The Franchise Law Review: India
An update for 2020 has to begin with acknowledging covid-19 and the impact that this has had on jurisdictions all around the world. So too has India been impacted. India imposed a strict nationwide lockdown from 24 March 2020 to 31 May 2020. While it is broadly thought that this lockdown saved lives, inevitably it had a significant impact on the Indian economy, including the food and beverage (F&B), apparel and luxury brand sectors, on education and consequently on the growth of franchised businesses in India. In a mirror image of the view held by many countries around the world, the sentiment in India has been 'first we must survive and then we can prosper'. With a population of 1.4 billion people the magnitude of the potential impact of the pandemic cannot be overstated but, equally, the very real opportunity for different segments of the economy to bounce back robustly should not be underestimated. On a very simplistic basis, in part because of the sheer size of the population and its perceived middle class of about 350 million people, the spending power of this category alone continues to sustain India as a significant destination for franchising.
Pre-covid-19, the Indian franchising market was growing steadily, to the tune of 30 to 35 per cent annually.2 In recent years, the government has undertaken important reforms to spur economic growth – introducing the Insolvency and Bankruptcy Code, implementing goods and services tax to integrate many central and state government taxes into one federated tax, and a series of reforms to ease the conduct of business.
Today India is home to a large number of international brands that have entered the market using the franchising model. Many of these are food and beverage (F&B), apparel and luxury brands. Prominent examples include Burger King, Pizza Express, Dunkin' Donuts, Hard Rock Cafe, Hermès, Fendi, Burberry, Bottega Veneta, Paul Smith, Jimmy Choo and Roberto Cavalli.
Looking ahead, F&B, education, retail, beauty and healthcare and will continue to emerge as high-potential service sectors for franchising.3
Various market entry options are available to foreign brands. The available options include operating the Indian business through an Indian subsidiary wholly owned by the foreign brand; entering into a joint venture, franchise arrangement or licensing arrangement with an Indian partner; or a combination of these structures. Considering the size and diversity of India, and to cater to local tastes, franchisors often localise their offering to appeal to the Indian consumer; for example, McDonald's and Starbucks have both introduced food options that cater to Indian tastes and Uniqlo launched a special collection of kurtas (Indian tops) for India when opening its first store.
Foreign investment is permitted in most sectors of the Indian economy, except for atomic energy, lottery, gambling, etc. where foreign direct investment (FDI) is not permitted. The few limitations that may affect a prospective franchise arrangement are as follows.
India's FDI policy is relevant for foreign brands looking to own an equity interest in Indian businesses. The policy prescribes the requirements for foreign investment, including the extent to which foreign investment is permitted and if the investment needs any government approval. India's current policy makes the following provisions.4
Foreign companies can own up to 100 per cent equity interest in an Indian company offering single-brand retail services. For this purpose, single-brand retail refers to retail trading of products that are sold under a 'single brand' – that being the brand name under which the products are sold internationally. Products should be branded as such during manufacturing. International brands such as Zara, IKEA, Mothercare, Clarks and Marks & Spencer have entered India using this route.
If foreign investment in the Indian company exceeds 51 per cent, then 30 per cent of the value of goods procured must be sourced from India, preferably from micro, small or medium-sized enterprises, village and cottage industries, artisans and craftspeople. These sourcing norms do not apply up to three years from the opening of the first store or commencement of online retailing by single-brand retail entities having state-of-the-art and cutting-edge technology, and where local sourcing is not possible. All procurement from India by a single-brand retail entity for a single brand is counted in relation to local-sourcing norms, whether the goods are sold in India or exported overseas. Set-off for local-sourcing norms is available against products sourced from India for global operations.
Entities permitted to undertake single-brand retail trading through bricks-and-mortar stores are also permitted to undertake e-commerce activities. Retail trading through e-commerce can be undertaken prior to opening bricks-and-mortar stores, provided bricks-and-mortar stores are opened within two years of commencing online retail.
Foreign companies can own up to 51 per cent equity interest in an Indian company offering multi-brand retail services, with prior government approval. An Indian company operating multi-brand stores, and that has foreign investment, can set up stores in states that have permitted multi-brand retailers to operate. In the permitted states, stores may be set up in cities above a specified population. Additionally, sourcing conditions similar to those set out above for single-brand retail apply to multi-brand retail: multi-brand retailers are required to invest a minimum amount of US$100 million and certain requirements for investment in back-end infrastructure must be satisfied. UK-based Tesco Plc was the first to apply and obtain DIPP approval for multi-brand retail trading in India, but stores have not been opened. The Modi government, which took office in 2014 and was re-elected in 2019, has not changed the FDI policy in this respect, but equally this sector has not seen any foreign investment since the Modi government took office.
