How Does a Franchise Agreement Protect Both The Franchisor and Franchisee in India?

In India, Franchising is a very popular way to run and expand a business, and India is the world’s second-largest franchise market. Let’s try to explain this business concept in easy language. You might have seen various food brands operating near your home, like La Pinoz Pizza, Pizza Galleria, Domino’s, Pizza Hut, etc. In such a type of agreement or business, generally a person who wants to invest capital and run a business in their region (franchisee) takes the permission to use the brand name of a larger business or company like Domino’s, Pizza Hut, etc. (franchisor) and in return for the name (trademark), pays the franchise fee, commonly known as royalty, and thus gets the permission to run the business.

But is that all? No. In these agreements, apart from the name, the person also gets to know about the business model, processes, training, etc., and they get to operate under the larger brand’s name, goodwill, and reputation, and thus are more likely to succeed.

So, through these franchise agreements, the franchisor gives the license of their trademarked brand name to the franchisee in return for the investment. To take a simple example, such an agreement will also include information about how the employees will be provided training, whether they will be employed by the franchisee or the franchisor. What equipment will be provided to the franchisee by the franchisor? How much cut will the franchisor get on the Profits? Etc.

Is there any legal framework for it in India?

The simple answer is no, there isn’t any specifically made law for the franchises in India, and thus, all the arrangements between the franchisee and the franchisor are managed through an agreement, which brings it under the purview of the Contract Law. And with that, other laws also apply, such as the Intellectual Property law, as the company name, whose license is given, is trademarked; Foreign exchange rules may apply in case of international payments, and data protection laws also govern this type of agreement.

So, in all, there isn’t any proper legal framework for protection of the franchisor and franchisee, and thus, the drafting of a proper legal document is necessary for protection of both the parties, and this is generally done by skilled lawyers and professionals, for more information, contact us through our website.

Coming back to the topic, let’s discuss how a franchisor can be protected under such an agreement.

How the agreement protects the Franchisor (Brand Owner):

The Franchisor, through the terms in the agreement, gives himself the right to inspect the franchisee’s shop to check the quality and maintain their standards throughout. Along with that, good quality ensures that customers are getting good quality products, and this prevents any sort of legal trouble in the future.

Through the terms of the agreement, the franchisor is given the right to audit the accounts of the franchisee regarding the transactions done for the course of business, and thus ensures transparency is maintained and money and operations are proper.

There are other rules added as well, such as the rules about the suppliers, which will contain information like, for example, using only approved suppliers or using one specific supplier for the raw materials required for production.

It also includes clauses that specify the conditions for the opening of other stores as well, and specifies how many stores and at what locations can be opened through the current agreement, and how permission will be required to open more stores.

It might also include the procedure for termination of the franchise agreement, based on the low performance and continuous underperformance of the outlet, showroom, etc., and thus protects the rights of the franchisor.

Further, through the non-compete clauses, the franchisors ensure that the franchisee doesn’t start a similar business using the knowledge and experience that they acquired during the earlier course of business in their name, so as to prevent the franchise business’s future.

Confidentiality clauses also save the business by restricting the franchisee from sharing their brand secrets with a 3rd party or to the public at large, and also add hefty penalties if the franchisee does so and thus preventing the business of the franchisor.

Another clause specifying that the franchisee cannot transfer the ownership without the franchisor’s permission also protects the franchisor’s rights and prevents the business from going down to the hands of a 3rd party.

How the agreement protects the franchisee (Shop Owner):

The agreement can include clauses to specify certain things, like the franchisor doesn’t have the right to change the rules of the franchise suddenly, and might include a provision of giving notice beforehand or a rule requiring mutual consensus for bringing about such a change.

And as the termination clause protects the franchisor, similarly, it protects the franchisee as well by specifying and providing clear rules for ending the contract or altering it. And this helps the franchisee as well because a sudden end or change to the agreement might affect them financially.

The agreement also explains the renewal process, so the source of income for the franchisee is confirmed at all times, and this builds trust as well.

If there are many franchisees in a particular area, the agreement also specifies the territorial limits of their business operations so as to protect one of the franchisees from going into loss and thus protecting the business overall.

In Conclusion, So, these were how the rights of the franchisor and franchisee are protected in the franchise agreement. Always remember to approach skilled lawyers and professionals for the formulation of such agreements so as to create a win-win situation for both parties.

Apart from all that, clauses to refer disputes to arbitration can also be included to speed up the process in case of any dispute between the parties. Thus, due to a lack of legal regulations, a well-made agreement can ensure the smooth functioning of a franchise business in India.