Buying a Franchise in India: Non-Compete Clauses

When buying a franchise, do not look only at the business you are being given the right to operate. Check which other businesses the agreement prevents you from pursuing. A non-compete clause could affect an existing shop, a family business or your future livelihood. Both brand protection and franchisees’ commercial freedom matter in franchising, so it is essential to understand the true scope of any restriction.

1. First, understand which activities are restricted

A non-compete clause generally prevents a franchisee from running a similar or competing business. However, the wording may go beyond opening another shop. It could also cover investment, employment, consultancy, partnerships or indirect support for another business.

Look for answers to these questions in the draft agreement:

• What counts as a competing business? A business selling the same products, or any related service as well?
• Who is covered? Only the entity signing the agreement, or also its promoters, directors and associated entities?
• Where does it apply? Near the premises, throughout the city, across India, or to online sales as well?
• How long does it last? During the agreement, after it ends, or both?
• What forms of involvement are prohibited? Are active management and a small passive investment treated in the same way?

Suppose you want to buy a bakery franchise and your family already runs a grocery shop. If the draft treats every type of food business as a competitor, there could be scope for a dispute. Rather than relying on verbal assurances, ask for an explicit written exemption for the existing business.

2. Indian law distinguishes between restrictions during and after the agreement

India has no dedicated franchise law, mandatory franchise-specific pre-sale disclosure regime or separate government franchise registration system. This does not mean franchise agreements sit outside the law. The Indian Contract Act, 1872 provides the main framework for contract formation, performance, breach and remedies. Rules on free consent, fraud and misrepresentation also apply.

Section 27 of that Act is particularly important for non-compete clauses. The general rule is that an agreement restraining someone from exercising a lawful profession, trade or business is void to that extent. There is a statutory exception relating to the sale of a business’s goodwill, but an ordinary franchise licence does not automatically amount to a sale of goodwill.

Courts assess limited non-compete clauses that support the operation of an ongoing agreement differently from clauses restricting business activity after the agreement ends. Some restrictions during the term may be enforceable; signing an agreement does not, by itself, make every broad restriction valid.

General post-termination restraints on trade are often caught by Section 27. Simply specifying a short period or a limited geographical area does not automatically make such a restriction valid. Even so, deciding to ignore the clause yourself is not a safe strategy. Ask an Indian lawyer to assess its wording and the circumstances. The Competition Act, 2002 may also apply where the arrangement raises concerns about anti-competitive effects.

3. Put your exemptions in writing before signing

List your current business activities and investments, then compare them with the draft agreement. Include any jointly owned shop, consultancy work, your role in a family business and shareholdings in other companies. Not every activity will necessarily be prohibited; the aim is to resolve uncertainty in advance.

Propose four improvements during negotiations:

1. A narrow definition of competing activity: Identify genuinely competing activities rather than restricting an entire product category.
2. An exemption for existing businesses: Record each relevant business’s name, location and permitted activities in a schedule to the agreement.
3. Clarity on passive investments: Address investments that involve no participation in day-to-day management separately.
4. A consent procedure: Specify whose consent is needed for a new activity, what information must be provided and when a response is due.

Also check whether you could be held responsible for a breach arising from a relative’s independent business. A relative being mentioned in the agreement and that relative being personally bound by it are separate questions. Seek specific advice before guaranteeing conduct beyond your control.

4. Read the consequences as well as the restriction

Do not read the non-compete clause in isolation. Check what the franchisor can do in response to an alleged breach: seek an injunction to stop the activity, terminate the agreement or claim damages. Nor should you assume that the full compensation amount stated in the agreement is automatically payable; the applicable contract law and the facts will matter.

Obtain written clarification for three situations: the agreement expires in the ordinary course, the franchisor terminates it, or the franchisor itself fails to meet its obligations. Check which restrictions are stated to continue in each case.

The freedom to trade and the right to use a brand’s intellectual property are separate matters. An unenforceable non-compete clause does not mean you can use the former brand’s name, logo or protected material. The Trade Marks Act, 1999 and other applicable laws may provide separate protection.

Practical takeaway: Before signing, prepare a one-page summary of the restricted activities, the people and entities covered, the duration and any exemptions. Clarify any restriction that could affect your other income or future plans, and have the revised agreement independently reviewed by a lawyer.