Setting up master franchise agreements in India
An international franchisor that does not wish to own an equity interest in the Indian business may, subject to Indian law, grant franchise rights to a local franchisee to establish and operate the brand in India through a contractual mechanism. There are no restrictions on a foreign entity granting master franchise or development rights to a local entity and, given the geographical size of India, it is not uncommon for international franchisors to appoint several master franchisees responsible for specific parts of India. Brands such as Ikea and H&M have entered India using this route. Currently foreign investment rules do not permit foreign companies to invest in or establish companies in India that are engaged in an inventory-based model of e-commerce,5 although relaxations have been made for single-brand retail companies to engage in e-commerce, and FDI up to 100 per cent has been permitted in marketplace-based models of e-commerce, subject to certain conditions.6
Owning real estate
Indian exchange control regulations impose restrictions on non-Indian nationals and companies acquiring real estate in India. However, franchisors who have established a branch office or other place of business in India, or companies incorporated in India that are owned by international franchisors, can acquire immovable property, including through a lease as necessary for or incidental to carrying on their activity.7
Indian exchange control laws8 are relevant to several aspects of franchise arrangements, particularly with regard to payments between Indian franchisees and international franchisors. Indian franchisees can make royalty payments and remit fees for technical services to international franchisors without any limit and without approval of the RBI. Certain other trade payments may also be made without approvals. If the payment sought to be made to an international franchisor does not fall within the permissible categories, the Indian franchisee will require specific approval from the RBI to make the payment. The approval process can be time-consuming and it is uncertain whether the RBI would grant approval. Therefore, it is advisable to seek legal advice on the type of payments proposed to be made under the franchise arrangement to ensure that the payments are correctly structured to be freely permissible under the Foreign Exchange Management Act 1999 (FEMA).
Following India becoming a signatory to the WTO TRIPS Agreement, with effect from 1 January 1995,9 Indian intellectual property (IP) laws were amended to make them more consistent with globally accepted IP norms and practices. These amendments coupled with better enforcement of the law have significantly improved the IP protection regime.
To protect their trademarks and brands, franchisors will normally also register their trademarks in India. They enter into contractual arrangements with the franchisee, such as trademark licence agreements or by including detailed provisions in the franchise agreement.
i Brand search
The process of searching for protected trademarks and other IP relevant to franchises (such as image rights) is quite simple. This can be done using the public search engine for trademarks on the Ministry of Commerce and Industry website.10 For a franchisor considering India as a franchising destination, this search engine can be helpful as it enables a potential franchisor to identify commonly known marks and prohibited marks, while also showing business images that are currently trademarked in India.
ii Brand protection
To register a trademark, the proprietor of the mark must make an application in the prescribed form.11 Applications for registration of trademarks are examined by the Registrar of Trade Marks. If the Registrar decides to accept the application, the application is published in the official gazette, the Trade Marks Journal. Following publication in the gazette, any person can, within a specified period, file an opposition. Where oppositions are filed they must be dealt with according to the procedure prescribed and the decisions of the Registrar may be appealed before the Intellectual Property Appellate Board. If no opposition is filed within three months, the trademark proceeds to registration. Registered trademarks are protected in perpetuity subject to renewal of the registration after every 10 years.
If a trademark is infringed, civil remedies can be pursued under the law of passing off or under the Trade Marks Act 1999 (the Trademarks Act) depending on whether the trademark in question is registered, pending registration or unregistered. Further, in respect of registered trademarks, criminal remedies set out by the Trademarks Act may also be available. Typically, in cases of trademark infringement, provided the court is satisfied, interim injunctions may be obtained to stop the infringing conduct until the infringement suit is decided. Such injunctions are normally granted at an early stage of the trial.
