Today, India is one of the biggest emerging markets for various goods and services, ranging from bare necessities to expensive luxuries. Until 1991 due to the archaic Foreign Exchange Regulation Act, 1973 (FERA), almost all sectors of goods and services relating to the consumer markets in India were secure from the grasp of foreign investors. After the repeal of FERA and the coming into force of the Foreign Exchange Management Act, 1999 (FEMA), foreign investors found their passage into India with rules for entry becoming far more favourable. Today, a convenient medium of entry by foreign companies into the Indian market is franchising. Franchising also exists as a successful business module for local companies in India within various sectors.
The United States of America stands at the forefront of the franchise boom. Today, the legal environment in the United States is highly conducive to the healthy growth and evolution of franchising. With more than 50% of total retail businesses in the United States, 45% in Canada and 26% in Australia choosing a franchise model for expansion the impact of franchising on retail industries across the globe is considerable. To foster the rapid and sustained growth that this channel brings it is critical that laws to regulate the franchising business exist.
However, there are no laws enacted solely for the purpose of regulating the growing business of franchising in India, even though many nations across the world have enacted such laws. The result is that when franchisors enter India they are governed by a number of different statutes and codes rather than a single comprehensive enactment.
Franchise Laws across the Globe.
There are many countries which have developed comprehensive legislation to cover franchising in their respective dominions. At the federal level in the United States, the Federal Trade Commission ’s Rules on Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures (1979) regulate the information a franchisor is required to supply the prospective franchisee in order to enable the franchisee to make an informed decision on the prospects of venturing into the business. The North American Security Administration Association (NASSA) has adopted a Uniform Franchise Offering Circular (UFOC) which delineates the information required to be disclosed to a prospective franchisee. Disclosure requirements under franchising are well-defined in the USA.
In 2000, the Ontario Legislature in Canada adopted the Arthur Wishart Act which deals comprehensively with disclosure requirements as well as important aspects of the franchisee-franchisor relationship such as fair dealing by each party to a franchise agreement as regards its performance and enforcement, and the right of action for damages for breach of the duty of fair dealing.
In the United Kingdom, there exists no operative franchise-related legislation. However different aspects are governed by norms laid down by the British Franchise Association (BFA), the regulatory body of the franchise industry in the United Kingdom. These include a code of ethical conduct, disciplinary procedure, complaints procedure and appeals procedure.
The Australian government has adopted a mandatory code of conduct and has also modified the Trade Practice Act 1974 to provide for franchising. The new code imposes comprehensive disclosure requirements and provides for mandatory mediation of franchising disputes and minimum standards for franchise agreements including, inter alia, a cooling period, refrain from seeking from a franchisee a general release liability, disclosing material facts and refrain from unreasonably withholding consent to transfer of the business.
In April 2002, the Japan Fair Trade Commission (JFTC), the competition authority of Japan, published new guidelines on franchising. These guidelines contain three parts – a general description of franchising, provisions for the disclosure of necessary information (such as details of the assistance to be offered to franchisees, the nature, amount and conditions of repayment, if any, of the fee to be paid at the time of entering into a franchise agreement, etc.) at the time of the offer of a franchise and a part on vertical restraints between a franchisor and its franchisees. Under the guidelines, the failure to provide necessary information shall constitute deceptive customer inducement, which is considered an unfair trade practice.
On 31 December 2004 the Ministry of Commerce of the People’s Republic of China promulgated the Measures for the Regulation of Commercial Franchises which became the sole legal framework for franchising in China. The measures became operative on 1 February 2005 and provide detailed regulations for franchising, comprising of 42 articles over nine chapters covering a wide span of areas from the franchise agreement to disclosure requirements, special rules for foreign invested enterprises and legal liabilities.
Need for a Franchise Law in India
A healthy legal environment is of great importance for franchising and should include provisions pertaining to all areas that fall within the ambit of franchising. This includes, inter alia, commercial law relating to contracts and joint ventures and intellectual property law for protection of trade marks and know-how. Franchise arrangements are subject to an array of laws and regulations in addition to those regulating commercial contracts and intellectual property rights. There are no specific laws governing franchising in India. As a result a franchise agreement may be governed by different laws.
