Buying a Franchise in India: Who Pays for an Unexpected Closure?

When buying a franchise, it is not enough to forecast sales and costs under normal trading conditions. If flooding, fire or a government order temporarily closes an operating outlet, some payments may still fall due. A trusted franchise partnership requires advance agreement on which obligations will be suspended, which will continue and how trading will resume. The key lies in the contract’s provisions for exceptional circumstances.

1. Define exceptional circumstances clearly

Contracts often include a ‘force majeure’ clause. This refers to events beyond the parties’ control that prevent or hinder them from meeting their obligations. But simply including the term does not guarantee relief whenever difficulties arise. You need to read the definition, understand the event’s actual impact and check the procedure for claiming relief.

Check whether the clause covers natural disasters, fire, pandemic-related restrictions, government-ordered closures and serious disruption to essential services. Alongside the list of events, it should specify whether performance must become impossible or whether serious disruption is enough. Higher operating costs or fewer customers do not automatically qualify.

Ask the franchisor for written answers covering three scenarios:

• The outlet is completely closed, but the brand’s online services remain available.
• The outlet can open, but the brand’s central supply operation has stopped.
• Operations have stopped because an essential permit was not renewed.

Do not treat these situations as equivalent. It is risky to assume that a closure caused by one party’s own failure will qualify for the same relief as an external disaster.

2. Understand the limits of relief under Indian law

India has no separate, comprehensive central franchising law, mandatory pre-sale franchise disclosure document or central franchise register. Nor is there a general, franchise-specific statutory right to suspend fees during a temporary closure. The applicable general law and the wording of the contract are therefore important.

The Indian Contract Act, 1872 is the main legal framework. Section 32 may be relevant where a contract provides for obligations to change or be suspended if an uncertain event occurs. Section 56 may come into play where circumstances not provided for in the contract make performance impossible or unlawful. Not every inconvenience, loss or temporary interruption meets this threshold.

Take particular care: the effect of Section 56 may be to render the relevant contract void, rather than simply provide a convenient payment holiday. Do not treat it as an easy route to a fee waiver. Seek independent legal advice on your circumstances.

Local administrative requirements, fire safety rules and other applicable regulations may also affect operations. A franchisor’s consent cannot override a government restriction; equally, a government-ordered closure does not automatically end all private payment obligations.

3. Set out separate arrangements for each payment

A statement such as ‘reasonable support will be provided during closure’ offers no clear financial protection. Have a payment schedule drawn up alongside the contract, setting out how each fee will be treated. In particular, check:

• Fixed monthly fees: Will they be waived, reduced or merely deferred during the closure?
• Sales-based fees: Will a minimum payment still apply if there are no sales?
• Technology and other recurring fees: Will charges for services you cannot use stop or continue?
• Existing arrears: How will obligations incurred before the closure be distinguished from those arising during it?

Draw a clear distinction between a waiver and a deferral. If all deferred sums become payable as soon as the outlet reopens, this could put cash flow under pressure. Set out the terms for instalments, interest and late-payment charges in writing too.

Do not regard insurance as a substitute for contractual relief. Business interruption insurance does not cover every cause of closure. Ask the insurer to explain the actual cover, exclusions, waiting periods and claims conditions. Even if the franchisor grants fee relief, your obligations to the landlord, employees or lender may remain separate.

4. Agree procedures for notice, evidence and reopening

A relief clause is useful only if its requirements are practical to follow. The contract should clearly specify the deadline for giving notice, the authorised contact and the accepted communication channels. Ask for an alternative notification procedure in case power or communications are disrupted.

Keep government orders, photographs of the site, supplier messages and a record of closure dates. Document reasonable steps taken to limit losses. If alternative sales channels are permitted, agree their costs, safety requirements and responsibilities in advance.

Allocate responsibility for cleaning, repairs, stock checks and the permits needed to resume operations. If the franchisor’s approval is required, put the approval process and response deadline in writing. Do not leave unclear when a prolonged closure will be reviewed or how long relief will last.

Practical takeaway: Before signing, have a one-page ‘unexpected closure plan’ drawn up: which events qualify, which payments will stop, how notice will be given and when operations will resume. Make it an explicit part of the contract, not just a verbal assurance.