Indian courts have generally been good at recognising the international reputation of trademarks whether registered or not in India. There have been numerous examples of courts stepping in to protect registered and unregistered trademark holders; for example, in the Calvin Klein case12 and in the H&M case, where the Delhi High Court held that for a mark or brand to have a reputation or goodwill in India, the setting up of a shop in India or sales in India are no longer a necessity.13 The introduction of web-based sales, which enable Indians to shop for whatever brands or goods available wheresoever, has further increased familiarity in India with the marks and brands essentially sold and marketed outside the country and courts have also dealt with issues relating to liability of online retailers for selling spurious and infringing goods.14 Recently, Skechers USA and its affiliates obtained a permanent injunction restraining defendants from infringing their trade dress and passing off the defendants' shoes as Skechers shoes. This case was also noteworthy as significant costs were awarded in favour of Skechers.15
In Crocs Inc v. Bata India Ltd And Others,16 Crocs sought interim relief restraining the respondents from passing off their footwear as that of Crocs by adopting and copying Crocs' shape, trademark and trade dress. Relying on previous judgements, the Delhi High Court gave interim relief to Crocs.
In McDonald's Corporation & Anr v. National Internet Exchange of India & Ors,17 McDonald's submitted that the defendants were fraudulently misusing the Mcdonald's trademark and copyright; were engaged in registering misleading domain names incorporating the McDonald's trademark and operating fake websites inviting people to apply for McDonald's franchise opportunities and collecting monies from them illegally; and sought an injunction restraining the defendants from carrying out activities of this kind. The Delhi High Court granted the injunction on the basis that McDonald's had made a prima facie case.
In addition to the Trademarks Act, customs laws prohibit import of infringing goods into India. Holders of registered trademarks may notify Indian customs authorities of goods infringing their IP rights. Customs authorities are empowered to suspend clearance of infringing goods and take certain other actions as are specified in the relevant rules.18
Know-how belonging to a franchisor may also be protected under the Indian Copyright Act 1957 or the Patents Act 1970 if it is capable of protection under those laws. If statutory protection is not available, contractual remedies will still be available to the franchisor and it is usual to see detailed provisions in the franchise agreement dealing with protection of know-how.
iv Data protection and e-commerce
Customer data is important for companies looking to market or cross-sell their products. India's data protection provisions are not located in one cohesive piece of legislation. This can therefore be an area that needs careful consideration by lawyers reviewing the types of personal data that may be collected by the franchisee or the franchisor and the impact that legislation such as the Information Technology Act 2000 (the IT Act) and the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules 2011 (the DP Rules) may have on the manner in which personal data is collected, handled, stored and processed.
On a strict reading of the DP Rules, difficulties can arise in determining whether the DP Rules apply to personal data that is not sensitive personal data and to companies that are not based in India. The pragmatic view is that consent should be obtained to collect, process, store, handle and export personal data. In addition to the DP Rules, Indian law, including through recent judgments of the Supreme Court of India,19 generally recognises the right to privacy of an individual and a person who discloses personal data in violation of their contractual obligations commits an offence under the IT Act.
So far as sensitive personal data is concerned (which includes bank and credit card information), the DP Rules would generally apply. Under the DP Rules, sensitive personal data must not be exported to a country that does not afford the same level of data protection as offered by the DP Rules, although export is permitted if the transfer is necessary for performance of a contract or if consent for the transfer has been obtained from the data controller or the data subject.
The IT Act also deals with cybercrime such as hacking, identity theft, tampering with computer records, and prescribes penalties and offences in respect of those matters.
Currently, India is looking to enact comprehensive data protection legislation. The final draft of the Personal Data Protection Bill 2019 has been tabled before the lower house of Parliament in India. The Bill seems to be inspired by the UK and European approach taken with the General Data Protection Regulation, rather than a US approach to data protection.
Unlike many jurisdictions, India does not have a specific statute dealing with franchise matters. The closest point available for interpretation was contained in India's Finance Act, which has now been repealed, owing to the introduction of the Goods and Services Tax. The Finance Act had defined a franchise, in the context of service tax, to mean an agreement by which the franchisee is granted the representational right to sell or manufacture goods or to provide service or undertake any process identified with a franchisor, with respect to any trademark, service mark, trade name, logo, etc. A franchisor was defined as any person who enters into a franchise with a franchisee and the term 'franchisee' is construed accordingly.20 These definitions are not mentioned in the law relating to the Goods and Services Tax.
However, the Indian Contract Act 1872 (the Contract Act), the Sale of Goods Act 1930 and the Specific Relief Act 1963, which apply to all commercial arrangements, are relevant to franchise agreements (these are discussed in detail below).
