Precautions while Executing International Franchise Agreements: Lawyers Advice | Franchise Lawyer in Delhi NCR | Franchise Business Attorney in Delhi NCR |

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International franchise agreements tend to delay and cause annoyance to the pre-existing state of laws in the appropriate state. It can be both legal as well as commercial in nature which can turn out to be a difficult situation for the parties involved in such transaction.

There are various commercial pitfalls while franchising internationally which are listed down below:
Targeting the Wrong Country or Domain: Factors which should be considered while choosing franchisee’s state includes:
• minimal government interference with the provisions agreed to by the parties
• The capability to earn profits for the franchisor.
• Political stability of the target country is also a prime consideration.
• Marketing reasons, it is likely that many franchisors have not shown great interest in the countries of Africa and Asia and have steered clear of many countries in South America.

Identical Unrecognized Traits: Some countries may appear to have same traits to those of the franchisor’s home country but, in fact, have basic differences. Franchisees, in particular, should be careful in looking at impressive figures/systems from a country other than their own. Even countries similar on their face may be different enough to make it impractical for franchising.

Unclear terms of Franchising & Roles of the Parties: Many arrangements fail simply because the parties (franchisees in particular) never really seek to answer this question. Franchising is full of cases where there has been no clarity as to what is being franchising causing dispute between the parties.

Besides the commercial pitfalls, there exists the legal pitfall too in the international franchising business. The pitfalls are the listed down below:

Assuming Legal Similarities with the Other Party: Many businesses have assumed the similarities of legal structure in entering a new market in a different state. The only way to avoid such problems is to opt for a Master Franchising Arrangement and avoid direct dealing or the establishment of a presence in the target country.

Misunderstanding the Anti-Competitive Laws: Local laws create special problems for many franchise agreements. On this issue, advice from target country lawyers is crucial. In some instances, local registration will be a requisite. In many countries (such as the United States, Canada, and Australia) a wide variety of restraints (primarily price fixing and resale price maintenance) are prohibited per se, but no specific examination of agreements is required. In others (such as the Andean Pact countries), individual arrangements are examined by government agencies and approval must be obtained.

Misunderstanding Legal Provisions Pertaining to Franchising: If a franchisor in the United States fails to comply with pre-disclosure laws, terrible results follow. There are various individual laws which have nothing to do with franchising, but which can result in significant problems. Local advice on these types of laws is also vital. Other laws such as Licensing controls and production regulations abound in various forms in all countries.

In the case of The Shetland Times Ltd. v. Dr. Jonathan Wills & Zetnews Ltd (1997) Sess. Case 604 of 1996 the franchisor if is not aware about the legal repercussions it can cause disputes in the franchised country. The Franchisors should also guard against the potential sources of contractual, statutory and tortuous liability arising from the website, which could lead to legal liabilities. Since the Internet has no restrictions, the owner of a website would be legally liable for non compliance of laws in almost any country.

Jurisdiction Issues: There is never a satisfactory resolution to the choice of law problem unless the franchisor and franchisee are geographically close. In patent, trademark, and antitrust matters, the target country’s laws will be applicable despite of what the agreement says. Furthermore, one cannot opt out of the target company’s official procedure by simply declaring the contract subject to the laws of another jurisdiction. Clients should be warned that target country laws must generally be obeyed in any case even if the agreement may say otherwise. Some countries have to approve agreement by submission to the jurisdiction of the target country’s Court. The present position is that franchisees rarely obtain a reasonable arrangement of this issue by the processes of inter parties bargaining.

In the case of Ultra Home Constructions (P) Ltd. vs. Choice Hotels International Inc. C.S. (OS) No.2589 of 2010 the Court dealt with the arbitration clause and the maintainability. It is admitted case of the plaintiff that there is an arbitration clause in the agreement between the parties in respect of Franchise as well as Hotel Operation Agreement and hence, all disputes relating to or arising out of or in relation to the Franchise Agreement or Hotel Operation agreement are required to be necessarily referred to arbitration. The arbitral tribunal will have the jurisdiction over the matter.

Taxation Structure: Tax structures in different states vary, but in most countries, income derived within the country’s borders is taxable, whether or not the entity earning the income is domiciled there. As it is harder for a tax authority to collect from taxpayers located abroad than those located within its own country, most countries impose withholding taxes on revenue generated in the country by foreign entities. Franchising parties should always consult with their tax advisors and lawyers to make sure the best methodology is adopted. However, to the extent that a franchisor has employees in market, opens a bank account there or in the franchisee, the company should have the proper understanding of the consequences in their tax regimes.

The franchising has various pitfalls which can hinder potential businesses in the particular country. The aim of any franchise agreement should be proper research and analysis of the legal structure and the target country’s product or service requirement. There are some countries that deter international franchising agreement that not only makes the country technology deprived but also prevents the economy from reaching its potential. As much as the franchisor should be understanding the laws created to regulate such transactions, it sometimes becomes problematic for an honest venture.
Authored By: Adv. Anant Sharma & Shivangi Ghosh