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Franchise Agreement and Laws Governing Franchising

Shubham Chauhan

| Updated: Dec 28, 2019 | Category: Legal Agreements, Vendor Agreement

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A Franchise Agreement is a legally binding document in which a well-established business (franchisor) approves to provide its brand, operational model and required support to another party (franchisee) for them to run a similar business in exchange for a fee and share in the income generated. This agreement outlines the terms and conditions of the franchisor for a franchisee. Every franchise is governed by these terms, which are generally a written agreement between both parties. The franchise agreement plays a key role in governing the franchisee-franchisor relationship. In this blog, you will get a clear understanding of various elements of the agreement, and critical laws governing the agreement.

Elements of a Franchise Agreement

Elements of a Franchise Agreement

Elements of a Franchise Agreement

Most of the Franchise Agreements will include the following elements:

An outline of the relationship: A Franchise agreement essentially includes the name of the people involved, ownership of the intellectual property. The agreement also includes the obligations of the franchisee to operate their business according to the standards of the franchisor.

Duration of the Agreement: This involves the course of the franchisor-franchisee relationship.

Initial and Continuing Fees: Generally, franchisees pay an initial fee to become a part of the relationship followed by continuing fees to maintain their position. The Agreement also includes other side fees to be paid by the franchise.

Location and Territory: The Franchise Agreement includes the territory assigned by the franchisor to its franchise. The territory assigned can differ in each agreement. There are two types of franchise territories:

  • Exclusive territory: When a franchise is sold with an exclusive territory, it means the franchisor cannot sell other franchises in that particular area. The territory assigned is exclusive to that franchisee.
  • Non-exclusive territory: When a franchise is sold in a non-exclusive territory, the franchisor can sell other franchises to people in that territory.

Use of Intellectual Property: The agreement also includes trademarks, patents, and manuals that will be offered by the franchisor to the franchisee. The agreement shall define the expected use of trademarks, patents, and manuals.

Advertising: Franchisors shall brief franchisees on the efforts to be put in for advertising the brand.

Insurance: All franchise agreements require the franchisee to get insurance to cover its business operations.

Training: This section of the agreement discloses the training offered by the franchisor, including seminars, meetings, etc. that the franchisor will expect the franchisee to attend.

Types of Franchise Agreement in India

Franchising offers excellent business opportunities for individuals, companies and investor groups. Following are the different types of franchise agreements:

Single Unit Franchise Agreement: This type of agreement is the most traditional and historically, the most common form of franchising. In this agreement franchisor grants the right and obligation to establish and operate one franchise to the franchisee. The franchisees have to invest their own capital and apply their management skills to enhance their business.

Multi-Unit Franchise Agreement: In this type of agreement the franchisor grants the right and the obligation to establish and operate more than one franchised unit to the franchisee. The multi-unit franchisee should have the financial and managerial capability to develop multiple units itself.

Master Franchise Agreement: In this type of agreement franchisor grants the right for a specific country, region or continent, hence empowering the master franchisee to provide a full range of products and services of the franchisor. Moreover, the master franchisee also has the right to recruit other franchisees. This way the master franchisee becomes a franchisor to those franchisees who joins the system through its master franchise.

Key Laws Governing Franchising in India

The Indian Contract Act, 1872: This Act is the mother law governing the fundamental aspects of the agreement between the franchisor and the franchisee. The Indian Contract Act decides the fundamental principles such as offer and acceptance, consideration, breach of contract and other related activities.

The Competition Act, 2002: This Act prohibits arrangements related to production, supply, distribution, acquisition or control of goods that cause or are likely to cause an adverse effect on the competition within the country. The Competition Act was launched in India to restrict big franchise from creating a monopoly in the market.

Consumer Protection Act, 1996: This Act promotes the idea of consumer and consumer interest. Under this Act, the consumer can file a complaint against both the franchisee as well as the franchisor, if there is any defect in the product or deficiency in services. Consumer Protection Act safeguards consumers against unfair trade practices.

The Foreign Exchange Management Act, 1999: This Act comes into play when there is the involvement of foreign currency or assets. All international brands like Reebok, KFC, Nike having their franchise in India are all controlled by this Act. It also controls the payment in foreign currency. The Indian government is working towards simplification of laws so that international brands can open up their franchises in India without much of a hassle.

Typical Franchise Businesses in India

Restaurant Franchise in India: India has a long list of Restaurant Franchisees that have been opened over the years. Some of the prominent franchise names in the food industry are Haldiram, Subway, Dominos, Macdonald, etc.

Hotel Franchise in India: The tourism sector has seen exponential growth over the years in India. People are spending money on their travels and booking lavish hotels for vacations. This has led to an increase in the number of Hotel Franchises all over the country. Some of the common examples are Radisson, Marriot International, etc

Gym Franchise in India: over the years, there has been a positive increase in the number of people hitting the gym regularly. People are becoming aware of fitness and its benefits. Various franchises of Gym are operating all over India such as Gold’s Gym, Chisel, etc. to fulfill the demands of fitness freaks.

Clinics Franchise in India: There is a number of big players in these sectors who have started franchises all over India. Hospitals such as Fortis, Dr. Batra, Lal Path Labs, etc are some of the examples.

See Our Recommendation: Sample Format Of Franchisee Agreement

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Shubham Chauhan

A passionate legal content writer, a nature enthusiast, an avid reader, and a part-time thinker. By means of conducting in-depth research on industry related topics, Shubham often builds flawless and intelligible legal content for populace from all walks of life.

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