Buying a Franchise in India: Check the Indemnity Clauses

When buying a franchise, the initial investment is usually clear, but the cost of a customer claim or legal dispute is often overlooked. An ‘indemnity’ clause in the agreement may determine whether you must pay for losses suffered by the other party or claims brought against it. A trustworthy franchise partnership requires these responsibilities to be allocated according to fault, control and risk.

1. Understand the scope of the indemnity first

In plain English, an indemnity is a promise by one party to compensate the other for losses in specified circumstances. In a franchise agreement, it may cover customer injuries, defective products, employees’ actions, regulatory breaches or claims involving third-party rights. Actual liability will depend on the wording and the applicable law.

Do not simply read ‘the franchisee is responsible for its operations’ and move on. Check whether the next line also makes you responsible for every loss suffered by the brand, its associated companies, officers and suppliers. In particular, establish:

• What event triggers the obligation to indemnify?
• Does it cover only your own fault, or any claim connected with the business?
• Are legal fees, settlement payments and investigation costs included?
• Does it cover only third-party claims, or the franchisor’s own losses as well?

If you encounter broad wording such as ‘all claims’ or ‘losses arising from any cause’, ask for its practical meaning to be set out in writing. Also ask whether payment can be demanded as soon as a claim is made, or only once liability and costs have been established.

2. What does Indian law say?

India has no separate, comprehensive franchise law, mandatory franchise disclosure document or central franchise registration system. This does not mean there are no legal obligations. The relationship between franchisor and franchisee is governed mainly by their agreement and the general laws that apply.

Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity. Section 125 concerns the indemnified party’s rights, in specified circumstances, to recover damages, costs and settlement payments relating to legal proceedings. It is therefore important to have a lawyer explain the procedure and scope of payment set out in the agreement.

Customer-related matters may fall under the Consumer Protection Act, 2019, which includes product liability provisions. Depending on the business, food safety, employment and other general laws may also be relevant. The franchisor and franchisee can agree how to share costs, but their agreement cannot remove the statutory rights of customers or regulators. Equally, a private agreement does not automatically transfer a statutory responsibility to the other party.

3. Allocate responsibility according to control

Before buying, draw up a short list of potential incidents and establish each party’s role. For example, a product spoilt by poor storage at the outlet is different from a product supplied by the brand with an existing defect. In the first case, local operations will be important; in the second, manufacturing, supply and product instructions will need to be examined.

Use this approach to negotiate mutual indemnities. The aim is not to impose identical wording on both parties, but to clarify responsibility for the risks each controls. Ask what protection you will receive if a claim arises from promotional material, central instructions or products supplied by the franchisor.

When reviewing the agreement, propose these safeguards:

• Excluding losses caused by the franchisor’s own negligence or breach from your responsibility.
• A procedure for sharing liability where both parties are at fault.
• A reasonable financial cap on the indemnity, with clearly defined exceptions.
• Clear treatment of remote or indirect losses.

Also check whether the agreement’s general liability cap applies to indemnities, or whether they are carved out, leaving you with unlimited exposure. Have the validity of each limit or exception checked in light of the circumstances.

4. Include claims-handling procedures and insurance

How a claim is managed matters before the amount payable is settled. The agreement should specify who must be notified, how and within what timeframe. It should also set out procedures for preserving records, choosing lawyers, controlling the defence and approving costs. Be wary of any clause that allows the franchisor to settle without your consent and then demand full payment from you.

Do not treat insurance as a substitute for an indemnity. Show the proposed agreement to an insurance adviser and ask which claims are covered, which exclusions apply and what you will have to pay yourself. Additional liability accepted solely under a contract is not covered by every policy. Also clarify how claims arising from past operations will be handled after the outlet closes or the agreement ends.

Practical takeaway: Before signing, present three hypothetical claims and ask for written answers: who is at fault, who will handle the defence and who will pay? Wherever the answers are unclear, ask for a revised agreement, not reassurance.