LEGAL ISSUES IN FRANCHISING

LEGAL ISSUES IN FRANCHISING

Franchising is a well-known market strategy for business expansion in which the owner of a product or a service i.e. the franchisor, obtains distribution by granting certain licenses and rights to an affiliated dealer i.e. the franchisee. The owner licenses all of his intellectual property, use his business model, and rights to sell products under his name to the franchisee. The dealer, in return, works under the franchisor and markets his products in a limited territory. However, the franchisee has to pay a certain amount of initial fee and ongoing royalty to a franchisor in order to acquire the rights and licenses over his business and sell his products or services.

Franchising calls for a contractual agreement between the franchisor and the franchisee. This contract includes a number of provisions that help both parties in understanding their objectives clearly and prevents disputes. The basic structure or format of the contract popularly known as a franchise agreement varies from company to company. This structure solely depends on the kind of products and services the company provides. Often the lack of flexibility and privacy in a franchise proves to be fatal and causes huge losses for the owner. Even if the business incurs profits, it can still fail if its customers do not pay on time when they fall due. There is no guarantee to succeed in a franchising business, however, there is a legal obligation if the agreement demands it. In fact, the franchisee might have to pay fees even after he has failed in achieving his goals and objectives.

To know more about, what is franchising, see the video below-

It is an obvious truth that nobody buys a franchise with the thought of failing, but failures occur. Hence, it is important to consult an expert and scrutinize the agreement thoroughly before signing it. There are a number of legal issues that are involved in the franchise business. These issues along with the provisions under the agreement form the basic structure for keeping the business going. In Spite of the fact that there are no specific laws relating to franchising in India, it addresses different business and industry laws inside the nation. It is important to see how these various laws can influence the business and what are the issues that could emerge thereunder.

• INTELLECTUAL PROPERTY RIGHTS: All franchise agreements include some type of invention or creation of designs that need to be trademarked. These intellectual property licenses lie at the disposal of the laws relating to Intellectual Property Rights. A number of legal issues could arise out of this in a franchising business that should be looked after.

• CONSUMER PROTECTION: Objections and legal actions by customers is a potential issue that both parties must remember. As per the Consumer Protection Act, 1986, a consumer can lodge a grievance related to any unfair trade practices or any defect in goods in a consumer forum. It is the franchisor and the franchisee who would be held liable for such defects or deficiencies. Hence, a proper provision regarding this legal issue must be formulated in a franchise agreement.

• TORTS: Torts are civil wrongs that can cause harm or loss to the consumer resulting in legal liability for the franchisor or the franchisee. A legal issue like a tort should be well thought of beforehand and provisions should be made accordingly. The tortious liability may arise due to the following reasons:

1. Vicarious Liability: Any wrong committed by a franchisee during the course of his employment can bind the franchisor to be liable for his actions. But when a franchisee wilfully acts outside the authority granted, the franchisor gets entitled to recover damages from the franchisee.

2. Negligence: A tort in which harm is caused due to the carelessness of the franchisor or the franchisee, is called negligence. Any breach of duty on part of the franchisor and the franchisee which causes any loss or damage to a third party calls for civil litigation.

• AGENCY RELATIONSHIP: Typically the relationship between both the parties in a franchise agreement is that of an independent contractor, but sometimes, it can be viewed as an agency. For instance, if the franchisee is given the position to enter into contracts with outsiders in the interest of the franchisor, the relationship could be said to be an Agency. It is explicitly important to describe the relationship between both the parties in a franchise agreement to prevent any legal issues regarding the same.

• COMPETITION: One major legal issue that could arise is competition and rivalry. During the period of the franchise agreement, if a franchisee promotes goods of another franchisor along with the former one, it could lead to competition and disputes. In the landmark judgment of Gujarat Bottling Co. Ltd. and Others v. Coca Cola Co. and Others, Coca Cola had put a limitation on the bottling company from getting into any agreement with any rival beverage company during the term of their agreement. The Supreme Court upheld the point of the franchisor and stated that it does not amount to restraint of trade.

Despite the fact that the industry and business laws in India can ensure and administer a franchise plan, there is an ardent need to improve such laws and introduce certainly related to franchising exclusively. Several Indian Organisations with solid brand acknowledgment are using franchising to grow their businesses just like McDonald's, Kentucky Fried Chicken, and many more international brands. With the emergence of globalization and progression having hit the Indian markets, franchising is by all ways a charming and best choice, for domestic businesses and also for foreign undertakings.

To know more about, legal issues in franchising, see the video below-

BY:-

Ridhika Kapoor