Franchise

Legal Aspects of Franchising – The Complete Guide

In this article we examine the various legal aspects of a franchise business and the implications of their regulations.

Most business practices have been elaborately covered in legislation and have their own governing regulations specific to their structure. The Partnership Act 1932 governs partnerships. The LLP Act of 2008 governs LLPs. And companies are governed by the Companies Act, 1956 (revised in 2013).

The franchise is one of those business models with no exclusive act to regulate it. Instead, a host of different acts and laws regulate various aspects of a franchise’s operation, starting from its formation to its operation and its dissolution. Let us look at what these legal aspects of a franchising are.

Different Legal Aspects of Franchising

Franchise Agreement – Contracts Act

This is the founding document of a franchise. It is the equivalent of a certificate of incorporation or a partnership agreement. It is the constitution of the business.

It details the entire structure of the franchise, its objectives and modus operandi. It defines the roles and responsibilities of the parties involved in the franchise, the financial arrangement between the parties and the exchange of information and intellectual property between the parties. But in essence, the Online Franchise Agreement is a contract between two private parties.

Hence, it is governed by the provisions of the Contract Act, 1872. The contract act regulates the validity of a franchise business agreement. Some of the essentials of a valid contract, according to the contract act, are as follows

  • Offer and Acceptance –There has to be an offer that precedes an agreement and an acceptance to that offer which completes the agreement. All the clauses and provisions of an agreement are essentially offers and counter offers. A franchisee offers to run their business in the franchisor’s name. Or the franchisor offers his brand and intellectual property to a franchisor in exchange for a fee. The signature of the parties at the end of an agreement indicates acceptance.
  • Legal Relationship – The agreement should create and define a legal relationship between the parties. In this case, the relationship between a franchisor and a franchisee is defined in detail in the Franchise Business agreement.
  • Lawful Consideration – There has to be an exchange of consideration between the parties for the benefits each receives from the other party, and the consideration has to be lawful. The franchisor receives a monetary franchise fee from the franchisee. And the franchisee receives the licence to use the franchisor’s intellectual property to conduct their business.
  • Competency of the Parties – Both parties have to be sound of mind and competent when making the agreement
  • Free Consent – Both parties must accept the agreement willingly and be fully aware of all aspects of the arrangement. There can be no misrepresentation, confusion or undue pressure to agree to the offer for either party.

Intellectual Property Laws

This is probably the most critical of all the legal aspects of a franchise business agreement. This is the very essence of the agreement.

As far as the franchisee is concerned, this is the lawful consideration they receive upon accepting the agreement. Intellectual property law is taken rather seriously in the business community. For a franchisor, the goodwill enjoyed by his brand and his trademark attracts the customers and franchisors alike towards the brand. So it is an extremely valuable asset. The different intellectual property laws that come into play in a franchise are as follows.

  • Trademark Act, 1999 – A trademark is the identity of a business. It is the brand under which the business operates. The brand can be a name, a logo, a tagline or a combination of all. Customers bear goodwill and trust towards a trademark. It is this goodwill and trust that the franchisee harnesses to boost their own business. This law protects the franchisor’s rights over their trademark.
  • Patents Act, 1970 – A patent is an original invention or innovation by a person or organisation that has been duly registered under this act and is protected for its uniqueness by the provisions of this act. A patent gives an organisation an edge in the market. It makes the manufacture and delivery of a product or service unique in terms of utility and experience for the customer. So if part of operating a franchise involves having access to the franchisor’s patents, then the provisions of this act govern the exchange of patent-related information. Alternatively, it is also possible that a franchisee offers some personal patent to enhance the franchisor’s product in return for using the franchisor’s brand name. All patent-related transactions fall under the provisional jurisdiction of the patents act.
  • Copyright Act, 1957 – Copyright is an exclusive right to use and licence any original artistic content reserved by the creator of such content. A franchisor may licence a musical jingle for the brand, some interesting written content as marketing material, some video movie as an advertisement, or something to engage the customers. Any transaction involving the exchange or licensing of the copyrighted material is subject to the Copyright Act’s provisions.

( We can take KFC Franchise  and Bata Franchise for reference )

Shops and Establishment Act

Most franchises involve a physical space like a showroom or an eatery. A physical space allows the franchisee to publicly display the franchisor’s brand to harness its power and attract customers. Having a physical space involves getting registration under the Shops and Establishments act. The shops and establishments outline the standards and requirements to be met while opening and operating a physical commercial space. It includes things like fire safety, availability of drinking water, basic facilities for the staff etc. This is a mandatory requirement, although different states have different requirements.

Employment Related Laws

Many laws have been established to protect workers’ rights and prevent exploitation. The laws are

  • Contract Act – This regulates the employment agreement or contract where the nature of the employment, roles and responsibilities and remuneration are detailed.
  • Minimum Wages Act – This regulates the basic remuneration payable to all employees of the franchise
  • Occupational Safety, Health and Working Conditions Code – This regulates all the preliminary conditions the employer must meet at the workplace before hiring any employee.
  • The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act outlines the measures and provisions that the employer must put in place at the franchise, especially if there are women workers in employment.
  • Employment Retirement Benefits – Acts regulating schemes like Provident Fund, Employee State Insurance etc. have to be integrated into the payroll system.
  • Weekly Holiday Act – These regulate the working days of the employees and the paid holidays they are entitled to.

Do you aware of the Must Read Topic: Top 8 Profitable Franchises in India

Consumer Protection Act

This, of course, applies to all businesses. This act protects the interests of consumers from fraud and exploitation. It creates provisions to address consumer grievances and provides a forum where consumers can complain against unfair and dubious trade practices. In the case of a franchise, it can sometimes get tricky to establish who the blame lies, the franchisor or franchisee. For instance, if the grievance is against the product, it could be the franchisor’s burden. But if there is a grievance regarding poor service or experience, the burden may lie with the franchisee.

Income Tax and GST Act

A franchise is considered an independent entity for taxation and hence has to register separately for a PAN and TAN if necessary to file its annual Income tax returns. Also, it must register under the Goods and Services Tax Act to collect GST from its customers.

Dispute Resolution

This is critical from the standpoint of a franchise because a franchise is usually opened in a location other than the location of the original brand’s outlet. That is the principle under which a franchise revolves.

The franchisee can leverage the brand power, and the franchisor can open more outlets in remote locations without the business risk or the investment.

Given that the two parties of a franchise business agreement are almost always going to be in different geographical locations, the laws regarding disputes and claims also might differ in the two places. So the parties need to agree on the jurisdiction under which the agreement falls so that in the event of a dispute, each party would know under what laws the dispute will be resolved.

Conclusion

As discussed before, unlike other business forms, there is no one go-to act for franchises. Depending on the various circumstances, a franchise becomes subject to different laws. And so it is very important to have a legal expert you can consult whenever there is an unexpected or unencountered situation. If you have queries or requirements concerning a franchise, contact Vakilsearch today, and we will connect you to our team of legal experts to take care of your needs. Click here to learn more about Franchise Business.

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