How to Draft a Franchise Non-Compete Clause in India

When turning a successful business into a franchise, it is natural to worry that a franchisee might use the experience to open a competing outlet. But banning every other business activity is not the answer. In India, the validity of a non-compete clause depends on its purpose, scope and duration. A healthy franchise network needs a clear boundary between protecting the brand and preserving the franchisee’s freedom to do business.

1. Identify the risk the restriction needs to address

A non-compete clause is a contractual restriction on a franchisee’s involvement in a competing business. Before drafting one, set out which activities could genuinely harm your existing business. Simply stating that the franchisee must not engage in any other business may be excessively broad.

For example, if a food franchisee also operates a competing food brand from the same premises, the businesses may share staff, equipment and customer traffic. A passive stake in an unrelated business is a different matter. Treating both situations under the same restriction would be impractical.

Ask three questions as you prepare:

• Is the concern about selling directly competing products, or diverting the brand’s resources elsewhere?
• Will the franchisee operate the other business, manage it or merely invest in it?
• Could the conflict of interest be managed through disclosure and written approval?

This exercise will help you decide whether a narrowly drawn conflict-of-interest policy would be sufficient instead of a broad restriction.

2. Understand Section 27 and the limits imposed by competition law

India has no dedicated franchise legislation, mandatory national franchise code of conduct, or franchise-specific registration and pre-contract disclosure regime. General laws nevertheless apply. The Indian Contract Act 1872 governs the validity of agreements; the Trade Marks Act 1999 is relevant to brand rights, while the Competition Act 2002 applies to terms affecting competition.

Under Section 27 of the Indian Contract Act, an agreement that restrains someone from exercising a lawful profession, trade or business is void to the extent of that restraint. Non-compete wording from an overseas agreement should therefore not be copied directly into an Indian contract.

Courts have upheld certain restrictive covenants linked to the core commercial arrangement while a contract remains in force. This does not mean that every restriction imposed during the contract term is valid. The nature of the clause, its connection to the main agreement and the circumstances all matter.

Restrictions on operating a competing business after a contract ends are generally unenforceable under Section 27. Specifying a short duration or a small geographical area does not automatically make them valid. The statutory exception relating to the sale of goodwill should not be assumed to apply to an ordinary franchise licence.

Relevant vertical restraints may also be reviewed under Section 3(4) of the Competition Act. Such restrictions are not automatically unlawful; an assessment of any appreciable adverse effect on competition and the surrounding circumstances is required.

3. Define the activities, parties and duration covered

Do not simply ask a lawyer to draft a “strong non-compete clause”. Give them a description of your risks and the limits you propose. The draft should make the following points clear:

• Competing activities: Which products or services will count as direct competition? Avoid open-ended wording such as “any similar business”.
• Restricted involvement: Define operating an outlet, managing a business and holding a passive investment separately.
• Parties bound: If the franchisee is a company, its directors or their relatives do not automatically become personally bound. Have the necessary parties and enforceable commitments reviewed separately.
• Duration: State clearly when the restriction begins and ends. Do not bury it among other obligations that continue after termination.
• Exceptions and approval: Record previously disclosed businesses, passive investments and the procedure for seeking approval.

If a franchisee’s existing business has been accepted, include its details in a schedule to the agreement. Verbal consent can later lead to disputes over whether the brand knew about that activity.

4. Make the enforcement process fair too

A clause is only useful if your team can apply it consistently. During recruitment, ask prospective franchisees to disclose relevant business interests and explain the restrictions. The absence of a mandatory franchise disclosure regime does not permit misleading assurances.

When a suspected breach arises, distinguish allegations from evidence. Gather details of the activity, request a written explanation and follow the procedure set out in the agreement. Do not make an immediate penalty or termination the automatic outcome in every case.

Unauthorised use of the brand name and misuse of confidential material are separate legal issues. Do not draft protections for these as a substitute for a blanket restriction on doing business. Have the final draft reviewed from both contract law and competition law perspectives.

Practical takeaway: Identify the risks first, then choose the narrowest effective restriction. Clear provisions on duration, exceptions and approval procedures help protect the brand without unnecessarily restricting every aspect of the franchisee’s business activities.