09 July

Ensuring Franchise Compliance with Local Laws: A Guide for Noida Franchisors

in Business Laws, Corporate Lawyer, Franchise or Franchising, Legal Advice, Uncategorized

With the emergence and spread of globalization, the business model of franchises has seen a surge in growth. The businesses, which were earlier operating only in their territorial jurisdictions, were now able to establish their identity across borders internationally. This helps both the franchisor and franchisee, as the former gets to expand their business and the latter gets employment. But these benefits come at the cost of stringent compliance with the laws of the nation in which they step foot. This means that whenever the franchisor considers opening a franchise, either in his homeland or outside his homeland, he has to adhere to all the rules, regulations, and local laws of that place. Without following these laws, the franchise would not be able to survive for a long time, or might even not be able to begin at all. So, compliance with the local laws is a golden rule for franchises.

Let us discuss some key legal frameworks governing franchise agreements in India:
• The first and most important legislation in regard to franchise agreements in India is The Indian Contract Act, 1872, which serves as the foundational legal framework for all types of contracts in India. A franchise agreement will be considered valid only when it fulfils all the essential conditions mentioned under this Act, namely, offer and acceptance, lawful consideration, legal capacity of both parties, free consent, and lawful object. In case any breach is committed by any party to the agreement, this Act provides the non-breaching party with the right to claim damages for losses incurred due to the breach. The parties can also opt for the out-of-court settlement mechanism, which aligns with the Contract Act’s provisions on dispute resolution mechanisms. Thus, it is imperative that both the franchisor and franchisee adhere to the essentials of this Act for the smooth functioning of their franchises.
• Ensuring that any company, brand, franchise, or similar entity does not take unfair advantage of its position in the market and that there be maintained a fair competition throughout which protects the interests of the consumer, The Competition Act, 2002 is established. Apart from many other things, in regard to this Act, the franchises are to ensure that neither they get involved in any anti-competitive agreement nor do they abuse their dominant position, which would have an appreciable adverse effect on the competition.
• The consumer is the king of the market, and thus, every policy of the franchise agreement shall be made considering the welfare of the consumer. To give an extra layer of protection to the consumers, The Consumer Protection Act, 2019 is in existence, which ensures that the interests of consumers are upheld in every scenario against unfair trade practices. Franchisors and franchisees shall ensure that the rights of the consumer, including the right to information, the right to safety, the right to choose, the right to be heard, the right to seek redressal, and the right to education. Apart from this, the provisions related to product liability and unfair trade practices are also to be upheld.
• A key characteristic of every franchise agreement is that they guarantee the transfer of their brand value to the one who takes the franchise. In legal terms, this means that the trademarks, patents, copyrights, trade secrets, etc. are shared between the parties involved in the agreement. And to ensure that this sharing or transferring runs smoothly, several intellectual property laws are made in India, namely The Trade Marks Act, 1999; The Patents Act, 1970; The Copyright Act, 1957, etc., and the franchisors and franchisees are under obligation to obey these laws.
• Apart from all these specific local legislations, there are certain laws which are dependent on the type of franchise undertaken. Example: in the case of a franchise agreement in relation to food and beverages, The Food Safety and Standards Act, 2006 is to be complied with, or if the franchise agreement relates to the education sector, then the parties must comply with the guidelines and standards made by and under the educational authorities.

Along with having knowledge of the existing laws, it is also necessary to stay updated on the laws of the nation in which a business is set up, and thus, the franchisors and franchisees cannot afford any negligence in complying with the laws of the nation. After all, proper compliance with the local laws will eventually benefit the franchise.

Mention below some of the points which talk about the importance of staying updated with the local laws:
• The biggest benefit of staying updated with the laws will be that the operations of the franchise will remain legal and can continue without interruption.
• This would help in identifying and mitigating the risks proactively.
• The franchise will remain prepared and stay ahead of its competitors.
• It would help to avoid unintentional violations and associated penalties.
• This would build the brand reputation and trust of the stakeholders, consumers, and future partners as well by signalling that their franchise is ethical and responsible.
• A franchise that stays updated will be in a better position to innovate and adapt as per market demands, etc.
The list of benefits of complying with and staying with local laws is never-ending, but there are certain implications as well for the non-compliance with these laws, which are mentioned below:
• Non-compliance with laws will result in the imposition of hefty penalties and fines by authorities.
• Legal actions can also be brought against the franchisor or franchisee, or both, by consumers, competitors, or regulatory bodies.
• This could lead to tarnishing the brand’s reputation and a loss of trust among the stakeholders.
• Losing customer base and market share.
• Adverse effect on managing the operation of franchises due to poor financial health.
• Disqualification from government schemes or other opportunities, etc.
From the above discussion, it is clear that compliance with local laws must be one of the top priorities of every franchise, and taking any shortcuts could be very problematic for a franchise.

Following are some tips which should be put into action by both the franchisors and franchisees on maintaining compliance and avoiding legal pitfalls:
• Engage legal experts or consultants who have a specialization in laws related to franchises.
• Create a detailed, transparent, and exhaustive franchise agreement highlighting the responsibilities and obligations of both parties.
• Perform regular legal audits to ensure that every aspect of franchise operations aligns with the local legal requirements.
• Impart consistent training sessions to franchisees and their staff regarding compliance with laws and promote best practices.
• Keep thorough records and documentation of all business activities and transactions related to compliance.
• Maintain effective lines of communication between the franchisors and franchisees to address and resolve compliance matters timely.
• Develop comprehensive compliance programmes to enforce adherence to legal requirements.
• Subscribe to legal and industry publications, partake in seminars, and be an active member of professional associations to stay updated on legal programs.
By adhering to these tips and staying updated on the laws of the nation, a franchise will be in a better position to stay strong in the market and run for a longer time. Proper compliance is the obligation of both the franchisor and franchisee, which will eventually result in a successful and sustainable business relationship.
Authored by: Adv. Anant Sharma & Sahil Arora

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Ensuring Franchise Compliance with Local Laws: A Guide for Noida Franchisors

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