Franchise Disputes: Resolving Conflicts between Franchisors and FranchiseesOctober 30, 2023 By Dinesh Parmar
No business runs smoothly without conflicts, be it a startup or a giant corporation, private limited or joint venture, partnership or franchising. From small disagreements to major disputes, every now and then; something keeps happening. Take for example a franchising business, the disagreement between franchisor and franchisee can arise at times, and while minor conflicts usually get dissolved, in some cases they turn ugly and reach court. So, the question arises, do we have a law against such disputes in India? What causes such conflicts? How to resolve them? Let’s understand it all.
Franchising Business - An Overview
Franchising offers a strategic pathway for aspiring entrepreneurs to venture into business without the complexities of building a brand from scratch. It is a kind of business model that fosters a partnership between franchisors, who provide established products and services, and franchisees, the independent entrepreneurs running individual outlets.
At its core, franchising represents a mutual agreement built on trust. Franchisors extend critical support in the form of training, marketing, and operational assistance to franchisees. In return, franchisees pay fees and royalties based on their sales, creating a symbiotic relationship.
While franchising significantly mitigates risks and lowers the entry barriers for entrepreneurs, it is not without challenges. Disputes between franchisors and franchisees are not uncommon and demand careful handling. So in this comprehensive guide, let's peek into the nuances of franchise disputes, addressing common issues, and outlining effective strategies for resolution. By understanding these challenges and employing proactive conflict resolution methods, a harmonious relationship can be sustained between both parties, ensuring the long-term success of the franchise business.
Understanding Franchise Disputes: Common Causes
Just like in every other business, disputes arise in franchising too causing turbulence in the relationship between the franchisee and the franchisor. Franchise disputes can stem from various issues such as contract disagreements, territorial disputes, or financial concerns. Here are some of the common causes that can give rise to disputes between franchisors and franchisees:
1. Financial Disputes
Royalty and Fee Disagreements -
Franchisees might feel that the royalties and fees they are paying to the franchisor are too high, especially if they perceive that the support and services provided do not justify the cost.
Profitability Issues -
Franchisees may struggle to achieve the expected level of profitability, leading to frustration and financial strain.
2. Operational Control and Independence
Franchisees might resent excessive control or interference from the franchisor in their day-to-day operations.
Lack of Flexibility -
Franchisees may feel constrained by rigid operational guidelines and want more freedom to make local decisions.
3. Communication Problems
Poor Communication -
Lack of clear communication or misunderstandings about policies, changes, or expectations can lead to frustration and resentment on both sides.
Franchisees might feel ignored or unsupported if their concerns or inquiries are not addressed promptly by the franchisor.
4. Quality and Branding Issues
Inconsistency in Standards -
Franchisees may not maintain the quality and standards expected by the franchisor, leading to disputes about brand integrity.
Product or Service Changes -
Franchisees might resist changes in products or services that do not align with their local market preferences.
5. Competitive Concerns
Territorial Disputes -
Franchisees can clash over territorial rights and market boundaries, especially if new franchises are being opened in close proximity.
Price Wars -
Competition among franchisees, especially if they are located near each other, can lead to pricing conflicts and reduced profitability for everyone.
6. Legal and Contractual Issues
Breach of Contract -
Alleged violations of the franchise agreement terms can lead to legal battles between franchisors and franchisees.
Ambiguity in Contracts -
Unclear contract clauses or vague terms can lead to differing interpretations and conflicts.
7. Changes in the Franchise System
Policy Changes -
Changes in franchise policies, marketing strategies, or product offerings might not be well-received by franchisees, especially if they perceive negative impacts on their business.
8. Cultural and Regional Differences
Cultural Mismatch -
Franchisors and franchisees from different cultural backgrounds might have different approaches to business, leading to misunderstandings and conflicts.
Regional Market Variances -
What works in one region might not be successful in another, causing disagreements over the best business strategies.
While certain conflicts between the franchisee and franchisor get dissolved in a short period of time, some stay afloat, and when the trust is broken, both parties take the legal path to put an end to disputes. Although there are no specific laws related to franchising in India, we do have a couple of dispute-resolution mechanisms under our judicial system with the help of which franchisee vs franchisor conflicts can be resolved. Let’s understand what they are.
Exit Strategies for Franchisee vs Franchisor Disputes
Since knocking on the doors of the court is a tiring and long process, both parties - the franchisee and the franchisor must try to solve the dispute first either by coming to a mutual agreement with a settlement, selling the franchise back to the company or a new franchisee approved by the franchisor, or transferring the franchisee to a third-party. However, if the dispute continues and requires serious actions and intervention then approaching the law is the right way to fix it.
Franchisee Regulations in India
As India does not have any dedicated law for franchising disputes, a franchise arrangement is governed by various statutory enactments. Below are essential aspects concerning the legal framework governing franchising in India.
