Code of Conduct

1. A franchise is a specific type of business and the Franchising Code of Conduct contains rules that govern franchise arrangements.
2. The Franchising Code regulates the conduct of franchisors and franchisees, with the aim of ensuring that franchisees are sufficiently informed about a franchise
3. The code informs franchisors and franchisees of their rights and obligations under the code and enforcing it where necessary.
4. The code applies to franchise agreements entered into, renewed or extended. A franchise agreement is an agreement (written, verbal or implied) between a franchisor and franchisee with the following characteristics:

• The franchisor grants the franchisee the right to carry on the business of offering, supplying or distributing goods or services in India under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor.

• The operation of the business will be substantially or materially associated with a trademark, advertising or commercial symbol that is owned, used, licensed or specified by the franchisor.

• The franchisee is required to pay, or agree to pay, a fee before starting or continuing the business.

5. Exceptions

In some limited circumstances the code does not apply to franchise agreements. For example, the code does not apply to franchise agreements where another mandatory industry code applies.

6.The rights and obligations under the code include:

A. Disclosure

Franchisors and master franchisees (or sub-franchisors as they are sometimes called) must give a franchisee:

• A copy of the code.

• A disclosure document in the required form.

• A copy of the franchise agreement in the form it is to be executed at least 14 days before the franchisee enters into, renews or extends a franchise agreement or pays a nonrefundable deposit in relation to the proposed franchise agreement.

• A franchisee who is entitled to a long form disclosure document must also be provided with a copy of any other agreement that they are required to enter into under the agreement (e.g. leases, security or confidentiality agreements) at least 30 days before the franchise agreement is signed, if they are available at that time, or at the earliest when available.

• A statement signed by at least one director saying whether the franchisor is able to pay its debts as and when they fall due must be provided to the franchisee with the disclosure document.

• Information about the history of the proposed franchise site, including the circumstances under which any previous franchisee ceased to operate on the site, must be provided to the franchisee in a separate document with a long-form disclosure document (if applicable).

• Franchisees must be informed of any materially relevant facts about the franchise (for example, certain court proceedings) within 14 days after the franchisor becomes aware of them.

• A copy of a current disclosure document must be given to a franchisee within 30 days after a written request to the franchisor, as long as only one request has been made within the last 12 months, not including a request made under a right of renewal.

B. Advice

• Before entering into a new franchise agreement, the prospective franchisee must provide the franchisor with a signed statement that they have been:
  • given independent advice by a lawyer, business adviser or accountant about the proposed franchise agreement or
  • informed that they should seek that kind of advice but have decided not to do so.

C. Cooling off

• A franchisee may terminate a franchise agreement within seven days after entering into the agreement, or paying any non-refundable money, whichever is earlier. If the franchisee chooses to exercise their cooling-off rights, they must be given a refund minus any reasonable expenses incurred by the franchisor within 30 days.

D. Transferring a Franchise Agreement

• A request to transfer a franchise agreement must be put in writing by the franchisee to the franchisor.

• The franchisor will be taken to have consented to the transfer if they do not object within 60 days of the written notice.

• A franchisor cannot unreasonably withhold consent to the transfer of a franchise agreement.

E. Termination of a franchise agreement

• Where a franchisor seeks to terminate a franchise agreement due to a breach of the agreement by the franchisee, the franchisor must give the franchisee a reasonable opportunity to remedy the alleged breach (not more than 30 days).If the breach is remedied in that time, the franchisor must not terminate the agreement as a result of that breach.
• The code specifies special circumstances where the franchisor is not required to provide the franchisee with an opportunity to remedy the breach before proceeding to terminate the agreement. These include where the franchisee no longer holds a license to carry on the franchise, becomes bankrupt, voluntarily abandons the franchise or operates the franchise in a way that endangers public health or safety.

• A franchisor may also have a right under the terms of the franchise agreement to terminate the agreement before the agreement expires even though the franchisee has not breached the agreement nor consented to the termination. When a franchisor terminates a franchise agreement in these circumstances, they must give the franchisee reasonable notice of the proposed termination and the reasons for it.

