How to Agree an Indemnity Clause in an Indian Franchise Agreement

When turning your existing business into a franchise, agreeing fees and operating rights is not enough. If one party’s fault leaves the other facing a legal claim, loss or defence costs, who pays? The indemnity clause in the agreement answers this question. To maintain trust across the franchise network, it should reflect responsibilities and actual control rather than provide one-sided protection.

1. Understand indemnities and Indian law

An indemnity is generally a promise to compensate another party for losses in specified circumstances. It is not a guarantee against every business loss. Low sales, higher rent or slower-than-expected growth do not automatically give rise to an indemnity claim; the triggers specified in the agreement and the applicable law matter.

India has no standalone franchise legislation, mandatory franchise disclosure document or central franchise registration system. Nor is there a generally applicable mandatory franchise code of conduct. The wording of the contract is therefore important, but it cannot remove mandatory legal obligations.

Sections 124 and 125 of the Indian Contract Act, 1872 provide the principal legal basis for contracts of indemnity and the rights of the indemnified party. Depending on the circumstances, these rights may cover damages, litigation costs and sums paid under a settlement, subject to legal conditions.

The Trade Marks Act, 1999, Consumer Protection Act, 2019, Competition Act, 2002, and applicable tax, employment and local laws may also be relevant. The parties can allocate costs between themselves, but this does not alter the statutory rights of consumers or regulators.

2. Allocate each risk to the party that controls its source

Start by listing the main risks in your business. For each risk, identify who makes the decisions, who carries out the work and who can prevent something going wrong. Use this as the basis for drafting the indemnity clause.

For example, risks associated with the franchisee might include its employees breaching local rules, unauthorised changes to services or misleading advertising it creates itself. Risks associated with the franchisor might include promotional claims it supplies or authorising the use of a trade mark it has no right to license.

Treat these as examples of how to allocate responsibility, not as automatic legal conclusions. The clause will also need exceptions. If the franchisee makes unauthorised changes to brand-approved material, responsibility for any resulting claim may be different.

Include a provision for shared fault too. For example, if the franchisor’s instructions are inadequate and the franchisee also ignores a warning, making one party bear the entire loss could intensify the dispute. Have the agreement set out a process for allocating responsibility according to each party’s contribution to, and role in causing, the loss.

3. Specify which losses are covered

Broad wording such as “all losses of any kind” may look reassuring, but its scope can be unclear. Work through the following points separately with your lawyer:

• Type of claim: Will the clause apply only to third-party claims, or also to direct losses suffered by one party as a result of the other’s conduct?
• Covered costs: Are reasonable legal fees, court-awarded sums and approved settlement amounts included?
• Causal connection: Did the loss actually arise from the relevant party’s breach or conduct?
• Limits and exceptions: Will there be a general liability cap, and which matters will be treated differently?
• Double recovery: How will compensation received from another source be accounted for?

Discuss fraud, deliberate breaches and intellectual property claims specifically. Do not assume that indemnification for fines or penalties is lawful in every situation. Recovery of such sums may depend on the relevant law and public policy. Simply mentioning an amount in the contract does not guarantee that it can be recovered.

4. Agree the claims procedure in advance

A good indemnity clause does more than promise payment: it sets out how to act. Specify who must be notified of a claim, by what means and how quickly. The notice should include details of the incident, potential losses and available documents. Make the consequences of late notification clear and proportionate too.

Control of the defence is important. Who will appoint the lawyers, who will approve costs and how will the other party co-operate? Consider arrangements for independent legal representation if the parties’ interests conflict. Neither party should be able to settle a claim by admitting fault on the other’s behalf or imposing non-monetary obligations on it without its consent.

Finally, specify the evidence needed for payment, payment deadlines and how claims relating to earlier events will be handled after the agreement ends. Ensure the operations team also understands its responsibility to preserve incident records and supporting documents.

Practical takeaway: Before finalising the agreement, prepare a shared checklist covering risks, control, payment and the claims procedure. Then ask a lawyer familiar with Indian law to check that the indemnity clause expresses that allocation of responsibility clearly and in an enforceable way.