Understanding Disclosure Requirements in Indian Franchise Agreements

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Non-compete clauses are specially mentioned in a franchise agreement to ensure that any sensitive or confidential information or secret is not compromised to any outside authority by the franchisee without the authorization of the franchisor, and to ensure that this clause is obeyed properly, the franchise agreement shall properly distinguish in it that which information is confidential and which is not. No matter in which category the information falls, an important point to note is that every piece of information shall be discussed in as much detail as possible and in a simplified manner which both the franchisor and the franchisee understand and agree to after mutual discussions.

Disclosing all the relevant details to each other is very beneficial, and following are some of the essentials of disclosure requirements in the franchise agreement:
• Though there is no specific law in relation to the franchise system, certain other laws which deal with some insider aspects of this system shall be followed. For instance, provisions of the Indian Contract Act, 1872, or laws related to intellectual property like the Trade Mark Act, 1999, or the Patents Act, 1970, shall be followed, and all this could be considered to have been followed if they are explicitly stated through terms and conditions in the agreement. This results in clear framing of the clauses, which eventually helps in later stages to prevent any dispute on the point of legality.
• Not only the parties to the agreement, but the consumers of the franchise products or service also have a right to get necessary information about that franchise. It allows the consumer to verify that the products or services they are consuming are beneficial to them and that they are not becoming the victim of any misrepresentation or unfair or deceptive trade practices.
• Through detailed disclosure of information, both the franchisor and franchisee build a relationship of trust with each other. It eventually turns out to be more beneficial for the franchisee, as he feels more secure and responsible towards his obligations, seeing the trust the franchisor has shown upon him. Moreover, through this disclosure, the franchisor can also make the franchisee aware of what he expects from him in this franchise relationship.
• Initially disclosing things reduces the possibility of misunderstandings in the future. That is why it is often advised to define all the terms, conditions, obligations, targets, etc. beforehand in a clear and detailed manner, as this helps in preventing legal conflicts to a great extent.
• Clearly outlining the distribution of financial structure, including initial investment costs, ongoing fees, projected earnings, royalty fees, etc., enhances the capability of the franchisee to do better planning with their finances. This makes the franchisee use its resources in a smarter way to avoid the risk of getting insolvent by overextending himself financially.
• Providing past records, historical performances, profits and losses of previous years, projections expected for the upcoming years, market analysis, territorial exclusivity, etc. helps to make better and more informed decisions. This helps to understand which aspect requires more focus or investment to enhance the franchise.
• Overall, the reputation of the franchise will also be increased if it successfully and honestly discloses its information to its business partners and the outside world. This would attract more high-quality franchisee candidates, which eventually led to the creation of a stronger network.
As discussed above, it is essential to differentiate between which information shall be disclosed and which shall not.

Thus, following are some of the points which give a brief overview of the types of information that should be disclosed in the franchise agreement:
• Key information about the franchisor’s business, its history, milestones it has achieved, growth rate, current number of staff and franchises with locations, organizational structure, and support system available to redress any grievance.
• The responsibilities of the franchisee, the guidelines to be followed while operating the franchise, performance targets to be achieved, initial and ongoing fees and payments to be made, the intervals and methods through which payment is to be made, and consequences in case of failure to meet or violate any condition.
• A thorough breakdown of the initial investment required and working capital available to run the business until it turns profitable.
• Annual financial statements, balance sheets, operating expenses, and profit margins of the business.
• The geographical area in which the franchisee shall operate its franchise; the criteria to determine that area; demographic and economic characteristics; and the market potential of the area where the franchise would be opened.
• Training programmes, support systems, workshops, and refresher courses are provided to upgrade the working potential of the employees.
• All the intellectual properties available which can be used by the franchisee and the manner in which they are to be utilized. Any legal dispute pending in relation to any IP and the penalty in case of violation or misuse of any IP by the franchisee.
• The date of initiation of the franchisee, the duration for which the franchise agreement stays valid, the conditions to keep it valid, the terms and conditions for its renewal, the conditions or grounds on which it could be dissolved, the laws governing the franchise, and the transfer of the agreement.
• Procedure and mode to resolve the disputes; the proportion of legal expenses to be shared between the parties.
• Non-compete clauses to restrict the franchisee ability to disclose any sensitive information to outside authorities without the franchisor’s permission.
• Any other information which the franchisor and franchisee find necessary to be added to the franchise agreement can also be added to the agreement to make things clearer.
Disclosing vital information has numerous benefits for everyone related directly or indirectly to the franchise in one way or another. But mostly, it is done keeping in mind the benefits it will yield to the franchisor and the franchisee.

A few benefits of the detailed disclosure of information to these parties are discussed below:
• For franchisors, the biggest advantage could be that disclosing information reduces the chances of misunderstanding to a great extent and thus minimizes the likelihood of legal disputes. Furthermore, brand loyalty would be positively impacted by being transparent and honest in disclosing its details. Consistency is also maintained across all franchises because of standardized procedures and guidelines for products and services. All in all, better and more serious franchisees will be attracted who would appreciate the honesty of the franchisor, which will eventually lead to higher turnover and better management.
• For franchisees, providing complete and detailed disclosure of past records, future expectations, financial capacity, and rewards and penalties allows him to make better and more informed decisions about entering or withdrawing from the franchise. After entering the system, the franchisee can make plans as per the expectations and resources available to him, creating a balanced approach. Information about the technology, properties, training, and support system enables the franchisee to manage the franchise in a much better way and helps them achieve benchmarks and targets smoothly.

In conclusion, it can be said that incorporating detailed disclosure requirements into the franchise agreement is crucial for the prosperity and continuity of the franchise partnership, as it ensures compliance with legal regulations, maintains better relationships between the parties, and increases the overall effectiveness of the franchise system.
Authored by: Adv. Anant Sharma & Sahil Arora

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