A comparison of developments in Franchise law

Franchise law in India: bridging legal gaps

Franchising as a form of business ownership has transformed the retail sector of India, which has for generations been dominated by family-owned stores. Once viewed merely as a gateway for the entry of international brands to India, franchising has evolved into a profound instrument for growth that bridges the gap between traditional trade and modern retail.

The sector today contributes to nearly 2% to India’s GDP with more than 200,000 outlets employing 5.5 to 6 million people. Franchises continue to grow in smaller cities and towns, capturing tier II and III markets. Growing at an impressive 30-35% annually, India’s franchise industry is currently valued at USD47-48 billion and is projected to reach USD140-150 billion by 2028. But these raw figures mask a deeper shift.

What began as a gateway for Western brands has evolved into a strategic tool for Indian businesses to scale up while preserving local relevance. Today’s franchise networks span an improbable range, from medical testing centres to traditional medicine retailers, and cloud kitchens to education providers.

The model’s appeal lies in its ability to solve a uniquely Indian challenge: how to scale businesses in a market where consumer preferences and business practices vary dramatically across regions. By combining standardised operations with local market knowledge, franchising offers a middle path between the informality of traditional trade and the rigidity of corporate chains. Remarkably, this expansion has taken place without dedicated franchise laws or regulators, relying instead on mutual adaptation and trust between franchisors and franchisees.

To understand where Indian franchising is headed, it helps to examine how the sector has evolved, what rules govern it, and why it matters.

Legal framework

The evolution of franchise law in India presents an intriguing interplay between judicial interpretation and statutory provisions. In McDonald’s India Private Limited v Vikram Bakshi, Delhi High Court confronted fundamental questions about arbitration, jurisdiction and international franchise agreements. The court’s analysis established that anti-arbitration injunctions warrant exceptional circumstances, marking a departure from earlier approaches that readily entertained challenges to international arbitration.

This judicial framework operates against a backdrop of statutory provisions. While India lacks dedicated franchise legislation, the sector operates under multiple laws. The Indian Contract Act 1872 governs basic obligations. The Consumer Protection Act 2019 holds franchisors accountable for product and service standards. The Competition Act 2002 prevents restrictive practices in franchise agreements, from territorial limits to pricing controls.

International franchises face additional requirements. The Foreign Exchange Management Act regulates royalties and franchise fees. Recent court interpretations have clarified when Indian courts can intervene in international franchise disputes, primarily when agreements are void or incapable of performance, not merely because litigation might be more convenient in India.

Data protection presents fresh challenges. The pending Data Protection Bill will likely impose stricter requirements on customer data handling, particularly affecting franchises in healthcare and financial services. Intellectual property protection has also gained importance as franchises expand into smaller markets where enforcement becomes more difficult.

Recent reforms in foreign investment rules and tax administration have simplified operations. Yet gaps remain in quality control standards and dispute resolution mechanisms.

Policy reform

India’s policy reforms in franchising tell two stories: one of systematic barrier removal, another of financial access expansion. The government’s success in streamlining business processes shows in India’s Ease of Doing Business ranking, a climb from 142^nd in 2014 to 63^rd in 2020 in the World Bank’s assessment.

The introduction of the National Single Window System marks a shift from India’s traditionally fragmented regulatory approach. Where businesses once needed to approach multiple departments for approvals, a single digital interface now handles clearances, particularly valuable for franchise networks managing multiple outlets.

The numbers show the impact. Between 2014 and 2024, India attracted USD667.4 billion in FDI, a 119% increase from the previous decade. Manufacturing alone drew USD165.1 billion in equity inflows. These figures reflect deeper changes in India’s investment climate, with liberalised FDI norms now allowing 100% foreign investment through automatic routes in most sectors.

The Jan Vishwas Act of 2023 addresses a longstanding business concern. By decriminalising minor regulatory violations, the act reduces compliance risks for franchise operations. This reform particularly benefits multi-unit franchisees who previously faced potential criminal liability for technical breaches across their networks.

Recent initiatives focus on capital access. New MSME policies help franchisees secure bank financing. The government’s push to recapitalise public sector banks has increased lending capacity, while specialised loan programmes target franchise expansion. The Startup India programme, with its recognition of more than 140,000 startups, has created new pathways for innovative franchise models.

These changes reflect a shift in regulatory philosophy. Rather than controlling business operations, policy now aims to enable growth while maintaining necessary oversight. For franchising, this means simpler establishment procedures, clearer operational guidelines and better access to growth capital.

Rise of small-format franchising

India’s franchise revolution is unfolding far from urban centres. In small towns, neighbourhood tea stalls transform into branded chains, local diagnostic labs standardise their operations, and educational centres adopt systematic teaching methods while maintaining their community connections.