In contrast to the requirements in the United States, there are no laws requiring a franchisor to provide a lengthy franchise disclosure document to potential franchisees within a stipulated period prior to signing the franchise agreement. Aspects of potential litigation, bankruptcy, initial fee, estimated initial investment, etc. are expected to be captured by a party's own due diligence and commercial understanding. Franchise agreements are not required to be registered in India.
Indian law does not regulate termination of franchise agreements. Parties are therefore free to incorporate provisions in the franchise agreement dealing with termination. Franchise agreements will usually permit termination for breach of contract and insolvency, and stipulate the consequences of termination.
If the franchise agreement is terminated, an international franchisor's ability to take over the franchisee's business is predicated on applicable foreign investment guidelines. If the Indian company operating the business is a joint venture between the international franchisor and the Indian franchisee, in the single-brand retail sector, the franchisor could acquire the franchisee's interest in the joint venture such that the Indian company becomes a wholly owned subsidiary of the international franchisor. However, if the Indian company operates in the multi-brand retail sector, and assuming the current foreign investment guidelines continue to apply, the international franchisor could not acquire all the franchisee's interest in the joint venture and would have to find a local Indian partner to own 49 per cent interest in the Indian company. Alternatively, if the international franchisor wishes to exit the joint venture, it could sell its stake in the joint venture, to the franchisee.
The FEMA provides that transfer of shares in an Indian company by a foreign party to an Indian party must not take place at a price more than the fair value calculated using any internationally accepted pricing methodology for valuation of shares on an arm's-length basis. The foreign party must not be assured an exit price at the time of making its investment and the price must be certified by a chartered accountant or a merchant banker registered with the Securities and Exchange Board of India.21
In a purely contractual relationship where the franchisor does not own an equity interest in the franchisee or the Indian company operating the business, the franchise agreement should specify the consequences of termination, including any step-in rights for the franchisor. Step-in rights must be drafted keeping the FEMA in mind. For example, under the FEMA, foreign companies cannot directly enter into a lease for property in India, except in limited circumstances (as discussed in Section II). Therefore, an international franchisor desirous of stepping into the franchisee's position will need to establish an entity in India to whom the lease may be assigned.
The Contract Act deals with various matters, including formation, performance and breach of contracts. Contracts are voidable at the instance of an innocent party in certain circumstances, including if consent to the contract was granted by the innocent party because of misrepresentation. Alternatively, the innocent party may insist on performance of the contract consented to as a result of misrepresentation, and be put in a position such that the misrepresentation was not made.22 Misrepresentation is defined in the Contract Act as:
- a positive assertion of untrue matters (although the person making the assertion believes it to be true);
- a breach of duty that gains advantage to the person committing the breach by misleading the other person to their prejudice; and
- causing (even innocently) a party to a contract to make a mistake as to the subject of the contract.23
Importantly, a contract that is formed as a result of consent being given on account of a misrepresentation is not voidable if the innocent party had means of discovering the truth by due diligence.24
Sale of Goods Act
Inter alia, the Sale of Goods Act 1930 stipulates conditions that are implied into contracts for sale of goods (some of which can be contractually waived), rules relating to passing of title and risk in the goods, and the remedies for breach of such contracts.
Specific Relief Act
The Specific Relief Act 1963 set outs the remedies available for enforcement of contracts. Until recently, specific performance of a contract was a discretionary remedy that was awarded if the court was satisfied that damages would not be adequate for breach of a contract. However, pursuant to the amendments made by the Specific Relief Amendment Act 2018, courts are now bound to award specific performance except in certain cases.25 Additionally, under the substituted performance regime introduced by the Specific Relief Amendment Act 2018,26 the aggrieved party can engage a third party or an agent to perform the contract and recover expenses and costs actually incurred by it in seeking this substituted performance from the defaulting party. Further, if the substituted performance remedy is exercised, the aggrieved party cannot seek specific performance but can seek damages for breach of contract.
Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code 2016 deals with insolvency and bankruptcy of companies and individuals. The Code provides for resolution of insolvency proceedings filed against a corporate debtor by financial, operational creditors and voluntary insolvency proceedings filed by the corporate debtor. An operational or financial creditor who has a debt outstanding of more than 10 million rupees can file proceedings against the corporate debtor under the code. However, to protect businesses that have suffered on account of lockdowns imposed because of covid-19, initiation of fresh insolvency proceedings has been suspended until 24 March 2021 for defaults arising on or after 25 March 2020.
ii Guarantees and protection
Franchise agreements may require a franchisee to deliver a parent company guarantee or a bank guarantee, guaranteeing performance of the franchisee's contractual or payment obligations under the franchise agreement. Guarantees are contractual in nature and are regulated by the Contract Act.
Under the FEMA, an Indian company or individual cannot issue a guarantee in favour of a company or individual resident outside India, except in limited circumstances, without prior permission of the RBI and there is no certainty as to whether the permission would be granted by the RBI.
Normally payments under franchise agreements attract direct and indirect taxes in India. Income tax will be payable by a franchisee on the income earned from franchise operations. If the franchisee is providing a service to consumers (for example, a restaurant), Goods and Services Tax will be payable by the entity providing the services.
i Franchisor tax liabilities
A franchisor may be liable to pay income tax in India if it is resident in India for tax purposes. If the franchisor is based outside India, the franchise agreement should be structured carefully to ensure that the franchisor is not considered to have a permanent establishment in India.
ii Franchisee tax liabilities
Subject to the FEMA provisions, a franchisee can make royalty payments to an international franchisor from India.27 However, the franchisee will be obliged to withhold tax on payments towards royalties and technical services made to the franchisor under the franchise agreement. The rate of withholding tax is 10 per cent (plus any additional cess or surcharge). This is subject to double-taxation avoidance agreements (DTAA), or treaties, and for treaty countries the effective withholding tax liability may be reduced. India has in force DTAAs with approximately 120 countries.28
The fee payable for the use or enjoyment of intellectual property is a taxable service under the Goods and Services Tax regime in India and attracts tax at the rate of 12 per cent. If the franchisor is based outside India, the franchisee will be legally obliged to pay Goods and Services Tax to the Indian tax authorities. Furthermore, depending on the terms of the franchise agreement, additional taxes such as customs duty may be levied on goods imported by the franchisee from the franchisor.
iii Tax-efficient structures
International franchisors often route their investment or contractual arrangements in India through entities based in tax-efficient jurisdictions.
Impact of general law
i Good faith
Except in the context of fiduciary relationships, Indian law does not imply an overarching duty of good faith in contractual arrangements. Parties may, however, contractually agree a duty to act in good faith. Having said that, in the event of a dispute, even in the absence of any contractual understanding regarding good faith, courts will consider conduct of the parties in granting relief and the equitable principle that a party cannot take advantage of its wrongdoing may be considered by the court in granting relief.
The Contract Act deals with contracts of agency. An agency arises if a person is employed to undertake acts for another person or to represent that person. Franchise agreements will normally be drafted to clarify that the parties do not intend to create a principal–agent relationship. If an agency relationship is taken to exist, the provisions of the Contract Act that deal with such relationships would apply, including the principal being liable for acts of the agent in certain circumstances, such as tortious acts. There could also be tax consequences for the franchisor if the agent is considered to constitute a permanent establishment of the franchisor in India.
In instances of sub-franchising, the sharing of liability between parties would be governed by the contractual agreements between them.
iii Employment law
It is unlikely that the franchisee would be treated as an employee of the franchisor under Indian employment laws, as often the franchisee would be a corporate entity rather than an individual. It would be advisable to incorporate clear drafting in the franchising agreement demarcating responsibilities with respect to franchisee employees, and their salary and benefits. Until recently, there was a plethora of employment laws in India covering aspects such as wages, payment of benefits, gratuities and leave. Parliament has recently enacted legislation that would replace several employment laws, including the Code on Wages 2019, the Industrial Relations Code 2020, the Occupational Health Safety and Working Conditions Code 2020 and the Code on Social Security 2020.29 These Codes have not come into effect as yet and delegated legislation under the Codes is in the process of being drafted. Companies formed in India are bound by these laws and, depending on individual states, additional regulations may also apply.
