Importance of a quality franchise agreement

The Indian franchise industry has seen solid growth over the last decade. Despite the economic downturn, the annual growth rate of the franchise industry in India has remained positive and is currently set at between 30% and 35%. The success of the franchise story in India is a testament to the enormous potential and promise that India holds for the franchise industry.

In India, franchises have gained considerable popularity in numerous sectors such as education and training, healthcare and wellness, information technology services, and in particular the retail sector, including food and beverage, fashion and lifestyle, etc. However, franchising products and services in India is still in its infancy, presenting interested foreign companies with a huge untapped business opportunity.

A fast growing middle class population with a faster growing disposable income and propensity to spend is one of the primary reasons for the proliferation of the franchise industry in India. Furthermore, the entrepreneurial character of the Indian population and the increasing awareness of brand and quality among urban consumers provides another boost to franchises in India.

Apart from a huge consumer base, alongside that of China, exposure to international standards of goods and services and the availability of skilled, tech-savvy and relatively cheaper human resources, India has one of the fastest growing retail sectors. increase. According to Business Monitor International’s India Retail Report for the third quarter of fiscal 2010, retail sales are expected to grow from $ 353 billion in 2010 to $ 543 billion in 2014. Combined, these factors present an opportunity. very lucrative commercial for foreigners. companies that wish to franchise their businesses, brands or their products.

The franchise is a relatively modern distribution channel that allows foreign brand owners to exercise a substantial degree of control over the manner and manner in which their products or services are offered and sold to consumers. It guarantees the franchisor fast and efficient cross-border market penetration, an opportunity to take your brand across borders with minimal capital investment and risk.

Simply put, a franchise is a business model based on a license granted by one entity (the ‘Franchisor’) to another (the ‘franchisee’) that allows the use / exploitation of the intangible assets of the Franchisor, such as the brand / name business model, 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 established legislation regulating franchises, although private sector bodies have been pushing for specific franchising legislation to be enacted. Some key laws affecting franchising in India include the Indian Contracts Act of 1872, the Competition Act of 2002, the Trademark Act of 1999, the Copyright Act of 1957, the Patent Act of 1970, Consumer Protection Act 1986, Management Act 2000, labor and tax laws.

Importance of a quality franchise agreement

The ‘quality’ in any agreement, regardless of its purpose, is, among other things, essential to mitigate or avoid disputes between the contracting parties. The ‘quality’ of a deal can be assessed based on numerous parameters including: clarity of purpose, holistic / loophole-free; unambiguous provisions / terms / conditions without room for contradiction; form of presentation; and the most important applicability.

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 carry out 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 the protection of intellectual property; payment conditions and taxes; duration, renewal and termination; agency problems; post-termination problems; negative pacts; governing law and jurisdiction (especially in international franchise agreements).

A good franchise agreement should further ensure that the quality control mechanisms do not violate the competition laws of India. For example, in certain situations, a provision requiring a franchisee to obtain products exclusively from the Franchisor or any other specified entity may be considered anti-competitive and contrary to the provisions of the 2002 Competition Act.

Naturally, the importance of a quality franchise agreement to a franchisor and a franchisee differs considerably as discussed below.

The franchisor perspective:

The importance of a quality franchise agreement to a franchisor cannot be stressed enough. Protecting its brand, image, reputation, technical knowledge, business concept and other intellectual property rights is of utmost importance to the franchisor, as well as limiting exposure to potential risks and liabilities resulting from the franchisee’s conduct.

It is important that the franchise agreement is carefully written to ensure clarity about the functions and services of the franchisee, including investment and infrastructure areas, compliance with specific operational guidelines to maintain uniformity, reporting requirements, quality maintenance; annual market penetration targets; financial returns such as royalties and payment of fees, etc.

A quality franchise agreement must provide adequate barriers 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 allow him to control his business concept and protect his brand and reputation. Accordingly, 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 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 licensed and the mode and form of operation must be clearly stipulated to allow the franchisee to adjust to it. However, the disadvantage of excessive control over a franchisee and the franchised products is that the Franchisor may become liable for the acts of the franchisee in claims of third parties. A quality franchise agreement must 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 covenants during and after termination in most franchise agreements. However, a quality franchise contract, like any other contract, must have a carefully crafted non-compete clause to ensure that it is enforceable under the law and not a redundant term. Post-termination non-compete clauses that are unreasonable and that go against public policy 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-adherence to the commercial format and misuse of the brand by the franchisee. Additionally, the franchise agreement must protect the income stream from the franchisee to the franchisor.

Issues related to prevailing law and jurisdiction, post-termination obligations to ensure protection against infringement of confidentiality and intellectual property, inventory management are equally critical and must be properly 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. As the initial investment in the business is that of the franchisee, a quality franchise agreement is essential for the franchisee to capitalize on his 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 the infringement of the intellectual property rights of third parties due to the use of the franchisor’s intellectual property by the franchisee. In addition, the franchise agreement must allow the franchisee to make optimal use of the brand and other intellectual property rights licensed by the franchisor and ensure continuity of supply (where applicable). Therefore, a clearly and adequately defined business concept and format is as important to the franchisee as it is to the franchisor. It helps the franchisee to avoid implementation problems and ensure the profitability of the company. A quality franchise contract should allow the franchisee to extract maximum support for the implementation of the Franchisor’s business concept through training, updating of evolving concepts and technologies, etc. The relationship between the franchisor and the franchisee should be that of independent parties and the agreement should 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

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