Franchise adoption in smaller markets stems from local entrepreneurial adaptation rather than corporate strategy. Small business owners, recognising the benefits of standardisation and brand recognition, have modified franchise models to suit their markets. With lower investment thresholds and simplified operating procedures, these micro-franchises make organised retail accessible to a broader entrepreneurial class.

Financial services offer clear examples of this adaptation, with networks using physical outlets backed by digital tools to expand market reach. Retail franchises have developed models that maintain local connections while standardising core operations.

Rather than following established corporate models, these businesses create hybrid systems that combine organised retail’s efficiency with local market understanding. Their success suggests that India’s franchise future may lie not in replicating large chains but in adapting the model to serve smaller markets effectively.

Emerging issues in franchise operations

The core challenge in franchise operations stems from India’s sectoral regulations. Take data protection: franchisors not only need to comply with impending legislation but must also navigate sector-specific rules.

Healthcare franchises, for instance, must reconcile telemedicine guidelines with franchise data sharing practices. The proposed Digital Personal Data Protection Bill will add requirements for cross-border data transfers, a critical issue for international franchise networks managing customer data across jurisdictions.

Contract construction has gained complexity with technological integration. Courts must interpret traditional franchise clauses considering new business models. When does a mobile app’s geolocation feature violate territorial exclusivity? How do cloud kitchens affect non-compete obligations? Such questions require fresh legal analysis as digital operations blur traditional franchise boundaries.

Regulatory overlaps create tension. A franchise might comply with FEMA guidelines on royalty payments yet face Competition Commission scrutiny over the same fee structure’s market impact. Similarly, while the Consumer Protection Act creates direct liability for franchisors, the extent of this liability remains untested when franchisees use independent technology platforms for delivery or customer service.

The interplay between state and central regulations adds another dimension. Food safety standards, shop establishment laws and local trading licences vary by state. These variations affect how franchise agreements can standardise operations while ensuring local compliance. Professional service franchises face additional complications when state regulations govern service delivery, as with healthcare or education franchises navigating different state regulatory frameworks.

Maintaining uniform standards across diverse regulatory environments while allowing necessary local adaptations likely means creating more sophisticated legal structures that can accommodate both standardisation and flexibility.

The next legal frontier

Franchising forces courts to reconsider fundamental concepts of agency, control and liability in an era where business relationships defy traditional categories.

Traditional principles of vicarious liability strain when applied to modern franchise operations that blend standardisation with autonomy. Competition law must reconcile network effects with market efficiency. Intellectual property protection faces new challenges when brand value derives not just from trademarks but from data-driven customer relationships and algorithmic business insights.

These tensions suggest that India’s next phase of commercial law development may emerge from franchise disputes. As courts grapple with these cases, they must develop doctrines that balance standardisation with market adaptation, central control with local autonomy, and brand protection with competition.

The principles emerging from these cases will echo beyond franchise law, influencing the broader development of commercial jurisprudence.

Anand and Anand
First Channel Building Plot No. 17 A Sector 16 A
Film City Noida 201301 (UP) India
Tel: +91.120.4059300
Fax: +91.120.4243056 – 058
Email: email@anandandanand.com
www.anandandanand.com

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Legal guide to franchise laws in Taiwan

Franchising has become a common business model in Taiwan. Despite the prevalence of this approach, Taiwan lacks specific legislation to regulate franchising. The relationship between franchisors and franchisees is defined through a contract. Any violations related to franchise transactions or fair competition will be determined under the provisions of the Taiwan Fair Trade Act.

This article provides an overview of the legal framework governing franchising in Taiwan, focusing on key aspects regulated under the Fair Trade Act. The act addresses franchise agreements in three main categories: disclosure of important franchise information; improper restrictions on competition; and false advertising.

Disclosure of franchise information

Taiwan’s Fair Trade Commission has established the Fair Trade Commission Disposal Directions on the Business Practices of Franchisors (the guidelines) to ensure transparency and fairness in franchise relationships. The guidelines, last amended on 1 August 2018, aim to address the imbalance of information between franchisors and franchisees, and prevent misuse of unequal bargaining positions.

According to the guidelines, franchisors must provide franchisees with specific and essential information at least 10 days before a franchise business relationship is established. Such information includes:

1. 1. Startup costs, such as the costs or estimated fees paid to the franchisor for merchandise purchases and raw materials;
   2. Operating expenses, such as the costs and estimated fees to be paid to the franchisor for management guidance and marketing and promotion expenses;
   3. Contents, periods of validity, extent of authorisation, and corresponding restrictions of trademark rights, patents and copyrights involved;
   4. Contents and methods of operational assistance, training and guidance;
   5. Plans for setting up other franchisees of the same franchise system in a franchisee’s existing area of operation;
   6. Restrictions that apply to the franchise relationship during the contract period, such as the supply of merchandise or raw materials, or capital equipment from the franchisor or the supplier designated by the franchisor, and designated brands and specifications; and
   7. Conditions for and ways of handling the alteration, termination and cancellation of a franchise contract.