iv Consumer protection
The Consumer Protection Act 2019 sets out the rights of consumers. The definition of a consumer under the Consumer Protection Act 2019 excludes persons who purchase goods or services for commercial purposes and hence franchisees would continue to be excluded from the definition. However, the Consumer Protection Act 2019 entitles consumers to make product liability claims against product manufacturers and product sellers. The definition of a product seller includes persons who import and sell products, and who place such products for a commercial purpose, and may therefore include a franchisee who imports products from a franchisor for sale into India. Further, disclosure of personal information given by a consumer in confidence to another person (except as permitted by law has now been included as an unfair trade practice, for which consumers would have a claim against the person selling or distributing the product concerned.30 Pursuant to the Consumer Protection Act 2019, the Consumer Protection (E-Commerce Rules) 2020 have been notified. These rules apply to all good and services sold online and require entities (whether Indian or foreign) that own, operate or manage digital or electronic platforms for sale of goods or services to appoint a person resident in India to ensure compliance with the rules, provide certain prescribed information to users, establish a grievance redressal mechanism and comply with the requirements set out by the rules.31 Franchisees should be mindful of these obligations.
v Competition Act and restrictive covenants
The Competition Act 2002 deals with anticompetitive agreements and arrangements that constitute an abuse of a dominant position. Broadly speaking, anticompetitive agreements, such as exclusive distribution agreements are void if they cause or are likely to cause an appreciable adverse effect on competition within India, although there are exceptions that entitle a person to restrain infringement of or impose reasonable conditions to protect rights conferred on it under the Trademarks Act and other specified statutes protecting IP. If the Competition Commission determines that a party is abusing its dominant position, based on the criteria specified in the Competition Act 2002, civil penalties may be levied.
Non-compete covenants that apply during the term of a contract would normally be enforced. Clauses in franchise agreements restraining a franchisee from carrying out competing business may be treated as reasonable by the Indian courts and historically have been held enforceable.32
The Contract Act generally provides that except in limited circumstances contracts in restraint of trade that operate after termination of the contract are void. Having said that, it is not unusual for franchise agreements to contain post-termination non-compete arrangements, while recognising that there may be limits on their enforceability. Non-solicitation obligations restricting a party from poaching employees of another party that apply during or after the term of a contract are generally enforceable.
Several statutes in India deal with fraud, anti-corruption and money laundering matters. In general, the Prevention of Corruption Act 1988 penalises corruption by public officials and both the public official as well as the giver of a bribe are potential offenders. Further, the Prevention of Corruption Act 1988 was amended in 2018 to specifically include an offence of bribing public officials by persons associated with commercial organisations. It is important to note that there are no exceptions for speed money or facilitation payments under the Prevention of Corruption Act 1988. The Prevention of Money Laundering Act 2002 seeks to prevent money laundering, including laundering of property derived from corruption.
In addition to Indian laws, the US Foreign Corrupt Practices Act 1977 and the UK Bribery Act 2010 may also be relevant to the Indian operations, given their wide scope of operation. Recently, anti-corruption allegations seem to have been more robustly investigated and some convictions of high-profile people have occurred. A more transparent environment and rigorous enforcement of corporate governance and anti-corruption legislation is a positive development.
vii Dispute resolution
Since litigants may face backlogs and delays in the Indian court system, it is usual for commercial contracts to provide for disputes to be settled by arbitration in India or outside India; for example, through the London Court of International Arbitration or the Singapore Court of International Arbitration. Domestic arbitration in India tends to be ad hoc. Institutional arbitration mechanisms do exist, however; for example, through the rules of the Mumbai International Arbitration Centre (established in 2016), which provides a mechanism for institutional arbitration.33
The Arbitration and Conciliation Act 1996 (the Arbitration Act) is the Indian legislation relating to arbitration. The Arbitration Act is divided into several parts. Part I of the Arbitration Act deals with various stages of arbitration proceedings such as initiation and conduct of arbitration and enforcement, and challenge of arbitral awards. Part II of the Arbitration Act deals with enforcement of foreign arbitral awards (being awards delivered in foreign-seated arbitration proceedings) pursuant to either the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) or the Geneva Convention on the Execution of Foreign Arbitral Awards 1927 (the Geneva Convention).
In recent years, Indian courts have adopted a pro-arbitration stance and the Arbitration Act has been amended several times to bring the Arbitration Act in line with global standards and to address certain ambiguities in the law.
Pursuant to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015,34 separate commercial courts at the district level and a commercial division of High Courts at the appellate level have been established to decide on commercial disputes of a specified value (currently 10 million rupees), including applications or appeals arising out of domestic or international commercial arbitrations. Importantly, the definition of commercial disputes includes disputes arising out of franchising agreements, distribution and licensing agreements.
