ENDING A FRANCHISE DEAL

Termination clauses in the franchise agreements give a long list of grounds under which the franchisor can require the franchisee to shut down their franchise business and de-brand. The justification is to protect the franchisor’s intellectual property (IP), know-how and reputation which also have an impact on the franchise network. Franchisees usually have limited grounds to terminate, such as, insolvency of the franchisor or breach of some warranty provided in relation to their IP rights. This is despite the fact that the franchisee makes the investment to grow the franchisor’s brand in the territory. In addition, the International Development Agreements or the Master Franchise Agreements between foreign franchisors and Indian developers or master franchisees have clauses, whereby the developer or master franchisee is required to waive its right to take legal action against the franchisor.

Most franchisors to avoid termination, try to give the franchisee opportunity to remedy the breach within a reasonable time, if the breach is capable of being remedied. The franchisee then has to do its best to remedy the situation or seek any justifiable extensions. If the franchisee fails, the franchisor can exercise the right to terminate the agreement with immediate effect.

Foreign franchisors are often surprised when sending a termination notice to an Indian developer or master franchisee results in legal action with the Indian developer or master franchisee challenging the right of the franchisor in respect of termination and its interpretation of breach. This can be partly due to the perception among Indian developers or master franchisees that they are making the investment and taking the risk for growth of the foreign brand, whether or not it is known in India, and franchisors should not have unequal rights in their favour. The other reason is Section 28 of the Contract Act, which renders void any provision that restricts a party from enforcing his legal right or limits the time within which the contract may be enforced. Section 28 provides that “Every Agreement

(a) By which any party thereto is restricted absolutely from enforcing his right under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, or

(b) Which extinguishes the right of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period, so as to restrict any party from enforcing his rights, is void to that extent.”

The exception provided under Section 28 is in respect of arbitrations.

Other issues that can arise on termination are what would happen to the premises and the business. Some agreements allow the franchisor to take over the business on termination. In India, a foreign franchisor would need to check whether it is allowed for a foreign company to take over an Indian business in the particular sector. The process of taking over can invite a myriad of regulatory issues. Often it is easier to either shut the business down or allow another local party to enter into a franchise agreement in respect of the territory.

Termination at the expiry of the agreement is usually a natural end to the franchisor-franchisee relationship, unless the franchisee carries on a competing business using the franchisor’s know-how immediately after the termination of the franchise agreement.

It is important for a franchisor to spend some time and money to find a reputable franchisee. This can help in avoiding early termination and a number of problems post-termination. In any event, there can be a number of practical obstacles in relation to termination, despite having a comprehensive franchise agreement.

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