A franchisee is the party in a franchising agreement that is purchasing the right to use a business's trademarks, associated brands and other proprietary knowledge in order to open a branch. In addition to paying an annual franchising fee to the underlying company, the franchisee must also pay a portion of its profits to the franchisor.
Globalization and market liberalization has fueled brand awareness among the Indian masses making the importation of foreign brands to Indian shores an attractive business opportunity for local businessmen. Foreign brands such as McDonald's and Pizza Hut have studied India's tastes and needs and customized their products and menus to suit local preferences.
Many foreign companies consider franchising to be a convenient method of entry into the geographically vast and culturally diverse Indian market, which offers a very favorable franchising environment.
Compared to other parts of the world, the franchise sector in India is at a nascent stage and the general feeling at the moment is that there is no need for franchise-specific legislation. As a consequence, franchising in India is governed by a number of statutes, rules and regulations, some of which are discussed below.
The Contract Act
The contractual relationship between the franchisor and the franchisee is governed by the Indian Contract Act, 1872 (the Contract Act). There is no specific requirement under Indian law as regards a particular language; however, English is customarily accepted as the standard language.
Under the Contract Act, a "contract" is an agreement enforceable by law. A franchise agreement would be enforceable under Indian law since it would meet the criteria of a valid contract. However, care needs to be taken to ensure that the agreement does not contain any provisions that render the contract void or voidable.
Restraint of trade
Section 27 of the Contract Act deserves specific mention. As per said section, agreements in restraint of trade are void. The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) also regulates agreements that relate to restrictive trade practices; however, in the context of the Contract Act, it is imperative to understand the implications of a restrictive provision in a franchise agreement.
While deciding on the issue of restraint of trade in the landmark case of Gujarat Bottling Company Limited v Coca Cola Company (AIR (1995) Supreme Court 237), the Supreme Court of India held that:
"There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchisor on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchisor and it cannot be regarded as in restraint of trade."
Accordingly, covenants in a franchise agreement restraining the franchisee from carrying out competing business or limiting it to a given territory would normally be regarded as reasonable restraints and would be enforceable against a franchisee.
Consumer protection and product liability
The Consumer Protection Act, 1986 seeks to provide remedies to consumers in case of defective products or deficiency in services and holding the manufacturers and service providers liable.
Despite the fact that under a franchise goods would be manufactured and likewise services provided by the franchisee, it is quite likely that the consumers could file an action against both the franchisor and the franchisee, since the goods are sold and the services are rendered under the brand name of the franchisor.
While consumers may seek remedy against both, it is common for the franchise agreement to provide that all product liabilities and responsibilities for consumer claims lie with the franchisee.
Monopolies and restrictive practices law and competition law
The Monopolies & Restrictive Trade Practices Act, 1969 (MRTP Act) prohibits the imposition of restrictions in respect of sources of supply and pricing of products. It must be ensured that the terms of the franchise agreement are not construed as monopolistic or restrictive. If found to be otherwise the MRTP Commission could grant an injunction preventing such trade practices and may also award compensation to the complainant for any losses or damages suffered.
Following the globalization and liberalization of India's economy, competition law has shifted its focus from curbing monopolies to promoting healthy competition. Accordingly, the Competition Act, 2002 (the Competition Act) replaces the MRTP Act. Though some of its provisions have yet not been made effective, the provisions with respect to anti-competitive agreements and abuse of dominant position have recently entered into force.
The Competition Act prohibits any arrangements with respect to production, supply, distribution, storage, acquisition or control of goods or provision of services that cause or are likely to cause an appreciable adverse effect on competition within India. For the purpose of the said Act the following arrangements are presumed to have an appreciable adverse effect on competition:
• directly or indirectly determines purchase or sale prices;
• limits or controls production, supply, markets, technical development, investment or provision of services;
• shares the market or source of production or provision of services by way of allocation of geographical areas of the market, or type of goods or services, or number of customers in the market or in any other similar way; and
• directly or indirectly results in bid rigging or collusive bidding.