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. For more information about franchise law call us on 0203 983 8278 .
