The franchise industry in India has experienced robust growth over the past decade. Despite the economic downturn, the annual growth rate of the franchise industry in India has remained positive and currently stands at 30-35%. The successful history of franchising in India is a testament to the enormous potential and promise that India holds for the franchising industry.
In India, franchising has gained considerable popularity in many sectors including education and training, healthcare and welfare, information technology services, and in particular the retail sector, including food and beverages. , fashion and lifestyle, etc. However, franchising of products and services in India is still in its infancy, thus presenting interested foreign companies with a huge untapped business opportunity.
A rapidly growing middle-class population with rapidly growing disposable income and propensity to spend is one of the main reasons for the flourishing of the franchise industry in India. In addition, the entrepreneurial nature of the Indian population and increased brand and quality awareness among urban consumers provides another impetus for franchising in India.
Aside from a huge consumer base second only to China, exposure to international standards for goods and services, and availability of relatively cheaper, skilled, tech-savvy human resources, India has one of the fastest growing retail sectors. According to Business Monitor International’s India Retail Report for the third quarter of fiscal year 2010, retail sales are expected to rise from $353 billion in 2010 to $543 billion in 2014. Combined, these factors present a very significant business opportunity. lucrative for foreign companies who wish to franchise their business, brands or their products.
Franchising is a relatively modern distribution channel that allows foreign brand owners to exercise a substantial degree of control over how and how their products or services are offered and sold to consumers. It ensures efficient and rapid cross-border market penetration for the franchisor, an opportunity to push their brand beyond the limits with minimal capital investment and risk.
Simply put, a franchise is a business model based on a license granted by one entity (the ‘Franchise’) to another (the ‘franchisee’) that allows the use/exploitation of the franchisor’s intangible assets, such as the brand/name trade, business model and concept, image, marketing techniques and other intellectual property for the purpose of making sales or providing services in a defined geographic location in exchange for a sum of money.
India does not have consolidated legislation regulating franchising, although private sector bodies have been lobbying for specific franchising legislation. Some key laws affecting franchising in India include the Indian Contracts Act 1872, Competition Act 2002, Trademarks Act 1999, Copyright Act 1957, Patents Act 1970, the Consumer Protection Law of 1986, the Foreign Exchange Law Management Law, 2000, labor and tax laws.
Importance of a Quality Franchise Agreement
The ‘quality’ in any agreement, regardless of its object, is, among other things, essential to mitigate or avoid disputes between the contracting parties. The ‘quality’ of an agreement can be assessed according to many parameters, including: clarity of purpose, holistic/gap-free nature; unambiguous provisions/terms/conditions with no possibility of contradiction; form of presentation; and most importantly, enforceability.
A ‘franchise agreement’ is a contract between the franchisor and the franchisee that defines their relationship and inter se rights and obligations.
‘Quality’ becomes even more important in a franchise agreement due to the inherent business and operational complexities present in such agreements. A quality franchise agreement must affect the underlying symbiotic relationship between the franchisor and the franchisee.
A quality franchise agreement must guarantee clear, unambiguous and airtight coverage of all critical issues, such as the roles and obligations of the parties, confidentiality and protection of intellectual property; payment terms and taxes; duration, renewal and termination; agency issues; post-completion issues; negative agreements; applicable law and jurisdiction (especially in international franchise agreements).
Also, a good franchise agreement should ensure that quality control mechanisms do not blur India’s competition laws. For example, in certain situations, a provision that requires a franchisee to obtain products exclusively from the franchisor or from any other specified entity may be considered anti-competitive and in contravention of the provisions of the Competition Act 2002.
Naturally, the importance of a quality franchise agreement to a franchisor and a franchisee differs considerably, as explained below.
The Franchisor Perspective:
The importance of a quality franchise agreement to a franchisor cannot be stressed enough. Of utmost importance for the Franchisor is the protection of its brand, image, reputation, know-how, business concept and other intellectual property rights, as well as limiting exposure to potential risks and liabilities resulting from the conduct of the franchisee.
It is important that the franchise agreement is carefully drafted to ensure clarity of the franchisee’s duties and services, including in the areas of investment and infrastructure, adherence to specific operating guidelines to maintain consistency, reporting requirements, maintenance of the quality; annual market penetration goals; financial returns such as royalties and fee payments, etc.
A quality franchise agreement should provide adequate safeguards and security against misuse of the franchisor’s intellectual property rights by the franchisee. In addition, you must provide sufficient quality control mechanisms to the franchisor, including control over the franchisee’s administrative discretion, to enable you to control your business concept and protect your brand and reputation. Consequently, the franchise agreement must unequivocally and fully address vital issues, such as the temporal and territorial scope of the license, the licensed rights and property, the nature of the license, the restriction of the use of the rights and ownership licensees, quality control measures, including periodic audits to ensure compliance with the business concept, product supply, training, type of products to be sold under the franchise, etc. The business concept that is the object of the license and the mode and form of operation must be clearly stipulated to allow the franchisee to adjust to it. However, the drawback of excessive control over a franchisee and the franchised products is that the Franchisor may become liable for acts of the franchisee in third party claims. A quality franchise agreement should ensure that the relationship is principal to principal and that the franchisor is not responsible for the acts and omissions of the franchisee.
Another crucial issue for the Franchisor is the protection of competition by its franchisee. It is common practice to include non-compete agreements during and after termination in most franchise agreements. However, a quality franchise agreement, like any other contract, should have a carefully crafted non-compete clause to ensure it is enforceable by law and not a redundant term. Unreasonable post-termination non-compete clauses that go against public order and restrict trade would be applicable.
A quality franchise agreement must ensure that the franchisee conforms to the business concept. It must have strict provisions to deal with situations of non-compliance and non-compliance with the commercial format and improper use of the brand by the franchisee. In addition, the franchise agreement must protect the income stream from the franchisee to the franchisor.
Issues related to applicable law and jurisdiction, post-termination obligations to ensure protection against breaches of confidentiality and intellectual property, inventory management are equally critical and must be adequately addressed in a franchise agreement to ensure effective control and systematic business expansion.
The Franchisee’s Perspective:
‘Quality’ is as serious a problem for the franchisee as it is for the franchisor. Since the initial investment in the business is that of the franchisee, a quality franchise agreement is essential for the franchisee to capitalize on their investment.
For a franchisee, a quality franchise agreement should have clearly defined payment terms with no hidden fees or costs and a clearly defined area of operation. You must protect the franchisee from infringement of the intellectual property rights of third parties due to the franchisee’s use of the franchisor’s intellectual property. In addition, the franchise agreement must allow the franchisee to take optimal advantage of the trademark and other intellectual property rights licensed by the franchisor and ensure continuity of supply (where applicable). Therefore, a well-defined and clear business concept and format is as important for the franchisee as it is for the franchisor. It helps the franchisee to avoid implementation problems and guarantee the profitability of the company. A quality franchise agreement should allow the franchisee to obtain maximum support for the implementation of the franchisor’s business concept through training, updating concepts and evolving technologies, etc. The relationship between the franchisor and the franchisee must be that of independent parties and the agreement must be carefully drafted to avoid an agency inference.
Therefore, a quality franchise agreement is the fulcrum on which the success of a franchise rests, which in itself underscores the importance of “quality” in franchise agreements.
seema jhingan