1. Indian Contract Act, 1872 -
Franchise agreements, constituting contracts between franchisors and franchisees, are legally binding under the Indian Contract Act of 1872. These agreements encompass various critical elements in the partnership between the franchisor and franchisee. These include an offer, acceptance, consideration, and capacity to contract. It also specifies the parties' rights and obligations, which ensures that the terms and conditions of the franchise agreement are legally binding.
2. Consumer Protection Act, 1986 -
Protects the rights of consumers, including franchisees, ensuring unfair or restrictive trade practices do not exploit them.
3. Intellectual Property Laws -
Franchisors often need to register their trademarks in India to protect their brand identity. Intellectual property laws, including copyright and trademark laws, play a significant role in franchise regulations as they safeguard the brand and also provide remedies in case of infringement by third parties such as injunction, damages, lost profits, or destruction of the infringing products bearing the labels & trademark.
4. Competition Laws -
The Competition Act, of 2002, regulates anti-competitive agreements, abuse of dominant positions, and combinations (mergers and acquisitions) in India. Franchise agreements that might affect competition could fall under the scrutiny of this law where it is covered under vertical agreements that prohibit restraints such as tie-in arrangements, exclusive supply and distribution agreements, and resale price maintenance.
5. Foreign Exchange Management Act (FEMA) -
For international franchises entering India, FDI policies and regulations apply. These regulations govern the amount of foreign investment permitted in various sectors, including franchising, profit repatriation, and other related matters.
6. Taxation -
Both franchisors and franchisees must comply with GST and income tax laws when it comes to franchise transactions.
7. Specific Relief Act, 1963 -
Allows for the enforcement of specific performances of contracts, which can be relevant in case of breaches of the franchise agreement.
8. Transfer of Property Act, 1882 -
Deals with the transfer of immovable property, which might be relevant if the franchise involves leasing or owning physical property.
9. Information Technology Act, 2000 -
Addresses issues related to electronic contracts, digital signatures, and data protection, which are increasingly relevant in modern franchising practices involving online platforms.
10. Alternative Dispute Resolution Methods -
For those who do not want to go through conventional court proceedings, there are alternative ways called ADR (Alternative Dispute Resolution mechanisms that are often preferred in the realm of franchising. Typically, ADR methods are less confrontational, quicker, and more economical compared to pursuing legal action in a court of law. Listed below are a few common dispute-resolution methods for franchising:
An experienced professional is appointed as a neutral third party i.e. mediator who facilitates discussions to address concerns, guiding parties toward mutually agreeable solutions.
An arbitrator or a panel of arbitrators assesses evidence submitted by both parties and delivers a final, legally binding decision. It is more structured than mediation and resolves disputes more swiftly than lengthy court processes.
It is the simplest form of ADR, involving direct discussions between the parties to resolve. Negotiations can take place with or without the help of lawyers. In fact, many disputes are resolved through negotiation without the need for formal ADR processes.
Similar to mediation, a conciliator helps parties in dispute reach a resolution. However, a conciliator may provide more active suggestions and solutions to the parties.
Legal Recourse: Litigating Franchise Disputes
Litigating franchise disputes through the legal system is a formal process that involves taking the matter to court. While it is generally advisable to explore alternative dispute resolution methods first, such as mediation or arbitration, litigation might be necessary when all other attempts at resolution have failed. Here's an overview of legal recourse and considerations when litigating franchise disputes:
- The franchise agreement is carefully reviewed to understand the rights and responsibilities of both parties and clauses specifying the jurisdiction for legal disputes and the process for litigation.
- Both franchisees and franchisors seek attorneys who are experts in franchise law and can provide legal advice, assess the strength of their cases, and represent them in court.
- The party wishing to initiate legal action files a complaint in the appropriate court. The complaint outlines the claims, allegations, and the relief sought.
- Both parties gather evidence, interview witnesses, and request documents to strengthen their case which proceeds to pre-trial motions, trials, and appeals.
- In its judgment, the court may order damages, injunctions, or specific performance (ordering one party to perform its contractual obligations).
- Parties can settle at any stage of the litigation process. Settlement negotiations might intensify as the trial date approaches.
- The prevailing party also has the option to further pursue legal remedies to ensure enforcement if the judgment or settlement agreement is not adhered to.
Keep in mind that resolving any franchise dispute legally will lead to legal, financial, and reputational consequences. So, it is advisable for both parties to consult legal experts who can suggest feasible and fast alternative dispute resolution methods, before jumping into legal battles which will simply consume time, money, and resources.
Franchising in India is ballooning day-by-day and so are the disputes that arise due to lack of legal knowledge. Right from preparing the franchisee agreement to finding a resolution of a dispute, if the early advice of an experienced law firm like us - Parker and Parker Co. LLP is sought, unnecessarily costly, and lengthy court battles can be avoided.
So, if you are a franchisee or a franchisor seeking help understanding laws in franchising, reach out to us now.