Do you have the Legal know-how to turn your business into a Franchise?

As we all are aware that In India there is no specific legislation for regulating franchise agreements, however there are various legislations which impact and regulate the franchise agreements in India. The legislations that govern and impact franchise agreements in India are:

1. The Indian Contract Act, 1872: This legislation governs contracts and include franchise agreements. The said Act defines the essentials required in a contract such as an offer, acceptance, consideration and rights and obligations of parties.
2. The Trade Marks Act, 1999, The Copyright Act, 1957, The Patents Act, 1970, The Designs Act, 2000: These legislations are essential and critical for the franchisors who are relying on intellectual property (“IP”) to run their business as these legislations will help protect the IP rights of the franchisor.
3. The Consumer Protection Act, 1986: This legislation protects the interests of the consumers and remedies are available if there are defects in the goods or services.
4. The Specific Relief Act, 1963: In the event if the franchisor is in violation of the franchise agreement remedies are available under this act which can be valuable to the franchisee such as specific performance and injunctions which are remedies in case of contract breach.

Other Acts which affect the terms of franchise agreement and needs to be kept in mind while execution are:

 5 The Income Tax Act, 1961: This act impacts the taxes which accrue from the franchisor’s income of their Indian activities which also includes the royalties paid by franchisees.

6. The Foreign Exchange Management Act, 1999: This legislation governs the exchange transactions overseas in India which includes repatriation of cash and the royalties paid to the foreign franchisors.
7. The Information Technology Act, 2000: The legislation is important where the franchise agreement is executed electronically as it gives legal recognition to digital signatures and electronic documents.

 In Indian franchise ecosystem, intellectual property rights (IPRs) play a crucial role in nurturing innovation and protecting the interests of creators and innovators. In India, there are robust laws in place to safeguard IPRs, which are essential for promoting economic growth and technological advancement. Franchise agreements, a popular method of business expansion, involve the licensing of IPRs and thus necessitate careful consideration of the legal framework surrounding intellectual property rights. In the following lines we will delve into the laws governing IPRs in India and their significance in the context of franchise agreements.

• For franchisors to expand their business in India numerous laws and regulations needs to be complied with. The franchise agreement must be as per the Indian Contracts Act, 1872 as explained above and must explicitly include all the rights and obligations of both the parties.
• In India IP protection is a critical aspect for franchisors, therefore the franchisors must protect their IP by registering the IP with the appropriate government offices and enforcing their IP rights by pursuing infringers to cease use.
• Protection of Confidential information may include protecting trade secrets which are unique to the brands and products/services provided by the Franchisor.
• The franchisees must comply with Indian marketing and advertising laws and regulations which means that the advertisements and marketing material must not be misleading and must be in compliance with the existing laws.
• The franchisor must ensure that the franchisee is complying with the Indian employment laws such as minimum wages, employee benefits, working conditions, etc.
• As enumerated above the Indian tax laws and regulations must be followed wherein the franchisee will be required to file tax returns within a stipulated time. The franchisor must ensure that the financial records are correct, and the filing obligations are followed in a timely manner by the franchise.

A standard franchise agreement includes the following standard Terms and Conditions:

1. The agreement must be clear with fair terms and conditions for both the parties. The terms must be clearly defined and such as the period of agreement, renewal, termination, geographical exclusivity clause which should specify the geographical region in which the franchisee will operate, etc.
2. Franchise disclosure requirements in India requires the franchisor must provide full and complete disclosure of all material facts about the franchise, including the terms of the agreement, the investment required, the training and support provided, and any ongoing fees or royalties.
3. Franchisor may obligate franchisee to source their materials (raw as well as finished) from specific suppliers or distributors to maintain the quality of the products supplied to the end user.
4. The franchise agreement must clearly specify the terms of any intellectual property rights granted to the franchisee, including trademarks, copyrights, patents, and trade secrets.
5. The responsibilities of both the parties must be defined with respect to marketing and advertising for promotional operations.
6. The agreement shall also clearly define terms related to remuneration. Franchisors usually have a percentage of royalties fixed in any revenue generated by the franchisee. The remuneration is specified in percentages and may vary as per the sales of the products.
7. There is no mandatory registration requirement for franchise agreements in India. However, if the franchise agreement contains a trademark license, the franchisor must register the trademark with the Indian Trademark Office.
8. The franchisor must complete the registration and approval requirements before entering into the agreement, these may include obtaining permits and licenses depending on the state where the operations will take place by the franchisee. If the appropriate requirements are not fulfilled it may result in levying legal penalties and fines.
9. Conditions for termination and renewal procedures must be enumerated in the agreement. The termination clause must be unambiguous and should enumerate the conditions for terminations such as breach of contract, non-payment of royalty or any other violations.

(Source: Talwar Advocates – Intellectual Property Practice)