Exclusive legislation can expedite growth
September 27, 2006
Exclusive legislation can expedite growth. Check it out:(Financial Express Via Thomson Dialog NewsEdge) Unlike developed countries such as the United States and most European nations, India does not have a specific law to deal with franchising. Instead, the business of franchising in India is regulated by the provisions of the Contract Act, 1872 various commercial and taxation legislations, the Foreign Direct Investment (FDI) policy of the Indian Government, and guidelines laid out by the Reserve Bank of India (RBI). However, the absence of a specific franchising law and the need to comply with the often disjointed set of applicable rules, has not hampered the expansion of franchising business which witnessed impressive growth in the recent past. In addition to the Contract Act, the other important laws that deal with various facets and dimensions of franchising include Foreign Exchange Management Act, 1999 (FEMA), Trade Marks Act, 1999, Patents Act, 1970 and Shops and Establishment Act, 1988. The provisions of the Contract Act play a determinative role in defining the relationship between a franchisor and a franchisee. Therefore, the franchise agreement becomes an all-important document. All the rights and liabilities arising out of and relating to a franchise agreement are determined on the basis of the terms and conditions contained in the agreement. Further, under the Contract Act, a franchisee or franchisor can seek compensation and claim damages for breach of contract and for any losses incurred due to any fraudulent or deceptive practice in relation to the offer and sale of franchises. Moreover, common law also imposes a general legal obligation on the parties to the contract to deal with each other in good faith and not to withhold any critical information which may influence any material decision of the other party. No legal proceedings will lie against any person in respect of anything done in good faith. The duty of good faith can be imposed in common law even in the absence of a contract stating the existence of the duty. The basic requirements of a valid franchise agreement are that it should be made by free consent of parties competent to contract, for a lawful consideration, and with a lawful object. The FEMA and RBI regulate the terms of payment under franchise agreements (such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees) where one party is a non-Indian entity including the amount to be paid and procedure for remittance of these payments outside India. The RBI prescribes certain requirements such as furnishing of tax clearances and chartered accountant certificate at the time of remittance of royalty payments by the franchisee to franchisor outside India. The Trademarks Act provides exclusive rights to the trademark owner to use the registered mark and restrain others from using marks identical or similar to the registered trademark in relation to the class of goods/services for which the mark is registered. However, if the trademark is a well-known mark, the owner may restrict the use of the trademark by third parties in relation to other goods/services as well. India has recently updated the Patents Act to provide adequate protection to many types of intellectual property frequently involved in franchising arrangements. Under patent laws, the owner of technology can enter into a Technical know-how or License Agreement with an Indian party. These agreements are required to contain details such as the time period, territory for which the agreement is entered into, proof of up-front payment, a running and minimum royalty, etc. The Shops and Establishment Act is particularly relevant to franchisee outfits dealing in consumer goods. Every state or union territory has its own SEA. The SEA covers all establishments irrespective of their size, turnover, or number of persons employed. It applies to all persons employed, whether directly or through an agency or contract and whether for wages or not, in or about the business of an establishment, including apprentices. The SEA prescribes guidelines with respect to working hours, working conditions, overtime, leave, maintenance of records, etc. The FDI Policy facilitates foreign investors to enter into franchise agreements with Indian companies, proprietorship concerns, or partnerships to engage in franchise business in India. The FDI Policy allows foreign companies to establish retail operations in India provided the FDI is limited to 51 per cent of the enterprise's equity and the business pertains to retail trading of single brand products'. Pursuant to Press Note 1 of 2005 Series (dated January 12, 2005 )issued by the Ministry of Commerce and Industry, prior approval of the government is required in cases where the foreign franchisor has an existing franchise/trademark agreement in the same' field in India. The onus to provide requisite justification and proof to the satisfaction of the government that the new proposal would or would not in any way jeopardise the interests of the existing franchisee/trademark partner lies equally on the foreign franchisor/technology supplier and the Indian partner. Where there is no such previous or existing technology transfer/trademark agreement, only a simple declaration to that effect is required to be filed with the Secretariat of Industrial Assistance under the Ministry of Commerce and Industry. Further, in view of the government's 2005 change in policy concerning FDI in the single brand retail sector, foreign investment is likely to increase manifold. Foreign investment in multi brand retail sector should also witness a boost. The bulk of such investments will be made through the franchise route. The government could greatly expedite the growth of franchise business by enacting a law to deal exclusively with franchising. Such new legislation would have a direct influence on strengthening the relationship between a franchisor and a franchisee. It would also address specific issues like pre-sale disclosures, royalties, sub franchising liabilities, exemptions and exclusions from responsibilities and liabilities, etc. This would immensely help parties to the transactions to make informed decisions. -The writer is founder of the law firm Titus & Co, Advocates. He can be reached at [email protected]
Copyright 2006 The Indian Express Online Media Ltd.. Source: Financial Times Information Limited.
Related Tags: expedite growth, franchise agreement, india, franchise, contract, India
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