Failure to disclose such information is a common cause of franchisors incurring penalties, with fines for violation potentially reaching NTD1 million (USD30,300) or more.

Additionally, franchisors shall allow at least five days or a reasonable period for counterparties to conduct contract review before signing, and franchisors shall provide the counterparties with the contract within 30 days after the signing date, unless delayed for reasons not attributable to the franchisor.

Two recent cases involved franchisees of major convenience store chains being sanctioned by the Fair Trade Commission in Taiwan. These cases highlight the importance of transparency and fairness in franchise agreements, as governed by the Fair Trade Act.

In a case involving a convenience store chain, the franchisor was fined NTD3 million by the Fair Trade Commission for a violation of article 25 of the Fair Trade Act (which prohibits deceptive or obviously unfair conduct) by failing to disclose critical information to the franchisee before establishing the franchise relationship.

Specifically, the franchisor did not provide written details regarding minimum recommended order quantities and the sales-to-purchase ratio restriction. The latter restriction required franchisees to maintain a certain ratio of sales to purchases, necessitating the ordering of safety stock to avoid stockouts.

Failure to comply with such restriction incurs severe consequences to the franchisee, including termination of the franchise and demands for punitive liquidated damages.

The Taiwan Administrative Court upheld the Fair Trade Commission’s original sanction, emphasising the franchisor’s duty to disclose essential franchise information.

In a case involving another convenience store chain, the Fair Trade Commission also imposed penalties under similar circumstances. However, the Taiwan Administrative Court dismissed the original sanction. The court determined that such business supervision measures, such as issuing warnings and conducting performance evaluations, only slightly interfered with the franchisees’ autonomy in ordering goods. These measures did not reach a level of unfairness that warranted sanctions.

In the above-mentioned cases, the court assessed whether the franchisor violated its obligation to disclose important information by evaluating the strength of the contract’s binding terms, rather than merely checking to determine whether the information was disclosed, to determine if an unfair situation existed.

Improper restrictions on competition

The Fair Trade Act prohibits businesses from treating other enterprises unfairly without justifiable reasons, especially if such actions could interfere with competition. Franchisors cannot apply unequal treatment of different franchisees or businesses at the same competitive level regarding pricing or transaction terms without justification.

The Fair Trade Commission clarifies that this rule does not mean a business must offer the same price to all its partners. Instead, it means that if a business has the power to influence market transactions, any unfair treatment of different parties must be justified; otherwise, it is considered to constitute a restraint against competition.

The Fair Trade Act prohibits businesses from conducting transactions with counterparties if such transactions impose improper restrictions on the counterparties’ business activities. For instance, real estate brokerage firms operating under a franchise model could face scrutiny if they impose specific service fees on franchisees, as this may be considered an improper restriction on business activities, violating the Fair Trade Act, and could lead to fines.

False advertising

Franchisors shall be mindful of article 21 of the Fair Trade Act when advertising “guaranteed” profit rates for franchises. This includes when the franchisor discloses sales data or compares directly operated stores with new franchisees.

Advertisements containing exaggerations, falsehoods or misleading information, or lacking objective data support may lead to administrative penalties. Importantly, having objective data does not automatically make an advertisement legal.

For instance, a well-known dessert franchise was penalised for false advertising claiming a “net profit rate of about 20-35%” based on the performance of their four best-performing directly operated stores (selective data), while excluding the net profit data from their other 12 directly operated stores.

The Fair Trade Commission noted that even though the advertisement’s calculations were based on actual data, using only the best-performing store, or a single month’s data from all directly operated stores, does not accurately reflect the average business performance of the entire brand system, including both directly operated stores and franchisees. Consequently, an administrative penalty was imposed.

Conclusion

In Taiwan, the Fair Trade Commission may impose fines ranging from NTD50,000 to NTD25 million for failure to disclose essential franchise information or for engaging in false advertising, in accordance with the Fair Trade Act.

In cases of improper restrictions on competition, fines may range from NTD100,000 to NTD50 million, with potential imprisonment for up to two years, or a concurrent fine of up to NTD50 million. Additionally, civil courts often evaluate franchisor conduct by examining violations of the Fair Trade Act when addressing private law disputes concerning franchise agreements.

Understanding the legal framework and obligations under the Fair Trade Act is crucial for both franchisors and franchisees to ensure compliance and maintain fair business practices when engaging in franchising activities in Taiwan.

LEE AND LI ATTORNEYS-AT-LAW
8F, No 555, Sec 4, Zhongxiao E Rd,Taipei 11072, Taiwan, ROC
Tel: +886 2 2763 8000
Email: attorneys@leeandli.com
https://www.leeandli.com/EN

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