How to Define Territory in a Franchise Agreement in India

When granting the first franchise for your existing business, it is easy to say, ‘This whole area will be yours.’ But that promise can take on a different meaning when online orders, a second outlet or supplies to a major customer enter the picture. To maintain trust within the franchise network, territorial rights need to be set out in the agreement, supported by maps, sales channel rules and clear conditions.

1. First, decide which rights you are granting

Granting a territory does not necessarily mean giving the franchisee rights over every sale made there. Before drafting the agreement, review your expansion plans and distinguish between these three arrangements:

• Non-exclusive territory: The franchisee may operate in a defined area, but the brand retains the right to open other outlets within it.
• Exclusive territory: Within agreed boundaries and subject to specified conditions, neither another franchisee nor the brand itself may open a competing outlet. The agreement must specify which activities are restricted.
• Conditional exclusivity: Territorial protection continues only if the franchisee meets agreed operating and performance requirements.

Do not simply use the word ‘exclusive’ and leave it at that. Clarify whether the rights cover operating one outlet, opening several outlets or receiving the first offer for a future location. A right of first offer does not automatically authorise the franchisee to open an outlet; specify the response deadline and the steps that follow.

2. Define boundaries that both parties can identify

A city name or ‘the surrounding area’ is not enough. Municipal boundaries can change, and people may interpret informal neighbourhood boundaries differently. Attach a dated map and a written description in a schedule to the agreement. Specify which takes precedence if the two differ.

Boundaries can follow roads, administrative wards, PIN codes (India’s postal codes) or a set distance from a defined point. If using distance, state whether it is measured in a straight line or by road. Make provision for changes to PIN codes: will territorial rights change automatically, or will a written amendment be required?

Do not determine the size of a territory by population alone. Consider travel times, customer buying habits, distribution capacity and the franchisee’s ability to serve the area. Granting too large a territory can hold back the brand’s expansion; making it too small can create unnecessary conflict between outlets.

If special locations such as airports, railway stations, large complexes and shopping centres are to be excluded, identify them by name or clearly defined category at the outset. Adding exceptions later can undermine the original promise.

3. Set out arrangements for online sales and shared customers

Outlet boundaries and customer boundaries are different matters. Can an outlet accept a sale when a customer from another territory visits in person? Will website orders be allocated according to the customer’s address, stock availability or the nearest outlet? Agree the answers in advance.

For example, two franchisees may both be able to deliver to the same residential complex. In that situation, a map alone will not resolve a dispute. You need rules for allocating orders, assigning service responsibilities and recording sales.

Use a separate schedule to set out:

• Who will fulfil orders placed through the brand’s website and third-party delivery platforms.
• Who will be responsible for returns, complaints and refunds.
• Who will have the right to supply institutional customers operating across the city.
• Where local promotions may take place and how spending on joint campaigns will be approved.

These rules do not guarantee sales. Their purpose is to establish a clear division of work and responsibility.

4. Have the terms reviewed under Indian law

India has no dedicated central franchise law, mandatory national franchise disclosure document or general franchise registration regime. This does not mean that franchise agreements fall outside the scope of general law.

The Indian Contract Act, 1872 is the main legal basis for the validity of the agreement and the parties’ obligations. Territorial promises made during the sales process should therefore match the final document; misrepresentation can lead to legal disputes.

The Competition Act, 2002 is also relevant. Terms involving exclusive distribution, customer restrictions or control over selling prices may need to be reviewed for their effect on competition. Territorial exclusivity is not automatically unlawful, but putting a restriction in a contract does not necessarily make it lawful either.

The Trade Marks Act, 1999 may apply to the use of the brand, and the Consumer Protection Act, 2019 to obligations towards customers. Separately, check applicable state stamp duty laws and any registration requirements for documents relating to the premises.

5. Agree procedures for changes and disputes in advance

If territorial protection is linked to performance, use objective criteria. Rather than simply requiring ‘satisfactory performance’, specify agreed service standards, reporting requirements and review periods. Also clarify how factors such as disruptions to the brand’s supplies will be taken into account.

Where shortcomings are identified, provide for written notice, a reasonable opportunity to put matters right and a review process. Reducing a territory, approving a new outlet and terminating rights are separate decisions; the consequences of each should be clear. For disputes, agree which records will be relevant, a timetable for discussions and a resolution procedure.

Practical takeaway: Before granting your first franchise, prepare a map, a schedule of responsibilities for each sales channel and a procedure for changes. Have these reviewed by a lawyer familiar with Indian law and incorporate them into the agreement—rather than relying on verbal promises about territory.