F. Dispute resolution procedures:

A franchise agreement must set out a dispute resolution procedure that complies with the code. When a dispute arises, you should first refer to the dispute resolution procedure set out in your agreement. However, under the code:

• the complainant must inform the other party in writing of the nature of the dispute, what outcome they want and what action they think will settle the dispute.

• the parties to the dispute must then try and agree about how to resolve the dispute. 

• if the parties cannot agree on a solution to the dispute within three weeks, either party may refer the matter to a mediator.

• if the parties cannot agree about who should be the mediator, either party may ask the Mediation Adviser of Indian Franchise Association, New Delhi to appoint a mediator to help resolve the dispute.

• the Mediation Adviser must appoint a mediator to the dispute within 14 days of a request.

• the parties must attend the mediation and try to resolve the dispute.

• unless otherwise agreed, each party will be equally liable for costs associated with mediation or help to resolve the dispute.

• if 30 days has elapsed since the start of the dispute mediation and the dispute has not been resolved and either party asks the mediator to terminate the mediation, the mediator is required to do so.

• the mediator may also terminate the mediation without a request from either party at any time unless satisfied that a resolution of the dispute is imminent.

The Indian Franchise Association is likely to direct disputes to the Mediation Adviser at first instance. However, the Indian Franchise Association may take immediate action if there is a blatant disregard of the law. You should contact the Indian Franchise Association if you are aware of a breach of the code or the Act.

In case the parties fail to settle the disputes by mediation at the first instance, then the same may be referred to arbitration, under the provisions of the Arbitration & Conciliation Act, 1996 for holding Arbitration Proceedings in Delhi, under the ICA rules of  Arbitration.

 Administration Rules of Indian Franchise Association
Information Disclosure

Article 1-These Rules are formulated to commercial franchise activities carried out in India for the purpose of safeguarding the legal benefits of franchisors and franchisees. 
Article 2-Reference to an affiliate means the franchisor's parent company, the franchisor's subsidiaries in which the franchisor owns, directly or indirectly, the whole or the majority of the equity interests, and companies in which the whole or the majority of the equity interests are owned, directly or indirectly, by a shareholder who also owns, directly or indirectly, the whole or the majority of the equity interests in the franchisor.

Article 3- The franchisor shall, at least 30 days prior to the conclusion of the franchise contract, disclose to the franchisee in written form the information specified in Article 5 hereof, and provide the franchise contract.

Article 4- Information to be disclosed by the franchisor shall include the following twelve items:

(I) Basic information about the franchisor and the franchise activities.

1. The franchisor's name, mail address, means of contact, legal representative, general manager, amount of registered capital, business scope, and the quantity, addresses and telephone numbers of existing directly operated outlets.
2. Overview of the commercial franchise activities of the franchisor;
3. Basic information in the franchisor's filings;
4. Where an affiliate of the franchisor supplies products or services to the franchisee, the basic information of such affiliate;

5. Any information regarding the bankruptcy or application for bankruptcy of the franchisor or its affiliates over the last five years.

(II) Basic information of the franchisor's possession of operational resources.

1. The franchisor shall elucidate to the franchisee in writing the available information on the registered trademark(s), enterprise logo, patent(s), know-how, operation mode, and other operation resources;

2. Where the owner of the operational resources listed above is an affiliate of the franchisor, the basic information of such affiliate should be disclosed.  The franchisor shall simultaneously specify how it will handle the franchise system in the case that the authorization contract with such affiliate is terminated.

3. Information regarding any litigation or arbitration which has occurred in relation to the franchisor's (or its affiliates') registered trademark(s), enterprise logo, patent(s), know-how and other operation resources.

(III) Basic information regarding franchise fees.

1. The categories, amounts, standards, and payment methods of the fees collected by the franchisor for itself or on behalf of third parties.  Where the information cannot be disclosed, the franchisor must give an explanation.  Where different amounts of franchise fees apply among franchisees, the franchisor shall disclose the maximum and minimum amounts of such fees;

2. The conditions for the collection and return of guarantee funds, and the time and method of return of guarantee funds.