Primarily a franchise agreement is a contract between the franchisor and the franchisee. The first law which comes into the picture is the Contract Act 1872 which governs contracts in India. A franchise agreement will be governed by the Indian Contract Act, 1872 and the Specific Relief Act, 1963 which provides for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract. If a party to the franchise agreement commits a breach of contract, the aggrieved party has the option to initiate a suit for specific performance in Indian courts and apply for relief in the form of a temporary or permanent injunction, which may be granted at the discretion of the court considering the balance of convenience and the interests of justice. An order granting or rejecting an injunction may be appealed by an aggrieved party.
Laws relating to taxation, property laws, insurance law and labour laws also apply to franchise transactions. Additionally, laws and regulations applying to specific sectors of goods and services will also apply depending on the franchised.
The following are the reasons why a comprehensive franchise law is required in India:
Application of Multiple Legislation
A well-defined legal structure is indispensable for the effective functioning of any business operation. The international business environment demands a well-defined suitable legislation that is complete in all respects. The lack of a comprehensive legislation on franchising in India leads to the applicability of multiple laws to a franchise transaction.
This poses the following problems:
Complexities: Parties to a contract normally prefer agreements with a simple approach and encompassing all the required law procedures and rules required to be complied with. However the application of different laws to one agreement makes it complex to decide various issues arising from the agreement.
Ambiguities: Due to the necessary application of multiple legislation, ambiguities are created as to certain issues. For example, a franchisor would imagine that a certain issue is the franchisee’s responsibility under one law, whereas the franchisee would think the opposite based on a different law.
Time-Consuming: Referring to multiple laws consumes a lot of time at the initial stages of a transaction as well as other points of time when the agreement is sought to be enforced. This proves to be detrimental to the smooth functioning of franchising operations in India and also makes time-bound operations involving new enterprises difficult.
Absence of Disclosure Requirements
Countries with specific franchising legislation make it imperative for parties to a franchise agreement to disclose certain factual information pertaining to the business of the parties. This ensures transparency and facilitates an informed decision. A franchisor should be required, by law, to make certain disclosure to the prospective franchisee wherein he is supposed to reveal detailed information regarding himself, his litigation and bankruptcy history, his financial position, the facilities he offers etc. In India, in the absence of effective disclosure norms, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
In the absence of a specific statute governing the franchise agreement, the franchisor refrains from providing any information that is likely to prejudice or make a franchisee reconsider the business proposition of the franchisor. The lack of proper disclosure requirements provides a golden opportunity to a franchisor to abuse his position of importance as he is virtually under no statutory obligation to make the requisite disclosure.
Applicability of Laws of other Countries
Normally, the absence of franchise laws enables foreign franchisors to make the laws of their own country applicable to the agreements entered into with the franchisees in India. The same is the case with franchisors who enter into franchising agreements with franchisees from other countries. This proves to be an additional burden on the parties, particularly the franchisee.
Lack of Proper Format for Franchising Agreements
Due to lack of a specific format, franchisors from other countries draft agreements which are in the same format as is approved or followed in their countries. Such agreements are made to suit the specific environment of their respective countries and hence are not suitable for Indian environment.
Liability of Parties Uncertain
Due to the lack of specific legislation, the liability of either party is either determined by the agreements entered into between them or on the basis of general prevailing law. The liability clause is different in different countries, and this leads to a great discrepancy among the courts which try such disputes on liabilities.
The Central Government is currently considering a franchise law aimed at fast resolution of disputes; the proposal is expected to be placed before a sub-committee of the National Development Council. The aforesaid problems surrounding franchising in India necessitate the enactment of a specific legislation pertaining to franchising in India and providing for the gamut of activities that franchising encompasses. A special franchise law would greatly accelerate dispute resolutions and fortify the Indian retail industry.
The Franchise Association of India is the country peak industry body and franchise advisory committed to strengthening and promoting the best practices in franchising. Franchise Association of India members are businesses and service providers united by their common concerns for the wellbeing of the franchise marketplace.
Source: Meerad Business Solutions