Precautions while Executing a Franchise Agreement: Lawyers Advice
A franchise agreement is an agreement entered into by a franchisor and a franchisee to operate a franchise unit. It is a legal contract in which the franchisor consents to provide its brand and operational model to the franchisee to set up and run the similar business in another place in exchange for a fee and some share of the income generated. The franchise agreement specifies all the details regarding the contract like the rights and duties of both the parties, the fee the franchisor is supposed to pay, the duration of the agreement, the location of the franchise, etc.
There are a lot of legal issues which arise before and during the execution of a franchise agreement like intellectual property issues, contract issues, competition law and, tortious issues, etc. And since there is no specific law exclusively for franchise businesses in India, a lot of business and industry specific laws must be applied to this:
- The Indian Contract Act, 1872
- The Competition Act, 2002
- Consumer Protection Act, 2019
- Intellectual Property Rights: The Trademarks Act, 1999; Patent Act, 1970; Design Act, 2000; Copyright Act, 1957
- The Arbitration and Conciliation Act, 1996
So when any dispute arises out of a franchise agreement, these laws and the specific agreement in question are supposed to be examined to solve the dispute. However, for any company or business to be caught in a legal dispute can pose a threat on the goodwill of the company. So there are certain precautions that a franchise must take not just before the execution but even during the execution of the franchise agreement. These precautions should be taken by both the parties of the agreement- the franchisor and the franchisee.
Precautions to be taken during the execution of a Franchise Agreement:
The actions of both the franchisor and the franchisee are linked in the sense that both their actions can affect the franchise unit. So these precautions are supposed to be taken by both the parties in order to run the franchise in a peaceful and efficient manner.
• The franchisor from time to time must monitor the activities of the franchisee and ensure that the franchisee is meeting with the quality standards. This is important as there has to be uniformity in the quality of products or services among all the franchises and it this lacks it can cause complaints from the customers under section 2(6) of the Consumer Protection Act, 2019. Further, Section 35 of the Consumer Protection Act, 2019, talks about the manner in which a consumer can place a complaint.
• A franchisor and a franchisee enter into an agreement as independent contractors but sometimes this relationship turns into that of a principal-agent relationship where the franchisee (agent) deals with the third parties on behalf of the franchisor (principal). In such a case, as per Section 211 of the Indian Contract Act, 1872, the franchisor may be liable for the actions of the franchisee. When the third party faces any losses by the representation of the franchisee, the franchisor can be held liable for such losses. Similarly, the franchisor will be liable for the torts committed by the franchisee (Vicarious Liability). So the franchisor has to keep giving advisory assistance to the franchisee and must keep a close check on the actions of the franchisee.
• It is also important for both the parties during the course of the agreement to make sure that their practices do not constitute monopolistic. Section 3 of the Competition Act, 2002 talks about this. “No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”
• Another very important precaution which is to be taken during the execution of the franchise agreement is Tortious Liability. This involves two things- Negligence and Vicarious Liability. Negligence means breach of duty. If any kind of breach of duty is caused by either of the parties or to a third party, then it could lead to a civil action for negligence.
One major issue that arises out of these agreements is the negotiable aspect of the agreement. Yes, franchise agreements can be negotiable but the modifications are supposed to be limited and minor because there has to be uniformity within all the franchise systems. So, the terms of the agreement can be negotiable to the extent that it provides more favorable terms to the franchisee. But terms relating to the structural items like initial franchise fees and royalty obligations should not be negotiated.
Authored By: Adv. Anant Sharma & Sanjana Akasam