Legal Issues in Franchising

This article deals with the basic explanation of the term Franchising, what it comprises of, and what its features are, to know how it impacts our life and the society or nation in general. It further provides a brief explanation over different types of legal issues of franchising which exists and the legal aspect attached with it, to be kept in mind while dealing with the Franchising Aspect.

Introduction

The aspect of franchising has been existing from a few centuries back. Franchising has its precursor in feudality and licenses admitted by rulers in the medieval times. The societal framework which was presented in London at the time of the twelfth century is one of the recognized models. While franchising as an idea has not yet been brought into a form of an industry in India, it is developing. Several business associations and services all over the world particularly in the US and UK have already adopted this mode of business.

What does Franchising Mean?

There is no such specified definition of franchising provided under the Indian law. However, in general terms, the term franchising is defined as a strategy for distributing services or products.

According to the Black’s Law Dictionary, Franchising means a guaranteed license from the seigneur of a trademark or trade name allowing another person to sell an item or service under that trade name and/or mark.

Franchise Agreement consists of a minimum of two parties:

  • The Franchisor and
  • The Franchisee.

The Franchisor is the seigneur of the trademark or the trade name and licenses (related to Intellectual Property) and the system of business, while the Franchisee is supposed to pay the royalty for using Franchisor’s business system or product and such Intellectual Property.

Features of Franchising

As per the International Franchising Association, the British Franchise Association and the Federal Trade Commission of the United States features of franchising are as mentioned below: 

  • A franchising agreement is a relationship formed out of fulfilling the basic requirements of Contract;
  • The franchisor is supposed to have formed a business framework or arrangement, which is related to the brand name;
  • The franchisee is an important introductory capital investment and holds and takes care of the business activity
  • The franchisor’s work is to prepare the franchisee to make a guarantee that it is fitted out to reasonably acquired consent to the business framework;
  • Once the franchisee’s job starts, the franchisor consistently underpins the franchisee in particular parts of the business activity;
  • Similarly, the franchisor routinely looks over the franchisee’s business works so to make sure they are secured with the franchisor’s self-interest and brand name;
  • Consideration is paid to the franchisor by the franchisee for giving the rights licensed and the services rendered to him or her.

Legal Issues with Franchising

Franchising may appear to be absorbing and fundamental. But there are a few issues that have to be handled before beginning a sound franchising work process. Although there isn’t any particular law concerning franchising in India, it is still considered as a business that addresses different business laws and industry laws inside the country. 

It is crucial to have a glance over how these different laws make an influence over the franchising business in India and what the other issues which could emerge thereunder are.

Validity of Franchising Agreements

Every Franchising arrangement is like a relationship formed from a Contract which brings the provisions of the Indian Contract Act, 1872 into play. Under this Act, a “Contract” is an agreement which is enforceable by law and requires certain requirements to be fulfilled to be valid:

  • An offer and its acceptance;
  • lawful consideration;
  • lawful object;
  • free consent of both parties;
  • Capacity to enter into agreements.

Each franchising arrangement, therefore, must fulfill the above-mentioned criteria to become a legitimately enforceable contract.

Agency relationship

Ordinarily, the franchisors and franchisees form an independent contractor relationship, but sometimes, this agreement and relationship between them could be concluded as an Agency. For instance, if the franchisee is provided the position to participate in the contracts with an outsider with regard to his or her interest in it, the relationship can be said as an Agency. Another example is that of a distributor’s contract, say if a distributor enters into contracts with some retailers to promote and advertise the product along with distributing them to the clients. In cases where the Franchising agreement becomes an Agency, the Franchisor would be held liable furthermore for the franchisee’s every action, performed during the course of business.

Therefore, it becomes necessary to specify the relationship formed between the Franchisor and Franchisee, under the said Agreement.

Intellectual Property Rights

All franchising matters usually include the exchange of intellectual property, which could include an invention or a patent for the creation of any design, or a trademark or name, for instance, the Bata shoes or a business tactic format, formation process, trade secrets. Another example being the McDonalds recipes or Barista espressos or any copyright acquired over it. Since intellectual property issues licenses in case franchising agreement, the laws concerned with licensing of IPR establish also gets invoked as a franchise law.

Consumer Protection

Objections raised and legal action taken over in the end

Clients are an important issue which both parties must undertake. Under the Consumer Protection Act, 1986, a Consumer can file a grievance report with the consumer forums for the alleged unfair trade practices performed by the merchant or if there is any deficiency or defects in the services or products which has been offered by the dealer can also become a reason to lodge a grievance or if the offered products are dangerous or harmful to life or do not meet certain requirements prescribed under the law. In a franchise agreement, the franchiser and the franchisee have a possibility of being held liable for any deficiency or defect in the products or services provided by the franchisee. 

Provisions to limit liabilities arising out of such probable circumstances must be specifically mentioned in the Franchise Agreement.

Tort

A Tort means a civil wrong, the remedy for which is giving in unliquidated damages. Tortuous liability may arise in a Franchise Agreement in the following cases:

Vicarious Liability

In a principal-agent relationship formed between the Franchisor and the Franchisee, any civil wrong committed by the Franchisee in the course of business, can be put on the Franchisor to make him or her liable for it, but not at the time when the Franchisee knowingly acts outside the authority delegated to him by the Franchisor and would hold the Franchisor to make the recovery of the damages from the Franchisee.

Conclusion

Even though business and the related laws to it in India do have the capacity to administer and handle a franchise plan, there is still a need for development to improve this administrative and lawful structure. In 1999, a step was taken towards strengthening the franchising business in India, by establishing a Franchising Association of India (“FAI”), through the striving efforts of the Indo-American Chamber of Commerce. FAI supports and encourages the interests of franchisors, franchisees, specialists, consumers, merchants, and other interested people and bodies too. 

With the effect of globalization and the progress of Indian markets, franchising, by all means, is a perfect choice for domestic businesses, sole proprietorships, and also for foreign undertakings.

References

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