A franchise agreement is a contract between two parties that outlines both parties' rights, obligations, benefits and responsibilities. The contract, which is a legal document, is essential in franchising and can be tailored to suit the needs of both parties, who are typically the franchisor and the franchisee. This blog will look at the fundamentals, benefits and regulatory framework for franchising in India.
Did you know? Each franchise has a different set of rules to run its units. It may include the hours of operation, managerial structure, goods or services sold, pay grade of employees etc.
What is a Franchise Agreement?
Franchise agreements help the franchisor and the franchisee to run their business smoothly and prosperously. The agreement allows the franchisor to benefit from their brand name, which is their most important asset in terms of generating business. It also ensures that the franchisee does not misuse their rights to the name and brand of the franchisor.
A franchise agreement is a contract between a franchisor and a franchisee that establishes the rights and duties of both parties. It is the basic document upon which a franchise is built and contains the terms and conditions of the business relationship between the franchisor and franchise. An agreement sets forth the basic rights and obligations of the parties, as well as the term of the franchise. Franchise agreement drafts can tend to be lengthy and require legal knowledge, so it is best to have a lawyer help you in drafting in the proper language.
Franchise Documents Required
Certain legal documents are required to be prepared when a franchise business is set up in India. These documents are required to be signed by the franchisor and the franchisee and need to be filed with the concerned authorities in India. These documents ensure that both parties understand their obligations and rights and help safeguard the interests of both parties in the long run.
Franchise Disclosure Document (FDD)
Under the Indian Franchise Act 2006, a franchisor is required to provide a Franchise Disclosure Document (FDD) to the franchisee before entering into a franchise agreement. The Franchise Disclosure Document (FDD) is a document prepared by the franchisor to disclose all relevant information regarding the franchise to prospective franchisees. The FDD is a disclosure document, not a contract or a legally binding document.
Franchise agreements are a means of enabling the franchisor and franchisee to enter into a legally binding agreement that spells out the terms and conditions of the franchise relationship. Franchise agreements will typically cover a variety of topics related to the franchise relationship, including franchise fees, royalties, store specifications, inventory requirements, training and other elements important to the parties.
Given the nature of the relationship between the two parties and the fact that a franchise business owner is a part of a larger brand, it is important to be aware of the fundamental elements of a franchise agreement. The key elements of a franchise agreement are:
- The fee paid by the franchisee to the franchisor to use the latter’s trademark and associated systems and processes to establish the franchise business.
- The duration of the agreement.
- The territory of operation or the territory in which the franchisee is permitted to operate the franchise business.
Also Read: How To Get A Business License In India?
Franchise Agreement Sample
Here is a franchise agreement draft to give you an insight into what a franchise agreement looks like.
Benefits and Regulatory Framework of a Franchise Agreement
Getting into a franchise agreement will ensure that the franchisee gets a slew of various benefits, including:
- By signing a franchise agreement with the franchiser, a franchisee can escape the initial investment and other risks associated with starting the business.
- A wide range of products and services offered by the franchiser can be offered by the franchisee at their locality with minor modifications or changes required.
- A franchise agreement helps you to leverage your business skills, brand name and financial capital of the franchisor to make your business successful.
- The franchisor provides the franchisee with training, support and guidance necessary for running a successful business.
- Allows you to enter an already existing business model with proven success and a larger customer base, and you can easily increase your profit margin.
This string of benefits is attached to the franchisee if they get into a franchise agreement with the franchisor. But ever wondered what the regulatory framework governing the franchisee laws and franchise agreements is like in our country? Now, let’s take a look at the regulatory framework involved in governing a franchise business.
Indian Contract Act, 1872
The regulatory framework of franchise agreements in India is governed by the Indian Contract Act, 1872. Under this Act, a contract is deemed to be void if it is entered into between two parties who are not legally competent to enter into such an agreement. In addition, a contract is also void if it is entered into to defraud or deceive another party.
- Under the Act, a franchise agreement is considered to be a contract of agency and is therefore subject to the general principles governing agency relationships. In particular, the Act provides that a franchisor must disclose all material information to the franchisee, and the franchisee must act in good faith and use reasonable care and skill in carrying out its obligations under the agreement.
- The Act also contains specific provisions relating to the termination of franchise agreements. These provisions give franchisees several protections, including the right to be paid damages for any loss suffered as a result of the franchisor's breach of the agreement.
Consumer Protection Act, 1986
Franchise agreements in India are governed by the Consumer Protection Act, 1986. This act provides for the protection of consumers from unfair trade practices and regulates the franchising industry.
- Under this act, franchisees have the right to receive information about the franchisor's business, the franchise agreement and the franchisee's rights and obligations.
- The franchisor must also disclose the risks involved in the franchise agreement.
- The act also requires the franchisor to provide the franchisee with a cooling-off period of 14 days, during which the franchisee can cancel the agreement without any penalty.
Trade Marks Act, 1999
Franchise agreements are governed by the Trade Marks Act, 1999 in India. The act lays down the regulatory framework for franchise agreements and protects the rights of both franchisors and franchisees.
- The act also provides for the registration of trademarks and the enforcement of trademark rights. The Trade Marks Act, 1999 thus provides a comprehensive and robust legal framework for franchise agreements in India.
- The Trade Marks Act, 1999 allows franchise agreements to be registered in India. A franchise agreement must be registered with the Registrar of Trademarks to be valid and enforceable.
- The registration of a franchise agreement confers upon the franchisor the exclusive right to use the registered trade mark of the franchise business. The registration of a franchise agreement also protects the franchisor from infringement by third parties.
The Copyright Act, 1957
There are many regulatory frameworks for franchise agreements in India according to the copyright act of 1957. The most common and important regulatory framework is the requirement for a valid and enforceable copyright agreement.
- This agreement must be in writing and must be signed by both parties. It must also contain a provision for the payment of royalties.
- The other common regulatory framework is the requirement that the franchisor must have a valid trademark registration. The franchisor must also have the right to use the trademark in the territory in which the franchise is to be operated.
In the light of the recent changes in FDI policy in India, the franchise industry has grown by leaps and bounds. Franchising is one of the fastest-growing industries in India today. It is estimated that the franchise industry in India is expected to touch ₹7,94,07,50 lakhs by the year 2020. With the rising popularity of franchising, the stakeholders need to understand the fundamentals, benefits and regulatory framework of franchise agreements.
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