Though India is recognised as an emerging destination for foreign companies through the franchise route, with the scope of retail being restricted, there is no separate self-contained franchise legislation, while other developing countries such as Malaysia and Korea have adopted a single comprehensive law.
Though it is difficult to fashion a single law for all franchise arrangements, and the basics of the Contract Act and common law work fairly well, a uniform regulatory framework is imperative.
In India, the term “franchise” is defined under the Finance Act as an agreement which grants the franchisee representational right to sell or manufacture goods or provide services, and would include processes identifiable with the franchisor such as trade marks, brand name, logos etc.
The Contract Act deals with the transactional aspects of the franchising arrangement between the franchisor and franchisee in terms of inter party rights, obligations and duties. Essentially the franchisor grants the franchisee certain rights in a specified territory for a defined duration. Therefore, matters of performance, scope and restrictions, exclusivity rights, non-compete, termination and franchisor’s fee are the main ingredients.
Cross-border franchising models and arrangements involve the interplay of several laws and regulations. Whatever be the intellectual property franchised, brand name and trademarks are almost always involved – sometimes even as the only purpose of the relationship.
Indian regulations permit foreign franchisors to charge royalties up to 2 per cent on use of trademarks and names without technology collaboration. In case of higher payments, prior permission of SIA is required. Franchises which involve transfer of technology can pay royalty up to 8 per cent on exports proceeds and 5 per cent on domestic sales under the automatic route, and prior permission on higher outflows.
Statutory protections include the Trade Marks Act, 1999 , which permit foreign franchisors to register the franchised trademark in India and seek protection of infringement. The TRIPS compliant Patents Act provides additional protection where the franchising arrangement involves technical collaboration for all innovations – product and process.
The franchise agreement therefore is a highly critical document as the general obligations, whether commercial or legal have to be negotiated toughly. With the dilution of Press Note 18, Press Note 1/2005 governs the policy position on entry, whereby FIPB approval is required if the foreign franchisor has an existing franchise/ trademark agreement in the same field. Otherwise a simple declaration to the SIA suffices.
Any non-compete during the term and otherwise has to be provided for and governed contractually. However, long-term negative covenants are not easily enforceable in Indian Courts, particularly after the termination of the arrangement, unless such protection is reasonably necessary to protect the franchisor’s proprietary information and trade secrets.
Though not provided under any statute, this has evolved through case laws, particularly in situations where the franchisee is subsequently permitted to access the technology, or is by implication required to maintain secrecy and has failed to do so. What also works is a non-solicitation clause, situations where a master franchisee is appointed over a territory having several sub-franchisees under it.
Very often master franchisee developers seek exclusivity. While the overseas franchisee would want as large a territory as possible, it is not usually advisable for the franchisor to put all his eggs in one basket because today’s franchisee could be tomorrow’s competitor.
In geographical and physical terms, large territories are not difficult to allocate to a single franchisee, since India is a vast country. However, pure exclusivity is prohibited under Sec.33 of the MRTP Act (MRTPA) as such agreements are regarded as amounting to restrictive trade practices, and prejudicial to public interest.
The MRTPA also prohibits parties from taking any action which would result in concentration of economic power, a similar intent of prevention of cartel formation is addressed under the Competition Act, 2002 which envisages detailed disclosures in the possible event of threat of abuse of a dominant position. In other Asian jurisdictions, franchisors have to mandatorily register detailed disclosures in writing with the regulator in advance, even if the franchisee does not so require.
Why is then the existing structure not growth oriented? A regulatory regime, particularly for foreign franchisors is a must in a growing consumer market. And while most provisions are contractually thrashed out, certain protections, particularly for IPR and non-compete on termination need to be statutorily provided.
Kumkum Sen is a Partner in Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com
