FRANCHISING IN INDIA Legal Aspects to be Considered

Franchising is a popular way of conducting business as it is mutually benefiting. For the franchisor, it gives him the benefit of the franchisee’s knowledge of the local environment; provides access to local sales and marketing expertise and channels; reduces investment and regulatory compliances etc. For the franchisee, they get to develop the business in a territory under the franchisor’s established brand name in accordance with the franchisor’s operating guidelines with assured business format and expected financial returns.

- Seema Jhingan

There is lack of a well thought out franchising arrangement that can lead to potential disputes among the parties and here are a few pointers to minimize its commercial and legal risks:

1 Licensing and Use of Intellectual Property Rights (“IPR”): IPRs are an integral part of franchising and involves license of a trade mark, copyright, patent, design or trade secrets. Lack of clarity can lead to open issues such as what is the intended scope and purpose of the license, whether any exclusivity of use is granted and if yes, is it limited to a geographical area or a product/service, is the license for a fixed term andj liable for automatic renewal, what are the post termination rights and obligations related to unauthorized use of IPR and many more such issues. India has a host of IPR related laws such as the Trade Marks Act, 1999, Copyright Act, 1957 etc., that provide for extensive protection and enforcement mechanisms for IPRs and it is in the best interest of both the parties to carefully cover the essential terms in a franchise agreement.

2 Exclusivity and Territorial rights: Another open issue that sometimes create heartburn is on the exclusivity rights of the franchisee as to the territory, goods and services that can be provided, applicable sales channels etc. Territorial and sales channel exclusivity are extremely significant considering the commercial implications on the franchisee, especially if the franchisor requires payment of a minimum assured return.