Applicable Laws & Legal Compliances for Franchise Business in India: Lawyers Advice | Franchise Lawyer in Delhi NCR | Franchise Business Attorney in Delhi NCR |

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India is at a budding stage with huge potential for the franchising industry. Over the past few years, India has attracted the interest of major international brands and their success has encouraged others to explore franchise opportunities.

Some noteworthy franchise transactions in the past 12 months including the following:

• Doner & Gyros (Dubai) has started franchising in India.
• Italian brand Monnalisa is opening its first franchisee store in India.
• British brand Simon Carter has opened multiple stores in India.

There is currently no legislation which specifically regulates franchising. In the absence of specific legislation, the franchising is governed by various rules and regulations in India.

Applicable Laws & Regulations on Franchise Business in India:
Indian Contract Act (1872): As per the act, the contract should comprise of the following essentials:
• There should be an agreement
• It should comprise of a Lawful consideration.
• The object and purpose should be lawful.
• There should be free consent of the parties.
• The parties should be competent to contract.

In the case of Gujarat Bottling Co. Ltd. and others v. Coca Cola Co. and Others, the Coca Cola Co. 1995 AIR 2372 the franchisor had imposed a restriction on Gujarat Bottling Co. Ltd from entering into an agreement with any other beverage manufacturing company during the term of their agreement. Such agreements often have a clause that the franchisee shall not deal with competing products. Conditions restricting the right of the franchisee to deal with competing goods are for facilitating the distribution of the goods of the franchisor and it is not restraint of trade.

Intellectual Property Rights (IPR): As per the intellectual property laws, the intellectual property that is the crux of the franchising business should be protected by specific legislations laid down by the government. The various types of intellectual property protection that is granted by the legislations in India:
• Patent Protection of an invention which is protected under the Indian Patent Act of 1970.
• Protection of industrial design under the Industrial Design Act of 2000.
• Protection of mark/trademark under the Trademark Act of 1999.
• Protection of the work under the Copyright Act of 1957.
Since licensing plays a vital role in the business, it cannot be ignored.

In the case of Philadelphia Gear Corp. v. Philadelphia Gear de Mexico S.A., Bus. Franchise Guide (CCH) paragraph 10,370 disputes involving use of the franchisor’s trademark by the franchisee are possible litigious concerns in franchising if used post-term. The franchisee may use the mark pendent lite, or even after the termination for reference usages or as part of a corporate name.

Also its important to be cautious if there is any misuse of rights, in the case of In the US case of Getty Petroleum Corp v. Island Trans. Corp., 862 F. 2d 10 (2d Cir. 1988) the defendants who were distributors (franchisees) were liable for delivering gas which was not the plaintiff’s (franchisor’s) brand but was later sold under the plaintiff’s trademark. The Court found the franchisee liable for deliberate misbranding.

The Foreign Exchange Management (FEMA) of 1999: As per the act, the international franchising is regulated by the provisions mentioned herein. As per the rules, prior approval of the Reserve Bank of India is required for making remittances outside India for use/and or purchase of trademark/franchise in India. The Reserve Bank of India (RBI) has not set any permissible limit on lump sum amounts to be made by Indian franchisees entities to their foreign tie-ups, trade procedure would be a key ingredient to justify on the amount of lump sum payments agreed between both the parties.

The Competition Act of 2002: the act deals with anti-competitive agreements and abuse of a dominant position which constitutes as unfair trade practices by the enterprises in the industry. Anti Trust or restrictive trade practice, whereby the agreement between the franchiser and franchisee tends to ignore market competition is another issue. Interestingly in the US, the ice cream manufacturer Baskin Robbins was accused of imposing an illegal tying arrangement when it required all franchisees to buy their ice cream from Baskin Robbins. A franchising agreement could usually come under the purview of such “restrictive trade” agreements and therefore it is advisable to ensure whether these agreements need to be registered.

The Income Tax Act of 1961: As per the act, the taxation structure is laid out for the entities to adhere to and any non compliance of the same will lead to repercussions. It goes without saying that any transaction must be done after understanding the consequences from a tax point of view, and this will be a major consideration in devising a suitable formation for the franchising arrangement. For example, as per the Indo-US Double Tax Avoidance Agreement, royalties are taxed at 15% of the gross sum.

The Consumer Protection Act of 2019: As per the act, a consumer can file a complaint with the consumer tribunals for unfair trade practices adopted by a trader or for any lack/default in the goods or services provided by the trader or if the goods being offered for sale do not conform to certain provisions of the law. In franchising, either of the parties could be held liable for any goods or services provided by the franchisee which suffer defects or deficiencies.

Labour Laws: Depending on the nature of the franchise agreement and the amount of management power the franchisor has over the franchisee’s business operations, different labor law issues could arise. These issues could be based on
(a) The relationship between the parties.
(b) The relationship between the franchisor and the employees of the franchisee entity.
(c) The position of the employees of the franchising which includes questions such as the right of the employees to be consulted on vital business decisions.

The franchise agreement should contain provisions in accordance with Indian laws or franchisee’s state laws, it is advisable to carefully draft and get the necessary registration done with modification in the clauses as per the state’s legal compliances. The Franchising Association of India (FAI) was established in the year 1999 for consolidation of franchising industry which collectively represents interests of the franchising parties and other interested bodies.
Authored By: Adv. Anant Sharma & Shivangi Ghosh