Franchise Renewal

India does not have a separate law governing the franchise operations. Still, the now repealed Finance Act, 1999 offers a rough idea of the concept of franchise which runs along the same lines as defined by IFA. The International Franchise Association describes a franchise as a system in which a ‘franchisor’ specifies the items and services that the ‘franchisee’ will sell while also providing an operating system, a brand, and support. A franchisee is on the receiving side of the scale, since the franchisor offers permission to operate business under their brand. A franchise agreement is a contract between the franchisor and the franchisee which highlights the terms and conditions that will typically govern the relationship between the contracting parties. Also, noteworthy information to stress upon is that the franchise agreements in India must confirm to the provisions of the Indian Contract Act, 1872. One important distinction to keep in mind is that the relationship between the two parties is that of two independent contractors and not that of a partnership or joint venture or an employment contract.

What Happens When A Franchisor Terminates Franchise Agreement?

Franchise agreement termination and non-renewal are two alternative ways for the franchisor to achieve the same result. The franchisor terminates the agreement before the end of the contract term in a termination, whereas the franchisor refuses to renew the agreement after the end of its term in a non-renewal. The end consequence is the same for the franchisee: you lose your business.

There are a variety of reasons for cancelling a franchise agreement, some of the reasons for cancelling a franchise include:

• Default in payment of franchise fee.
• Default in payment of royalty payments.
• Intellectual property infringement issues.
• Loss of market or loss of potential opportunities in a specific market.

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Typically, the franchisor has an upper hand in controlling the provisions and their implications in a franchise agreement.  There are also cases of wrongful termination of the agreement which happens when the franchisor terminates the franchisee without the legal right to do so. This includes the termination in bad faith, in violation of the terms of the agreement, against the state law, false allegation of material default. At times, some hidden motives may be there, such as the desire of the franchisor to take over the lucrative business territory for him, consolidate multiple franchise locations under a single franchisee, or simply transfer the said franchise to a favored successor. In such a case scenario, a franchisee can approach the court and hire a competent franchise lawyer to fight for his rights.

Expiration of Franchise Agreement

The franchise agreement expires when the term or period of the agreement ends without any breach or any action/conflict between the contracting parties. Even after the expiration, the franchisee still owes some obligations to the franchise, for instance no right to continue the use of trademark upon expiration. The franchisor now reserves the right to purchase the franchised units' assets or allot it to a third party. The franchisee must be asked to return all the confidential information obtained during the agreement term and should not open a competing business within the same location. Moreover, the franchisee must pay the due royalties, advertising fees, or any other miscellaneous dues. Nonetheless the franchisee can very well negotiate the use of some rights post expiration for a specific period.

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Renewal Process of the Franchise Agreement

One of the crucial provisions mentioned in the franchise agreement is the clause of renewal which provides the option to either renew the agreement beyond the initial contract (typically 5-15 years) or disband it altogether before its expiration date. If the franchisor has a steady flow of royalties and if the franchisee has a profitable franchise and can maintain their goodwill, then there is no reason to prevent a renewal of the franchise agreement. But that’s not the case always, many a times things go south ways. Indian laws in particular do not mandate a franchisor to be registered with any regulatory body or national franchise association before entering into a franchise agreement. But, the Indian Trademark Act, 1999 does come into play when concerned with registering a mark. The provision of renewal is mentioned in the agreement as a separate clause. Usually, it contains a time period prior to the expiration within which the franchisee must convey his desire to renew the agreement. The renewal process differs from country to country, at some places franchisors offers continuing, unlimited renewals called evergreen agreements while others allow renewal just once. Many a times, the term of the renewed agreement is shortened than the original one, sometimes it remains the same. The 5+5 rule works in many nations, in this the franchise agreement is followed for five years and then renewed for another five years. One thing to note here is that the terms and conditions of the agreement are redefined and a ‘new agreement’ is drawn out.