While the enactment of these laws is encouraging, given the backlogs in the Indian court system and the delays often seen in ad hoc domestic arbitration proceedings, it is still recommended that franchisors choose to settle disputes by arbitration outside India over submission to jurisdiction of Indian courts.
When structuring their legal documentation, franchisors should be careful to ensure that the contracting parties have the ability to perform their obligations, that adequate protections or indemnities are obtained from the franchisee's promoters, and that available legal remedies are aggressively pursued to protect the franchisor's interests. A case in point, is the dispute between McDonald's and one of its Indian franchisees. McDonald's terminated the franchise arrangement for non-payment of royalties, but the termination was challenged by the franchisee and the franchisee continued to use the company's system despite the termination citing interests of consumers, employees and vendors. Both parties litigated the dispute at various levels in the Indian court system and through arbitration proceedings in London before a settlement was reached.35
India has remained steadily on the reform-oriented trajectory adopted by successive governments since 1991, and the government has continued to work on its agenda to improve the ease of doing business in India by introducing labour reforms and farm sector reforms in 2020. Alongside these reforms, because of issues arising from the covid-19 pandemic and border disputes with China, the Prime Minister has announced a 'Vocal for local' and 'Make for the world' strategies, which aim at increasing India's share in the world economy and promoting manufacturing in India. On one hand, these strategies may encourage the manufacturing sector in India, but on the other hand they may affect the prospects of companies seeking to sell imported goods into India, as consumer sentiment may be geared towards purchasing products manufactured in India.
The IT, life sciences and pharmaceuticals sectors have witnessed strong performance even through the covid-19 pandemic and it is felt that these sectors may play an important role in assisting the Indian economy to bounce back perhaps quicker than certain other economies around the world. Additionally, the government may seek to address some of the harsh consequences of covid-19 that were apparent during the lockdowns. The pandemic highlighted certain supply and demand bottlenecks and operational challenges; for example, apparently drivers engaged in the freight industry predominantly come from 14 districts and restrictions on the movement of people from these districts could affect the ramping up of national logistics activity.36
Nevertheless, given the large domestic market in India, we continue to believe that there are significant opportunities available for international companies looking to establish a presence in India through the franchising model. Notwithstanding covid-19, foreign investment has continued to come into India. The foreign investment inflow during financial year 2020–202121 was US$35.73 billion, the highest ever for the first five months of a financial year and 13 per cent higher than in the first five months of 2019–2020 (at US$31.60 billion).37 This may be recognised as an important indicator of the opportunity that India continues to present. While the economy contracted at an unprecedented pace in the first quarter of 2020 on account of lockdowns, the recovery in recent months has been encouraging and the general sentiment is that India continues to offer a strong and interesting franchising opportunity.38
Despite the current covid-19 crisis, the master franchisee for Burger King in India proceeded with its initial public offering on 2 December 2020, and this was oversubscribed 156 times.
1 Nipun Gupta is co-head of the India strategy group at Bird & Bird LLP. Divya Sharma is a solicitor (registered in England and Wales) and an advocate (registered in India).
2 See https://www.ibef.org/blogs/india-s-franchise-industry-the-road-so-far-and-way-forward (last visited on 18 December 2019) and see also 'Indian Franchise Industry Outlook for 2018', available at https://india.franchiseasia.com/information/indian-franchise-industry-outlook-for-2018 (last visited on 18 December 2019).
3 'Indian franchise industry outlook for 2018', available at https://india.franchiseasia.com/information/indian-franchise-industry-outlook-for-2018 (last visited on 18 December 2019).
4 For details refer to the FDI Circular published by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India. The circular as at 15 October 2020 is available at https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf (last visited on 10 November 2020).
5 An inventory-based model of e-commerce is defined as a model in which inventory of goods and services is owned by the e-commerce entity and sold to consumers directly.
6 A marketplace model of e-commerce is defined as the provision of an information technology platform by an e-commerce entity on digital and electronic networks to act as a facilitator between buyer and seller.
7 Under the provisions of the FEMA.
8 Indian exchange control laws are comprised of the FEMA and rules, regulations and notifications made under it from time to time. The FEMA is administered by the RBI, India's central bank.
