Are you one of the parties looking at executing an agreement between Franchisor and Franchisee? This article gives you information about legal provisions applicable while doing franchise business in India
With the revolution of entrepreneurship and business, the franchise business model has achieved huge momentum in India. With the increasing number of franchise businesses, questions related to an franchise Agreement between Franchisor and Franchisee have been raised from time to time. Read on to know more about Franchise Rules and Regulations.
To globalize their products and services, many businesses are now expanding their horizon beyond the country where the business was originally started.
There are many big names in the global market operating the franchise business. Some examples of franchise business models are KFC, Nike, McDonald’s, Reebok, etc.
What is a Franchise Business Model?
A franchise business is one where a business owner allows other individuals to operate the business using the parent company’s brand name and trademark. The company which provides the franchise is called the franchisor, and the individual who operates the business under the name of the parent company is called the franchisee.
Some of the features of the franchise business model are:
- There must be two parties to operate a franchise business: a Franchisor and Franchisee
- The Franchisor and Franchisee agreement must be for a specific period
- Both parties should be beneficial to each other while operating the business
- The franchisee has to pay a fee to receive the license and becomes part of the business of the franchisor
- The franchisee receives support from the franchisor in marketing, buying equipment, training, etc. We can make the KFC Franchise Registry Online from our Portal.
Types of Agreement Between Franchisor and Franchisee
The franchise agreement can be divided into two categories. One is product distribution and another is business development.
Product Distribution
- Product distribution is where the franchisor allows the franchisee to sell the product manufactured by the franchisee.
Business Development
- Under this type of franchise business, the franchisee sells the products by manufacturing them with the help of raw materials provided to them. For example, a KFC store in Delhi sells food from the ingredients provided by the franchisor.
Franchise Rules and Regulations
The absence of specific franchise rules does not mean that the franchise business in India is not regulated. Instead of enacting a specific franchise rules to govern a franchise business, some existing acts are being applied in this regard. Some of the acts that are relevant to the franchise business are:
The Indian Contract Act, 1872
Since a franchise business is developed based on an agreement, provisions under the Indian Contract Act, 1872 will apply to this business. The following elements should be present for an agreement to become a contract:
- An agreement
- A Lawful consideration
- A Lawful object
- Free consent
- Capacities of the parties to enter into an agreement.
The same procedures are applied to franchise businesses and governed accordingly. In the absence of any element mentioned above, the franchise agreement will cease, and there will be no legal enforceability. There has to be an offer and acceptance between the franchisor and franchisee, which constitutes the agreement.
In the Agreement between Franchisor and Franchisee, the franchisee agrees to sell and distribute the franchisor’s products.
The Arbitration and Conciliation Act, 1996
- If any dispute arises between the franchisor and the franchisee, the dispute can be resolved with the help of the procedure mentioned in this Act. The procedure which applies to disputes that can be resolved under this Act is called Alternative Dispute Resolution.
- This Act aims to reduce the burden of pending cases in Indian courts. In case of any dispute, parties can take the help of the Arbitrator or Mediator before filing a suit in court. If the dispute cannot be resolved under this Act, parties can approach the court of Law. One of the advantages of seeking help under this Act is to save both money and time for the parties.
Consumer Protection Act, 1986
Under the Consumer Protection Act 1986, a consumer can seek redressal in case of any discrepancy in the goods or services purchased by the consumer. If any unfair trade practice is proven, the franchisor has to compensate the consumer. However, a consumer can file a complaint against the franchisor or Franchisee Business Format.
Income Tax Act, 1961
The Income Tax Act of 1961 regulates tax payments in a franchise business. It covers all the aspects of tax in the business. The Act also covers the International franchise business, all royalties and fees, and Goods and Services Tax.
The Competition Act, 2002
- The Competition Act 2002 prohibits monopolies within India. This Act prohibits a single franchise from creating a monopoly in the franchise business by preventing supply and distribution, which can hurt the market.
- The Act also prevents any enterprise or individual from indulging in discriminatory practices. Violations of procedures in case of acquisition or mergers shall come under the scrutiny of this Act.
Trademark Act 1999
The Trademark Act 1999 ensures the protection of trademarks, and protects the trade names of businesses. Trademarks are protected in India by going through a registration procedure under this Act.
Copyright Act 1957
The copyright Act 1957 protects the right of the creator. The same procedure applies in the case of franchise businesses as well. Under this Act, the creator of the business is given the exclusive right to conduct the business.
Design Act 2000
Under this Act, the product’s design is protected so that no other organisation or individual can copy the design of a product. Under this Act, the word “Design” includes shape, pattern, colours, line, and ornament designed in two or three-dimensions.
Do you aware of the Must Read Topics: A Guide On Format of Franchise Agreement
Patent Act 1970
The Act protects creativity and innovation. This Act aims to protect the investment while conducting research and development.
Foreign Exchange Management Act 1999
Foreign Exchange Management Act (FEMA) 1999 deals with foreign exchange. In franchise business, this Act regulates monetary transactions between franchisor and franchisees in India. It also helps to exchange foreign currencies.
Final Thoughts
Due to the increase in the number of entrepreneurs in India, the franchise business has seen a huge momentum. People are now coming forward to operate a franchise business, instead of being bound to a 9 to 5 job. With increasing interest, increases the number of challenges. In case of any queries reach out to our experts in Vakilsearch.
In such scenarios, Law plays an important role in successfully governing every aspect of a business. Despite the lack of a specific franchise rules, other Indian Laws have played a major role in governing the franchise business in India.
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