3. Where the franchisee is required to pay any fees before the conclusion of the franchise contract, the franchisor shall specify in writing to the franchisee the purpose of use of such fees, as well as the conditions and method for the return of the same.

(IV) Prices and conditions of products, services and equipment to be supplied to the franchisee.

1. Whether the franchisee must purchase products, services or equipment from the franchisor (or its affiliates), and the relevant prices, terms, etc.

2. Whether the franchisee must purchase products, services or equipment from suppliers designated (or approved) by the franchisor.

3. Whether the franchisee may choose other suppliers, and the qualification requirements on the suppliers.
(V) Continuous services to be provided to the franchisee.
1. The specific contents, method of provision and implementation plan, including locations, methods and duration of the training.
2. The specific contents of technical support, and description of the table of contents and relevant page numbers of the franchise operation manual.
(VI) Specific method and contents of guidance and supervision on franchisee's operation.
1. The method and contents of the franchisor's guidance and supervision on the franchisee's operation, and the obligations that the franchisee must fulfill as well as the consequences resulting from the franchisee's failure to fulfill such obligations.
2. Whether the franchisor will bear joint and several liabilities for customer complaints.  If so, how.
(VII) Investment estimate of franchise stores/outlets.

1. The investment estimate may include the following expenses: franchise fees;
(i) cost of training;
(ii) real estate property and decoration expenses;
(iii) expenses for equipment, office appliances, furniture, etc.;
(iv) initial inventory; fees for water, electricity and gas;
(v) expenses for obtaining license(s) and other governmental approval(s); start-up working capital.
2. The source of data and the basis of estimation of the above expenses
(VIII) Relevant information of the franchisee(s) within India.

1. Number, geographic distribution and the authorized franchise scope of existing and anticipated franchisees, and whether they have any exclusive franchising rights (if any, specify the specific area expected to be covered).
2. Appraisal of the operation of franchisees. The franchisor shall disclose the franchisees' actual or estimated average sales volume, cost, gross profit, net profit, and simultaneously explain the source of the aforesaid information, time span, franchise stores/outlets concerned, etc. If such information is an estimate, the franchisor shall explain the basis of such estimate, and explicitly warn potential franchisees that the actual operating circumstances may be different from the estimate.
(IX) Abstract of financial accounting report and abstract of auditing report of the past two years that have been audited by an accounting firm or an auditing firm.
(X) The franchisor's material litigation and arbitration if any, in the past five years related to the franchise activities.

1 Material litigation and arbitration refer to litigation and arbitration involving the parties/other party and;
2. The franchisor shall disclose basic information, venue and result of such litigation.
(XI) Record(s) of material illegal operation of the franchisor or its legal representative. A record of material illegal operation refers to (1) the imposition of a fine by the relevant authority in charge of administrative enforcement of law in an amount no less than more than ; and (2) the imposition of a criminal liability.

(XII) Franchise contract text
1. Sample of franchise contract;
2. Where the franchisor requires the franchisee to enter into with the franchisor (or its affiliate) any other contract related to the franchise, a sample of such contract should be provided at the same time.

Article 5 The franchisor may not conduct advertising and promotion acts of a fraudulent or misleading nature, and the advertisements published by it may not contain content publicizing the profits obtained by a single franchisee when engaging in the franchise activities. 

Article 6 Before disclosing information to the franchisee, the franchisor shall be entitled to request the franchisee to enter into a confidentiality agreement with the franchisor.

Article 7 After the franchisor discloses information to the franchisee, the franchisee should issue a receipt (in two counterparts) to acknowledge the content of the information obtained from the franchisor.  Two counterparts of the receipt should be both signed by the potential franchisee, one of which will be retained by the franchisee, and the other of which will be retained by the franchisor.

Article 8 Where the franchisor conceals information that should be disclosed or discloses false information, the franchisee may terminate the franchise contract.   

Article 9 Where the franchisor violates a provision of these Rules, the franchisee has the right to report to the competent commercial administration authority.  Upon verification, the competent commercial administration authority may order correction, and impose a fine of not less than and no more than ; where the violation is serious, a fine of no less than and no more than may be imposed, and a public announcement may be made.

Article 10 These Rules will be implemented as of 01.07.2008.