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Basic Principles of International Franchise Agreements: Lawyers Advice

 > Foreign Direct Investment FDI  > Basic Principles of International Franchise Agreements: Lawyers Advice

Basic Principles of International Franchise Agreements: Lawyers Advice

Each country has its own rules and regulations of the franchise model. The different law regimes are franchise-specific laws, general commercial laws or Codes of Conduct:
Franchise Specific Laws:: Franchise business laws usually mention pre-contractual disclosure, franchisor/franchisee relationships and registration prerequisites. The purpose is to protect native franchisees from their own decisions, and from being subjugated by franchisors. In many cases franchise-specific laws are protective nature.
General Commercial Laws: In some states, the franchise model is usually covered under the general commercial and competition laws. For example, the France Commercial Code is followed for exclusivity and quasi- exclusivity clauses in France. Provisions of competition laws that franchisors have to be cautious.
Codes of Conduct: Codes of conduct can be either mandatory or voluntary. Where mandatory, they are incorporated into statutory laws as regulations. Voluntary codes are often recognized by franchise associations. Codes state guiding principles for the relationship between the parties.

Five Key features of a Franchising Agreement:
As per the Indian Contact Act, 1872, the prerequisites of a valid and binding franchising pact are:
• It should be an agreement; there should be an offer and acceptance of the proposal.
• There should be an involvement of Lawful consideration.
• The objective and purpose of the pact should be legal.
• There should be free consent of the parties involved in the pact.
• The parties should be competent.

A franchise agreement is not required to be executed in any specific language in order to be legally binding. Additionally, to be admissible as evidence; a franchise agreement is required to be duly stamped before its execution or within three months after it has been first received in India

In the case of Gujarat Bottling Co. Ltd. and others v. Coca Cola Co. C.A. Nos. 6839 of 1995, the Hon’ble Court held that a negative agreement limiting the franchisee entity from manufacturing, bottling, selling or otherwise being associated with the products or beverages of any other brands during the continuation of a franchise agreement including the period of one years’ notice, is not prohibited under the Contract Act.

In the case of New York Times Co. v Sullivan, 376 US 254 of 1964 the liability of parties may also arise due to various actions inter alia due to hyper linking (inserting a clickable link to another site) and framing, fraud, libel and defamation, invasion of privacy, trademark and copyright infringement. Once the parties form a contract, the liability is on both of them

Rights & Obligations of a Franchisee:
The franchisee usually has the rights to:
• Use the system made by the franchisor.
• Use franchisor’s methodology.
• Use the trade marks/service marks.

The franchisee must usually:
• Operate the franchised business in accordance with the franchising clauses.
• Promote in local advertising.
• Obtain supplies prescribed by the franchisor.

Rights and obligations of a franchisor:
The franchisor has the following rights:
• Right to approve the franchisee’s premises.
• Ownership of information and supplies received.
• Right to require the assistance of the franchisee in the case of any violation of intellectual property rights.
• Right of inspection.

The franchisor must usually:
• Train the franchisee’s staff the method of operation.
• Provide the Operations Manual.
• Improve the operations system.

Restriction on Purchase and Product tying
The Competition Act 2002 prohibits agreements that directly or indirectly cause an appreciable adverse effect on competition within India.

However, reasonable restrictions to protect Intellectual Property Rights (IPR) are not anti-competitive. Product tying provisions under a franchise agreement are not violative of competition act in India.

Duration of a Franchising Agreement
The parties are free to agree on the terms of the agreement. Indian laws do not have a prescribed term. But, the parties must take into account the following factors:
• Nature of the business.
• Industry/sector.
• Profitability.
• Viability of the business.
• Recovery of costs and break-even point.
In India, franchising agreements on an average last for ten to twenty years.

Grounds of Termination of a Franchise Agreement
There are no limitations on the right of the franchisor to terminate the franchising pact. The parties are free to agree on the basis for termination. The grounds for termination are usually expressly mentioned. For example:
• Material breach of any clauses of the agreement
• Failure to adhere to the target.
• Bankruptcy/insolvency.
• Incapacity to perform obligations under the agreement due to any unexpected circumstances

A pre-contract disclosure requirement in India is not necessary. This also applies to sub-franchising. There is no statutory compulsion imposed on the franchisor to supply any information to the prospective franchisee in the target country. It is therefore prudent for the franchisee to conduct a thorough investigation and evaluation of the whole business by both the parties. However, the common law requires that the parties deal with each other in good faith and act convincingly. If the franchisor makes any misrepresentation or violates any warranties under the franchise agreement, the franchisee can commence either or both civil/ criminal proceedings.
Authored By: Adv. Anant Sharma & Shivangi Ghosh

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