Mater Franchising arrangements would be the flavor of the day since it provides the franchisor the benefit of the franchisee's knowledge of the local environment; provides access to local sales and marketing expertise and channels; reduces investment; requires negligible government approvals; provides freedom from recruitment of local workforce and consequently lowers the financial danger of the franchisor. The present regulatory restrictions on retail trading by foreign companies in conjunction with sustained economic growth; ever expanding market with a thriving class of urban consumers; quality consciousness amongst India customers are some of the factors contribution to franchising being increasingly used as a type by foreign companies for entering India for the initial time. An average master franchise arrangement enables the master franchisee to produce the company in confirmed territory underneath the franchisor's brand name and trademark with or without the best to manufacture the products in accordance with the franchisors' operating guidelines in conjunction with assured financial returns to the franchisor.
There is a lot of discussion on the necessity of enacting a specialized law to regulate this growing sector in India. Before I proceed with my thoughts on the subject, I wish to quote several lines from a report presented by the International Institute for the Unification of Private Law (UNIDROIT, an unbiased intergovernmental organization of which India is really a member) which states that "the foundation of an effective franchising industry in virtually any country is based on the existence of a "healthy commercial law environment" which includes been defined as one with a 'general legislation on commercial contracts, with an adequate company law, where there are sufficient notions of joint ventures, where intellectual property rights are in place and enforced and where companies can depend on ownership of trademarks and know-how along with on confidentiality agreements' ;.The Indian legal environment is characterized by every one of these key attributes, an undeniable fact established by ever expanding international franchise relationships with India.
To gauge the necessity for a brand new legislation, let us first understand some of the keys issues/concerns involving a franchising arrangement that generally results in potential disputes or disconnects involving the parties and how they're protected or may be protected within the realm of current Indian legislation:
(1) Licensing and Use of Intellectual Property Rights: IP rights are an important part of most franchising arrangements and every franchising agreement involves transfer of some kind of IP right, either as a license of a trademark/service mark/trade name, or perhaps a copyright, or perhaps a patent, invention, design or perhaps a trade secrets. The types of usage of the IP rights and their protection against misuse is among the main concerns of the Franchisor. Some of the disputes that arise during implementation of the franchise agreement relate genuinely to the scope and intent behind the trademark license, exclusivity of good use and geographical scope, protection of confidentiality, extent of transfer of the know-how, misuse and damage caused to the brand and goodwill of the franchisor, etc. Similarly, post termination related issues include unauthorized usage of the trademarks post termination, limited directly to utilize the trademarks for the purposes of disposal of pending inventory (in the lack of that your inventory may go waste), destruction of stationary containing trademarks/trade names, return and ceassation of usage of IP rights. India already has a host of IPR related laws like the Trademark Act of 1940, Copyright Act, 1957, the Patent Act, etc that offer for extensive protection and enforcement mechanism for the intellectual property rights including permanent and mandatory injunctions against infringement and passing off. India is also a signatory to the international conventions on intellectual property rights like the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), thereby offering protection to trademarks or brand names, along with copyright and designs of the foreign franchisor. Recognition and protection is also extended to service marks in India enabling the foreign franchisor to license its mark to a franchisee to offer the services synonymous with him to the consumers in India. IPR laws have been recently amended to produce them compliant with exclusive right obligations under TRIPS and accordingly, the laws meet international standards for IPR protection. Even the Indian courts are quite sensitive and proactive regarding enforcement of infringement actions. It is therefore evident it's not the lack of IPR laws or its enforcement that cause potential disputes but insufficient carefully drafted and negotiated agreements involving the franchisor and the franchisee related to IPR conditions that cause potential IP related litigations.
(2) Obligations of Franchisor and Franchisee: Another crucial issue that cause potential disputes between the parties relate genuinely to implementation of the obligations of a franchisee such as the duties and services to be rendered by the franchisee, the investment and infrastructure of the franchise, adherence to specific operating guidelines or manual to keep up uniformity, reporting requirements, quality maintenance of the item or services delivered; creation of an agency between franchisor and franchisee, appointment of sub-contractors to manufacture and sub-franchisee to sell the products and franchisor and franchisee's liability owing for their acts/omissions; meeting of annual market penetration targets; minimum stock purchase/import obligations; financial returns to the franchisor, including royalty and fee. Similarly, obligations of the franchisor related to periodic training as to the conduct of business, upgrading the franchisee with new methods and technologies, ongoing support, recommendations on general operational, management, accounting and administrative practices, joint marketing and advertising campaigns, sharing of advertising costs generally cause heart burns to the franchisee.
