An ongoing dispute between
McDonalds and a major Indian franchisee shows what can happen when franchisors
and franchisees disagree. Even though the dispute is on a different scale than
most parties to a franchise or joint venture agreement would recognise, the
case is a useful illustration of what happens when a franchisor and franchisee
reach an impasse.
What’s going on with McDonalds
in India?
The dispute relates to franchises in
Northern India. That’s the territory where the US fast food giant has terminated
the franchise for 169 restaurants. The principal reason for the termination is
the alleged “default in payment of royalties” by the Indian franchisee
company, Connaught Plaza Restaurants Ltd (CPRL). CPRL is a joint venture
between businessman Vikram Bakshi and McDonalds India.
McDonalds says that it has
followed the provisions of the agreement to notify CPRL of the breaches. It
also says it gave the company adequate time to address the alleged failures.
According to McDonalds, CPRL has not remedied the breaches and as a result must
stop using the McDonalds name, designs, branding and food recipes.
In September the London Court of
International Arbitration (LCIA) ordered Mr Bakshi to sell his stake in CPRL to the US burger chain.
Fuelling the dispute further Mr Bakshi has now challenged the LCIA decision in
the Delhi High Court.
Some commentators say the case
reinforces the concerns some multinationals have about entering joint venture
and franchise agreements in India. They believe there is real potential for
long-drawn-out litigation that makes such agreements commercially unviable. But
more generally the case demonstrates the importance of getting franchise
agreements right in the first place. In particular being clear on what dispute resolution provisions apply to the agreement.
What are common types of
franchise agreement dispute?
At Nath Solicitors in London we
act for both franchisors and franchisees in a range of sectors. In our
experience disputes arise for a number of reasons, including:
·
Exaggeration
by the franchisor to the franchisee of the potential profitability of the
franchise
·
Non-payment
of fees that the franchisor believes are due. Generally there are various
payment streams under a franchise agreement, including rental of specialist
equipment, royalty payments on sales and training fees. It is essential to
specify these and payment terms in the agreement.
·
The
franchisee damages the brand in some ways
·
The
franchisee mishandles customer data
·
Intellectual
property infringement
·
Confidentiality
issues surrounding franchise customers or commercially sensitive information
about the franchisee or franchisor
How to get things right
Remember that the franchisee is
often in a weak bargaining position when it comes to negotiating the franchise
agreement. That’s because the franchisor will usually only offer a contract
that is standard across all its franchises and territories. An experienced
franchise solicitor will understand the points on which a franchisee is willing
to move or depart from standard terms.
As with any commercial agreement
both parties must be fully aware of the legal obligations they are assuming
when they sign a franchise agreement. At Nath Solicitors we specialise in
complex commercial contracts and act for both franchisors and
franchisees. We see things from both sides so have the insight to ensure we
protect your interests from the start of the franchise relationship.
Terminating a franchise
agreement
Often franchise agreements
enable a franchisor to terminate the agreement for a number of reasons,
including non-payment of fees and poor performance. The franchisee does not
usually have the same rights. If a franchisee wishes to terminate, usually he
or she will have to rely on the law of contract. It’s why advice from an
experienced contract lawyer is essential. The terms we will examine closely
before approving a franchise agreement include:
·
The
provisions for termination
·
What
the parties can do in the event of a dispute
·
The
implications on data protection and intellectual property when the agreement
ends
·
The
duration of the agreement and how it can be extended
·
The
territory covered by the agreement and whether it can be widened
Franchises remain one of the
most common forms of business partnership agreement. And when they work they
can provide a lucrative income for many years. But it’s essential for both
franchisor and franchisee to enter the agreements with their eyes open. For
franchisees in particular understanding how the law of contract applies to the
agreement is crucial. As the McDonalds case shows, when a dispute arises,
finding a resolution can be expensive and time consuming.
