Rights & Duties of a Franchisor in a Franchise Agreement: Lawyers Advice
When a franchisor and a franchisee are entering into an agreement over a franchise unit, they do so by signing a franchise agreement. A franchise agreement is an agreement entered into by a franchisor and a franchisee in order to operate a franchise unit. This agreement specifies all the essential aspects of the franchise transaction like the location, operations, duration, fee, royalties etc. A franchise agreement does not have a standard format. It varies depending on the type of business and the working conditions of the franchise. However, the basic provisions of any franchise agreement are as follows:
- Training and/or ongoing support provided by the franchisor,
- Assigned territory,
- Franchise fee and total anticipated investment,
- Duration of the franchise agreement,
- Trademark, patent, and signage use,
- Royalties and other fees you are expected to pay,
- Operating Protocol,
- Renewal rights and franchisee termination/cancellation policies,
- Resale rights
Laws relating to Franchise Business in India:
In India, there is no separate law that governs franchise agreements or franchise businesses. This necessitates the existence of a legal document that binds both the parties (franchisor and franchisee). This document basically describes all the rights and obligations of the parties. Even though there is no specific law for franchise, there are certain business laws which are applicable to franchise agreements. These laws are:
- 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
Rights of a Franchisor in a Franchise Agreement
A franchisor is the one who grants the license to a third party for conducting business under their brand name in order to expand their business to different places in the world. In doing so, the franchisor is placed with certain rights in the franchise agreement.
- The franchisor has a right to terminate the franchise agreement under the following circumstances:
a. If the franchisee is convicted of a crime
b. If he franchisee fails to pay royalty
c. If the franchisee goes bankrupt or become insolvent
d. If the franchisee fails to comply with required business operations
e. If the franchisee underperforms and it effects the wellbeing of the brand
- The franchisor has the right to royalty and an initial fee and also a continuous fee by the franchisee. The franchisee has to pay the franchisor an initial fee and also a continuous fee. The continuous fee is the fee paid on a monthly basis based on the sales made by the franchisee unit. These fees are basically a payment to the franchisor by the franchisee in return for the services provided by the franchisor.
Duties of a Franchisor in a Franchise Agreement
Since a franchisor is the one who grants the license to the franchisee, the franchisor is placed with more responsibility as the franchised units have to be taken care of too. So there are certain duties the franchisor has to perform. These duties are mentioned in the franchise agreement along with the other provisions but they vary depending on the type of business. However, some of the basic duties of a franchisor are:
- It is the duty of the franchisor to finalize the locations where the franchisees will be setting up.
- When the franchisor is transmitting the trademarks, he must make sure that transmission does not create exclusive rights to use the mark in more than one person, with respect to using the trademark for the same types of goods and services or similar description of goods or services. This is specified under section 40 of the Trademarks Act, 1999.
- The franchisor has to provide continuous advisory assistance during the course of business and also monitor the franchisee units from time to time. This is an important aspect. Usually the franchisor and the franchisee enter into an agreement with an intention to create an independent contractor relationship. But sometimes this relationship can turn into an agency when the franchisee is supposed to act on behalf of the franchisor to enter into contract with third parties. This is agency according to section 182 of the Indian Contract Act, 1872. In the relationship of an agency the franchisor (principal) can be held liable for the actions of the franchisee (agent) in the ordinary course of business. As per section 211 of the Indian Contract Act, 1872 the franchisor can be held liable for the actions of the franchisee outside the course of business or actions contrary to the franchisor’s directions. So, if the third party suffers any losses because of the franchisee, it will create issues for the franchisor.
- The franchisor is also supposed to monitor all its franchisees and make sure that all its franchise units are maintaining the quality and performance standards. This is very important not just to promote the well being of the brand but also to prevent customer complaints. The consumers, in case of any grievance relating to any defect in the product of deficiency in the services can file a case against the franchisor as well as the franchisee as per section 2 (6) of the Consumer Protection Act, 2019. The manner to place such complaints is prescribed under section 35 of the Consumer Protection Act, 2019.
- The franchisor must also help the franchisee in legal approvals required by the municipalities or even at the state and central government levels, depending upon the nature of the franchise.
- Another important duty of a franchisor is to make sure that the franchise agreement is in compliance with the Indian Contract Act, 1872. The agreement must be in accordance to the essentials of a contract as explained under the Act. The essentials which are mentioned in section 10 of the Indian Contract Act, 1872 are offer and acceptance, consideration, consent, competency of parties, lawful object.
- The franchisor must also comply with the laws relating to Intellectual Property Rights. He has to make sure that the brand being franchised is registered as mentioned under section 6 of the Trademarks Act, 1999.
- Another duty of a franchisor is to advertise the brand. While doing so the franchisor must ensure that the advertisements are not misleading in any way. Section 21 of the Consumer Protection Act, 2019 talks about the penalties against false and misleading advertisements.
- The franchisor must ensure that their practices are not monopolistic as per the Competition Act, 2002 was passed to promote healthy competition in India and also to prevent the practices which have adverse impact in the competition in India. Section 3 of the Competition Act, 2002 reads as follows “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.
These are the rights and duties of the franchisor in a franchise agreement. The franchisor is the one running the franchise so it is vested upon him to make sure that he/she complies with all the laws mentioned above and also performs his duties as such.
Authored By: Adv. Anant Sharma & Sanjana Akasam