Franchise Agreement

A franchise agreement is a legally binding contract that outlines the business connection parameters between the franchisor and the franchisee. This legal document outlines important information such as who owns the franchise rights, how much in fees and royalties they must pay, how long the agreement lasts, what territories they can work in, how they will receive training and support, what standards they must adhere to, how they must market and advertise, how they must protect intellectual property, how they can terminate or renew the agreement, how they will resolve disputes, how they must follow the law, and how they can exit the business. This all-inclusive structure guarantees lucidity and delineates the obligations of both sides in managing and preserving the enterprise running under the franchisor’s trademark.

Need for Franchise Agreement

• Franchise agreements are mandatory for individuals who aspire to become licensees and operate a business under the franchisor’s brand name and business model.
• The rights and responsibilities of both the franchisor and the franchisee are outlined in franchise agreements.
• Franchise agreements outline the obligations for business operations, fee payments, and the use of intellectual property.
• Franchise agreements benefit franchisors because they protect their brand and ensure that franchisees’ business operations are consistent.

Types of Franchise Agreements

There are several types of franchise agreements available.

• Product Distribution Franchise Agreement: With this kind of franchise agreement, the franchisee can sell the franchisor’s goods within a designated area.
• Business Format Franchise Agreement: With this kind of franchise agreement, the franchisee has access to all of the franchisor’s assets, including its trademarks, goods, and services.
• Area Development Franchise Agreement: With this type of franchise agreement, the franchisee can open and manage multiple business sites within a specific area.
• Master Franchise Agreement: With this kind of franchise agreement, the franchisee can sell and sub-franchise to other franchisees in that area.
• Conversion Franchise Agreement: With this kind of franchise agreement, a franchisee can turn an already-existing company into a franchise under the franchisor’s name.
• Joint Venture Franchise Agreement: This type of franchise agreement enables two or more parties to establish a joint venture with the aim of establishing a franchise system.

Laws that Govern Franchise Agreement

A definition of a franchise agreement was created in India by the Finance Act of 1999. The Income Tax Act of 1961 and other relevant laws have included this concept. A franchise agreement is defined by the Finance Act of 1999 as a legal arrangement that gives the franchisee the following rights:

• Provide services
• Sell or manufacture goods
• Follow any instructions provided by the franchisor.

It doesn’t matter if you use a trade name, trademark, service mark, logo, or another comparable symbol.

According to the Finance Act of 1999, any payment made by an Indian resident to a non-resident as part of a franchise agreement is governed by the Foreign Exchange Management Act of 1999 (FEMA).

The following are a few of the main laws in India governing franchise agreements:

• The Indian Contract Act, 1872: This Act outlines the fundamental rules of Indian contract law. It regulates the creation, validity, and termination of all franchise agreements.
• The Competition Act, 2002: This Act strictly prohibits anti-competitive behavior in the franchising sector. For example, it forbids franchisees from setting pricing or dividing up markets, and it prohibits franchisors from imposing unfair terms and conditions on their franchisees.
• The Foreign Exchange Management Act, 1999 (FEMA): This Act governs financial transactions related to international franchising, including the transfer of funds. For example, it requires franchisees to obtain prior authorization from the Reserve Bank of India (RBI) prior to paying any franchisors who are based outside of India.
• The Indian Trademark Act (1999): This Act gives franchisors’ trademarks legal protection. For instance, it prohibits unauthorized use of the franchisor’s trademarks by franchisees.
• The Copyright Act, 1957: The Act provides legal protection for franchisors’ copyrighted works. It prohibits franchisees, for instance, from stealing the franchisor’s copyrighted material without authorization.
• The Income Tax Act (1961): The taxation of franchise agreement income is governed by this Act. For instance, franchisors must pay taxes on the royalties and franchise fees they receive.