9 The Agreement on Trade-Related Aspects of Intellectual Property Rights is Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization, signed in Marrakesh, Morocco on 15 April 1994.
10 https://ipindiaonline.gov.in/tmrpublicsearch/frmmain.aspx (last visited on 10 November 2020).
12 Calvin Klein Inc. v. International Apparel Syndicate 1996 PTC 293 (Cal).
13 H&M Hennes & Mauritz AB & Anr. v. HM Megabrands Pvt. Ltd. & Ors, IA No. 7259/2016 in CS(COMM) No. 707/2016, decided on 31 May 2018, available on https://indiankanoon.org/doc/90123644/ (last visited on 10 November 2020).
14 In the case of Christian Louboutin SAS v. Nakul Bajaj & others, the Delhi High Court, held that the online retailer would be liable for trademark infringement if it can be proven that the goods it was selling were counterfeit. The decision is available at https://indiankanoon.org/doc/99622088/ (last visited on 11 November 2020). This decision was also followed in L'Oréal v. Brandworld and another, decided on 12 November 2018 (available at https://indiankanoon.org/doc/55867232/ (last visited on 11 November 2020)), which dealt with sales of spurious cosmetics by an online retailer.
15 Skechers USA Inc. & Ors v. Pure Play, Delhi High Court, IA No .6279/2016 and IA No. 8409 of 2018.
16 Crocs Inc. USA v. Bata India and Ors, decided on 29 May 2019 (available at https://www.livelaw.in/pdf_upload/pdf_upload-361256.pdf/).
18 Intellectual Property Rights (Imported Goods) Enforcement Rules 2007, available at http://www.wipo.int/wipolex/en/text.jsp?file_id=201652 (last visited on 2 January 2019), as amended by the Intellectual Property Rights (Imported Goods) Enforcement Amendment Rules 2018, available at https://www.manupatrafast.com/ba/Ruledispbot.aspx?nActCompID=13364&iActID=1861 (last visited on 2 January 2019).
19 Justice K Puttaswamy & others v. Union of India and others, available at https://www.sci.gov.in/supremecourt/2012/35071/35071_2012_Judgement_24-Aug-2017.pdf (last visited on 2 January 2019).
20 Finance Act 1994 (as amended), Chapter V, definitions 47 and 48.
21 Foreign Exchange Management (Non Debt Instruments) Rules, 2019 available at http://egazette.nic.in/WriteReadData/2019/213332.pdf (last visited on 12 November 2020).
22 Section 19 of the Contract Act.
23 Section 18 of the Contract Act.
24 See the exception to Section 19 of the Contract Act.
25 Section 10 of the Specific Relief Act 1963 as amended by the Specific Relief Amendment Act 2018. For contracts that are not specifically enforceable see Section 14 of the Specific Relief Act 1963 as amended by the Specific Relief Amendment Act 2018.
26 Section 20 of the Specific Relief Act 1963 as amended by the Specific Relief Amendment Act 2018.
27 Press Note No. 8 (2009 series), https://dipp.gov.in/sites/default/files/pn8_2009_1.pdf (last visited on 12 November 2020).
28 DTAAs, http://www.incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx (last visited on 12 November 2020).
30 Consumer Protection Act 2019 available at https://consumeraffairs.nic.in/acts-and-rules/consumer-protection (last visited on 12 November 2020).
31 The rules are available at https://consumeraffairs.nic.in/sites/default/files/E%20commerce%20rules.pdf (last visited on 12 November 2020).
32 Gujarat Bottling Company Limited v. Coca-Cola Company, AIR (1995) Supreme Court 237.
34 For text of the Act see http://egazette.nic.in/WriteReadData/2016/167379.pdf (last visited on 12 November 2020).
35 See https://www.business-standard.com/article/companies/mcdonald-s-vikram-bakshi-announce-out-of-court-settlement-end-dispute-119050901272_1.html (last visited on 12 November 2020).
36 See https://www.mckinsey.com/featured-insights/india/reopening-india-implications-for-economic-activity-and-workers# (last visited on 3 December 2020).
37 See https://www.investindia.gov.in/foreign-direct-investment (last visited on 3 December 2020).
38 See https://theprint.in/economy/indias-economy-to-bounce-back-emerge-stronger-from-covid-crisis-says-ficci-president/535030/ (last visited on 3 December 2020).