Alerts and Updates

Key Takeaways for Foreign Franchisors in India Upon Delhi High Court's Anti-Arbitration Injunction

February 2, 2015

It is essential for a foreign franchisor to consider taking steps to prevent any attempt by the Indian party to approach an Indian court or tribunal and then later claim that they acquiesced in that approach, rendering the arbitration agreement inoperative.

McDonald's has tasted significant success operating under a hybrid-franchise model in India since 1994. A recent spat with its joint venture partner, Vikram Bakshi, has brought to light several issues of which foreign franchisors in India should be aware.

The Delhi High Court Order

The Delhi High Court (DHC) recently issued an anti-arbitration injunction in a situation where the parties (Vikram Bakshi and McDonald's India Private Limited) had contractually opted for international arbitration. The DHC restrained McDonald's from pursuing arbitral proceedings under the London Court of International Arbitration (LCIA) Rules, citing two grounds:

  • a dispute pertaining to oppression and mismanagement alleged by Vikram Bakshi ought not to be referred to be arbitration; and
  • that an arbitration in London would cause undue hardship to Vikram Bakshi and was thus forum non-conveniens.

Market Practice

It is standard market practice for franchising transactions between an international franchisor and an Indian franchisee to provide that the transaction documents are:

  • governed by laws of the country chosen by the franchisor—often non-Indian law—of which the most common is English law; and
  • disputes are resolved by courts of a specified country (often by courts of the country whose law governs the transaction documents) or by arbitration by an institution such as the LCIA. Even if the transactions documents were to be governed by Indian law, recourse to international arbitration is still permissible.

The key issue is to obtain as much contractual certainty as possible against the ability of an Indian franchisee to bring a dispute to an Indian court, where matters can be indefinitely protracted.

Lessons for Foreign Franchisors to Consider

It appears that McDonald's did all that and yet, because of the DHC order, ended up being unable to pursue international arbitration to resolve its dispute with Vikram Bakshi. Some of the key lessons that foreign franchisors should consider in light of this decision are as follows:

  • At the very first stage, foreign franchisors should, when possible, cite to an arbitration agreement in place and resist submitting to the jurisdiction of the company law tribunal.
  • It is essential for a foreign franchisor to consider taking steps to prevent any attempt by the Indian party to approach an Indian court or tribunal and then later claim that they acquiesced in that approach, rendering the arbitration agreement inoperative.
  • The argument that an arbitration in London would cause Vikram Bakshi hardship should be appealed with vigor at the Supreme Court (SC), since there is a precedent there to the effect that such reasons as hardship, subject matter being in India or parties per se would not suffice to turn a forum conveniens into a forum non conveniens.
  • A foreign franchisor can also insert a clause that would require the Indian party to obtain independent legal counsel on the enforceability of these and other clauses, which could preclude raising arguments to the contrary at a later stage.
  • Foreign franchisors should be aware of this decision in relation to the operation of their franchises in India, but need not be unduly worried about the DHC order's becoming a binding precedent, since this was a rather fact-specific determination that is unlikely to lead the way for other cases to come in the future.

For Further Information

If you have any questions about the topics discussed in this Alert, please contact Saionton Basu in Duane Morris' London office, any of the attorneys in our India Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.