Buying a Franchise in India: Check the Interest on Late Payments

When buying a franchise, the initial fee is easy to spot, but interest on late payments often receives less attention. An incorrect invoice, a technical problem at the bank or a discrepancy in the accounts can all create additional liabilities. A transparent franchise relationship depends on understanding when a payment becomes overdue, what charges will be added and what opportunity you will have to put things right. Review these provisions separately before signing.

1. Clarify the due date and when a payment becomes overdue

It is not enough simply to read that payments must be made monthly. Review the agreement, fee schedule and invoicing process together. Is there a fixed payment date, or do you have a set period after receiving the invoice? If the invoice arrives late, will the payment deadline move accordingly?

Get written answers to these questions:

• Which email address or system will invoices be sent to, and when will they be deemed received?
• If the deadline falls on a public holiday, when will payment be due?
• Is payment considered complete when your bank sends it or when it reaches the franchisor’s account?
• Who is responsible if incorrect bank details or a technical problem on the franchisor’s side causes a delay?
• If an invoice is corrected, will there be a new due date, or will the original one still apply?

Royalties, advertising contributions and payments for goods may follow different processes. Identify the due date and applicable late-payment terms for each category. Do not assume that an allowance made for one invoice will apply to all payments.

2. Count all charges added alongside interest

Wording such as “interest at the prevailing rate” does not tell a buyer the true cost. The rate should be clear, as should whether it is monthly or annual. Get written confirmation of whether interest is calculated daily, charged for a full month or calculated in some other way. Understand the difference between simple and compound interest too: with compound interest, interest may also accrue on earlier interest charges.

Next, check the amount on which interest is calculated. Will it apply only to outstanding fees, or will taxes, existing interest and administration charges also be included? How will a part-payment reduce the balance? If payments are allocated first to recovery costs and interest, the principal amount may remain outstanding for longer.

Ask the franchisor for a written example using a hypothetical invoice. It should show the principal amount, due date, payment date, interest and other charges separately. Then ask for the same calculation with a part-payment included.

In particular, check whether interest, a fixed late-payment fee, a failed-payment charge and recovery costs can all be charged for the same delay. Negotiate limits on these charges and requirements for supporting evidence. A verbal assurance that “we do not charge that” does not change a liability set out in writing.

3. What is the legal position in India?

India does not have a separate, comprehensive central law governing franchising. There is generally no legal requirement to provide a prescribed franchise disclosure document before selling a franchise. Nor is there a central franchise registration system or a mandatory franchise-specific code of conduct. Late-payment terms therefore depend primarily on the agreement and applicable general laws.

The Indian Contract Act, 1872 provides the main legal framework for the formation, performance and breach of contracts, and the remedies available. Rules on free consent, fraud and misrepresentation also apply. The absence of a franchise-specific disclosure requirement does not give a franchisor permission to provide false information.

Sections 73 and 74 of the Act concern losses caused by breach of contract and sums stipulated in a contract or penalty provisions. Under section 74, reasonable compensation cannot exceed the stipulated amount; the full contractual penalty is not automatically recoverable in every case. An increased interest rate following default may also, depending on the circumstances, be treated as a penalty provision.

This does not mean that every late-payment charge is unlawful. The nature of the charge, the agreement and the facts will matter. Applicable tax laws may also be relevant, as may the Sale of Goods Act, 1930 where goods are supplied. If a dispute seems likely, seek independent legal advice before withholding payment.

4. Put notice, dispute and correction procedures in writing

Ask for the agreement to require any notice of default to include the outstanding invoice, calculations and payment details. The period allowed to remedy the missed payment should be clear. Also clarify whether interest will continue to accrue during that period: time to remedy a default is not necessarily an interest-free period.

Agree on a contact person, required documents and a response deadline for disputes over incorrect invoices. Ask for a written arrangement covering payment of the undisputed amount on time and how charges will apply to the disputed portion while it is being investigated. It is risky to assume that such concessions will be available automatically.

Ask whether late payment could lead to supplies being stopped or access to the sales system being suspended. Propose notice and an opportunity to put matters right so that a minor accounting error does not have disproportionate consequences. Ensure that all agreed changes are included in the signed agreement or an addendum.

Practical takeaway: Before signing, ask for a full calculation of late-payment charges and the effect of a part-payment using a sample invoice. If the due date, the basis for calculating interest or the process for correcting an invoice is unclear, get written clarification first.