The concept of Franchising has become recognized and popular means of conducting business across the world. The concept of Franchising occurs where the Franchiser allows the Franchisee to carry on a particular business, using his know –how under his trade mark as an independent business, for or consideration with continuing control over the manner in which the franchisee carry the business. At times the franchisor exercises continuing control over the management of the business of the franchisee there by extending all possible support to the franchisee to carry on said business.
The key elements of a franchisee:
1. A contractual relationship
2. The franchisor offers or is obligated to maintain a continuing interest in relation to the know-how and training.
3. The franchisee operates under a common trademark, format or producer,
4. Owned or controlled by the Franchisor, and
5. The franchisee has or will make a substantial capital investment from his own resources.
The advantages of Franchise or many for both franchisor and franchisee. The franchisee can establish its business with know-how and business concept of the franchisor.
The franchisors advantage in this form of business obviously lies in the fact that his business turns over and reputation increases. In addition he also earns by the way of royalty and service fees.
Though franchise agreement seems like that principal and agent it is not agency relationship. A franchise agreement primarily is governed by the Indian Contract Act and the Specific Relief Act 1963 which provides for specific enforcement of covenant in a contract.
There are various methods of appointment of franchises some of these are appointment of master franchises.
The advantage of agreement of franchisee is that the franchisor concentrates of the production of the goods and gets the products distributed to the end user through the franchisee. On the other hand, get an opportunity to deal a popular product there by taking benefit of the popularity of the product.
The franchisee further benefitted by the fact that franchisor regularly advertises his goods there by insuring that goods are sold.
The franchisor may require that the franchisee that is not deal any similar business or similar product.
Though the Indian Laws do not permit restriction on trade the Supreme Court of India as stated in Gujarat Bottling Company Limited v Coca Cola Company (AIR ( 1995) SC -237) that there is growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchisor on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of franchisee to deal with competing goods is for facilitating the distributing of goods of the franchisor and it can’t be regarded as in restraint of trade.
Master franchise: in this method a foreign franchisor who wants to enter into new country without dealing with many franchise appointing master franchise. The master franchise is given substantial target with the right to do business in the name of the franchisor in a particular territory. This master franchise can appoint sub franchisee.
1. Area franchise: in this method the master franchise, who is general appointed for the entire country, appoints franchise for region or area and is called regional franchise or area franchise.
2. This regional franchise further given right to appoint other franchise
3. Stake in master franchise: in this method the franchisor purchases some shares in equity in the master franchise company so that it can control the company in directly. It is in a case like this the party generally entered into joint venture.
4. Franchise buys ins: in this method the franchisor appoints a competent person to be his franchisee as he does not have funds to purchase the franchise business. The franchisor then purchases the franchise through its own subsidiary company.