The Indian Contract Act, 1872 is applicable to any or all the franchise arrangements and makes for specific parameters for legally enforceable agreements, lawful object and intent behind an agreement, lawful consideration for an agreement, performance of an agreement, statutory interventions in unfair or unconscionable transactions, consequences of fraud, misrepresentation and undue influence, voidability and rescission/repudiation of agreement, contracts in restraint of trade, contingent and conditional contracts, performance of reciprocal promises, discharge and frustration of contracts, consequences of breach and rights related to liquidated damages, enforcement of indemnification rights, agents and principal relationship and obligations thereto. It is not having less commercial law but insufficient carefully drafted agreements that generally fail the parties. It is therefore important that the franchisee tries to bridge all potential gaps by identifying and analyzing "what if?" situations keeping in perspective the franchisee's financial, technical, manufacturing, marketing, human resource, sales and business planning capabilities.
This does not need a specialized law that is already available in the proper execution of the Indian Contract Act but a fairly detailed and well negotiated contract. In any case even a specialized law can just only provide a wide frame work, the important points and the nitty-gritty of the connection needs to be always contractually agreed.
(3) Payment Terms: Delay in payment or non-payment of license and/or royalty payments might be another section of concern for the franchisor. Which means way and the occasions where such payments should be made must be carefully addressed. In case the franchisor is really a foreign entity, applicability of prior approvals and terms and conditions for foreign remittance should be informed to the foreign party. The Foreign Exchange Management Act, 1999 and the Regulations made there under specifically address the outbound payment related issues. As an example, an Indian franchisee can remit royalty towards license of trademark upto the total amount of 1% of domestic sales and 2% of exports without prior government approval. If the licensor also provides technical learn how to the Indian licensee, the Indian company can remit royalty upto 5% of domestic sales and 8% of exports and lump sum payment of upto US$ 2 million without prior government approval. Payment of royalty above the percentages specified above would require prior government approval. Detailed tax laws are actually in position to manage the withholding tax liability on such payments that might get reduced dependant on the provisions in the applicable double taxation avoidance agreement. The main element issue is that both franchisor and franchisee should be produced aware in advance on the payment and taxation related regulations. Divorce
(4) Duration, Renewal and Termination and its Consequences: Another serious concern of a franchisee is the extendibility of the definition of of the franchising and licensing agreement. Typically, extension of the definition of is the only real discretion of the franchisor based on annual sales turnovers and performance of the franchisee. Very often a franchisee struggles with the franchisor for renewal of the definition of especially when the franchisor is set up with a number of other franchisees offering higher royalties. The other possible scenario is each time a franchisee is suddenly informed of an abrupt termination of the franchise agreement leaving the franchisee with costs of salaries, infrastructure and interest on working capital and other debts. Now do we want a law to tackle with this abrupt termination or non-renewal situations. To start with, it should be clearly understood that agreements entered into between private parties (whether under franchise domain or any other commercial arrangements) are terminable in nature. That is regardless of the terms in the franchise agreement that the contract is interminable. The Indian Contract Act 1872 and the Specific Relief Act, 1963 supported by various Supreme Court judgments are clear that even yet in the lack of specific clause authorizing and enabling either party to terminate the agreement, from ab muscles nature of the agreement, that is private commercial transaction, exactly the same might be terminated even without assigning any reason by serving a reasonable notice.
Keeping this in perspective, it's advisable to negotiate for an open ended term (i.e., no fixed term) agreement with suitable termination clauses on breach with adequate notice period for rectification of breach/default. Though non-provision of the agreed notice will render the franchisor liable for damages underneath the Indian Contract Act, it's advisable to stipulate liquidated damages or substantial termination fees payable by the franchisor on breach of express termination provisions. Suitable exit options also needs to be provided if both parties are not willing to continue. Some of the key post termination conditions that cause potential dispute and are adequately protected by the prevailing Indian laws include:
(i) Misuse of IPR rights and Confidential Information post termination is generally a mater of concern for the franchisor. While there are adequate IPR protection laws against misuse and consequent infringement/passing off actions in conjunction with rights for permanent and mandatory injunctions underneath the Specific Relief Act, it is essential to offer provisions constraining the franchisee from utilising the IP rights of the franchisor and return of most confidential information obtained during the definition of of the agreement.
(ii) Protection of franchisees against negative covenants particularly associated with non-competition post termination. It should be understood that the negative covenant restraining the franchisee from directly or indirectly undertaking business competing with the company of the franchisor during the subsistence of the agreement may possibly not be violative of section 27 of the Contract Act, but post termination negative covenants may possibly not be enforceable under Indian laws. Therefore protects the franchisee against unreasonable negative covenants imposed by the franchisor post termination.
No comments:
Post a Comment