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Franchise law

i Legislation

Unlike many jurisdictions, India does not have a specific statute dealing with franchise matters. The closest point for interpretation was available in India's Finance Act, which has now been repealed, owing to the introduction of the Goods and Services Tax. The Finance Act had defined franchise, in the context of service tax, to mean an agreement by which the franchisee is granted the representational right to sell or manufacture goods or to provide service or undertake any process identified with a franchisor, with respect to any trademark, service mark, trade name, logo, etc. A franchisor was defined as any person who enters into a franchise with a franchisee and the term 'franchisee' is construed accordingly. These definitions are not mentioned in the law relating to the Goods and Services Tax.

However, the Indian Contract Act 1872 (the Contract Act), the Sale of Goods Act 1930 and the Specific Relief Act 1963, which apply to all commercial arrangements, are relevant to franchise agreements (these are discussed in detail below).

In contrast to the requirements in the United States, there are no laws requiring a franchisor to provide a lengthy franchise disclosure document to potential franchisees within a stipulated period prior to signing the franchise agreement. Aspects of potential litigation, bankruptcy, initial fee, estimated initial investment, etc. are expected to be captured by a party's own due diligence and commercial understanding. Franchise agreements are not required to be registered in India.

Indian law does not regulate termination of franchise agreements. Parties are therefore free to incorporate provisions in the franchise agreement dealing with termination. Franchise agreements will usually permit termination for breach of contract and insolvency, and stipulate the consequences of termination.

If the franchise agreement is terminated, an international franchisor's ability to take over the franchisee's business is predicated on applicable foreign investment guidelines. If the Indian company operating the business is a joint venture between the international franchisor and the Indian franchisee, in the single-brand retail sector, the franchisor could acquire the franchisee's interest in the joint venture such that the Indian company becomes a wholly owned subsidiary of the international franchisor. However, if the Indian company operates in the multi-brand retail sector, and assuming the current foreign investment guidelines continue to apply, the international franchisor could not acquire all the franchisee's interest in the joint venture and would have to find a local Indian partner to own 49 per cent interest in the Indian company. Alternatively, if the international franchisor wishes to exit the joint venture, it could sell its stake in the joint venture, to the franchisee.

The FEMA provides that transfer of shares in an Indian company by a foreign party to an Indian party must not take place at a price more than the fair value calculated using any internationally accepted pricing methodology for valuation of shares on an arm's-length basis. The foreign party must not be assured an exit price at the time of making its investment and the price must be certified by a chartered accountant or a merchant banker registered with the Securities and Exchange Board of India.

In a purely contractual relationship where the franchisor does not own an equity interest in the franchisee or the Indian company operating the business, the franchise agreement should specify the consequences of termination, including any step-in rights for the franchisor. Step-in rights must be drafted keeping the FEMA in mind. For example, under the FEMA, foreign companies cannot directly enter into a lease for property in India, except in limited circumstances (as discussed in Section II). Therefore, an international franchisor desirous of stepping into the franchisee's position will need to establish an entity in India to whom the lease may be assigned.

Contract Act

The Contract Act deals with various matters, including formation, performance and breach of contracts. Contracts are voidable at the instance of an innocent party in certain circumstances, including if consent to the contract was granted by the innocent party because of misrepresentation. Alternatively, the innocent party may insist on performance of the contract consented to as a result of misrepresentation, and be put in a position such that the misrepresentation was not made. Misrepresentation is defined in the Contract Act as:

  1. a positive assertion of untrue matters (although the person making the assertion believes it to be true);
  2. a breach of duty that gains advantage to the person committing the breach by misleading the other person to their prejudice; and
  3. causing (even innocently) a party to a contract to make a mistake as to the subject of the contract.

Importantly, a contract that is formed as a result of consent being given on account of a misrepresentation is not voidable if the innocent party had means of discovering the truth by due diligence.

Sale of Goods Act

Inter alia, the Sale of Goods Act 1930 stipulates conditions that are implied into contracts for sale of goods (some of which can be contractually waived), rules relating to passing of title and risk in the goods, and the remedies for breach of such contracts.

Specific Relief Act

The Specific Relief Act 1963 set outs the remedies available for enforcement of contracts. Until recently, specific performance of a contract was a discretionary remedy that was awarded if the court was satisfied that damages would not be adequate for breach of a contract. However, pursuant to the amendments made by the Specific Relief Amendment Act 2018, courts are now bound to award specific performance except in certain cases. Additionally, under the substituted performance regime introduced by the Specific Relief Amendment Act 2018, the aggrieved party can engage a third party or an agent to perform the contract and recover expenses and costs actually incurred by it in seeking this substituted performance from the defaulting party. Further, if the substituted performance remedy is exercised, the aggrieved party cannot seek specific performance but can seek damages for breach of contract.

ii Guarantees and protection

Franchise agreements may require a franchisee to deliver a parent company guarantee or a bank guarantee, guaranteeing performance of the franchisee's contractual or payment obligations under the franchise agreement. Guarantees are contractual in nature and are regulated by the Contract Act.

Under the FEMA, an Indian company or individual cannot issue a guarantee in favour of a company or individual resident outside India, except in limited circumstances, without prior permission of the RBI and there is no certainty as to whether the permission would be granted by the RBI.