Negotiation

University Selections Rounds

DONUT DELIGHT represented by Counsels for MR. DAVID WOOD, REGIONAL MANAGER, DONUT DELIGHT, ASIA AND MR. VALLYA represented by his Counsels

SUBMITTED BY
TEAM NO. 4

FACTS Donut Delight is a reputed and established US-based restaurant chain which specializes in food items such as donuts, ice-cream, milkshakes, tea, coffee etc. seen to be popular among the youth. It has been successfully operating in the US as well as in Europe for over 6 decades. It has a base in 3 countries in Asia so far (viz. Singapore, Malaysia and Indonesia.) Donut Delight now desires to extend its Asian market to include India. Its target population comprises of children and the youth because of their preference for the items produced by Donut Delight. According to a survey conducted by Donut Delight, Bangalore would be the ideal place for it to commence business as it is the educational hub of India and consists of several educational institutions. Mr. David Wood, the regional manager of Donut Delight Asia has decided subsequent to a visit to Bangalore that one of the restaurants has to be near the popular law school Harvard of the East, in Nagarbhavi. Mr. Vallya, a Bangalore based business tycoon has shown immense interest in being the franchisee for Donut Delights new wing of restaurants in Bangalore. Pursuant to some conversation between Mr. Vallya and Mr. Wood, they have decided to enter into a formal agreement and therefore their counsels have decided to meet in Bangalore to discuss the agreement.

LAW APPLICABLE Subsequent to the repeal of the Foreign Exchange Regulation Act, 1973 (FERA) and especially after the passing of the Foreign Exchange Management Act, 1999 (FEMA), foreign investors have found the franchisor-franchisee model as a very convenient model for expansion in the Indian Market. However, unlike countries such as the US, China, Japan, Australia etc., India does not have a specific legislation or rules dealing solely with franchise agreements and this leads to a situation where multiple statutes have to be considered while dealing with issues relating to a franchise agreement. Since a franchise agreement is primarily a contract between the franchisor and franchisee, the most relevant statute in this regard is the Indian Contract Act, 1872 and therefore principle governing 1) adherence to disclosure/transparency requirements and 2) liability sharing would be governed by the provisions of the aforementioned statute. Moreover, depending on the subject of the franchise agreement, laws related to taxation, property law, insurance law and labour law may also be made applicable.

MR. DAVID WOOD, REGIONAL MANAGER, DONUT DELIGHT, ASIA INTERESTS 1. To expand their market shares in Asia specifically in India. 2. Donut Delight is in search of a competent and efficient franchisee, who would be able to fulfill their requirements and also play a progressive role in the expansion of their business. 3. To find suitable locations in Bangalore apart from the one next to the Harvard of the East, Nagarbhavi so that they can attract the maximum number of people from their target consumer base. 4. To ensure the maintenance of quality standards of Donut Delight in terms of quality of the products, hygiene, quality of service, customer satisfaction etc. 5. To retain sufficient control in the decision making process so as to ensure that the basic pattern, procedure and mode of operations is not altered by the franchisee. 6. Keeping in mind the reputation of Donut Delight, it wants to ensure that adequate and appropriate royalty is recovered from the profits earned by the franchisee. 7. To ensure that the training and guidance of staff is handled by the professionals of Donut Delight so as to ensure the uniformity of standards across the world. 8. To ensure wherever necessary, that US Laws are made applicable to the Franchise Agreement due to the lack of a comprehensive legislation in India. Especially in the context of an arbitration clause. 9. To ensure that the Franchisee unit is sufficiently insured by the Franchisee against any loss or damage to property. 10. To protect intellectual property that has been secured by Donut Delight by means of patents / copyrights / trademarks etc. 11. To ensure that absolute confidentiality of trade secrets and technical know-how in maintained by the Franchisee. CONFLICTING INTERESTS OF MR. VALLYA 1. Extent of Control / Autonomy: As Mr. Vallya would be making a substantial amount of investment in the setting up of the Restaurant, he shall want to retain a considerable amount of autonomy in the functioning of the same. 2. Impacts on Mr. Vallyas business: Mr. Vallya would insist on sufficient disclosure of critical market related and other confidential information to ensure that he is in a position to make an informed investment. For instance, Mr. Vallya would be against any clause which permits Donut Delight to engage any of his competitors as Franchisees of Donut Delight in the future without terminating the contract with Mr. Vallya. 3. Mr. Vallya would like to have sufficient freedom in choosing the location of the restaurant as it would have a direct bearing on his profits as well as his costs. 4. To make use of the goodwill of the Donut Delight to augment his business standing.
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5. To ensure that an exorbitant and unrealistic royalty is not charged. 6. To prevent excessive interference from Donut delight in matters relating to training, guidance, etc. VIABLE OPTIONS AVAILABLE 1. Grant the franchise to Mr. Vallya and retain sufficient control over Procurement of raw material Selection of location Quality control Termination of franchise agreement 2. Grant the franchise to Mr. Vallya with minimal supervisory control 3. Do not grant the franchise to Mr. Vallya and look for some other interested and equally competent investor. BEST ALTERNATIVE TO A NEGOTIATED SETTLEMENT To abort the negotiation and grant the franchise to some other interested investor

LEGAL ARGUMENTS 1. Disclosure Clause: There has to be sufficient disclosure on part of the Franchisee so as to ensure that the investment has not been channelized from any illegal or fraudulent source. 2. Liability Clause: The agreement has to unambiguously stipulate the liability sharing arrangement between the parties in case of any litigation. 3. Entry Fee: All payments relating to entry fee, security deposits, advertisement costs etc. have to be made by the Franchisee prior to the grant of franchise. 4. Mandatory Mediation Clause / Arbitration Clause: There shall be a mandatory Mediation/Arbitration Clause in case of any dispute between the Franchisor and Franchisee. Further, keeping in mind the nature of regulatory regime in India, the seat of arbitration would be in the United States of America. EXTRA-LEGAL ARGUMENTS 1. The collaboration of Donut Delight and Mr. Vallya would be beneficial to both the parties as Donut Delight would be able to expand in India and Mr. Vallya would be able to capitalize on the first movers advantage as Donut Delight would set sails in India for the first time. 2. Keeping in mind the nature of a franchisor-franchisee agreement, it is essential that Donut Delight retains sufficient control of the enterprise so as to ensure that the standards of Donut Delight are not compromised with.
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3. Mr. Vallya would also benefit from the goodwill that Donut Delight has, as a result of its reputation built up since 1947. 4. Training provided by Donut Delight to the working staff would substantially reduce the human resource development cost of Mr. Vallya. RELATIONSHIP BUILDING Employees of Mr. Vallya would be entitled to exclusive discounts and other offers at any Donut Delight outlet across the world. Moreover, after the completion of every successful year of the franchise agreement, the royalty rate would be open to negotiation. ISSUES IN SETTLEMENT 1. Whether Mr. Vallya should be allotted the franchise? 2. What would be the best location of setting up an outlet and how can that be ascertained? 3. What should be the extent of control? 4. What should be percentage of royalty? 5. How to ensure sufficiency of disclosure? RANGE OF SETTLEMENT 1. Grant the franchise to Mr. Vallya SET I 2. First Restaurant has to be in Nagarbhavi 3. Optimum entry fee 4. Maximum control and royalty 5. Total Disclosure regarding financial accounting and other ancillary matters 1. Grant the franchise to Mr. Vallya SET II 2. Optimum entry fee 3. Mutually acceptable location which suits both parties 4. Compromise on royalty and extent of control 1. Grant the franchise to Mr. Vallya SET III 2. Remove initial entry fee 3. Mutually acceptable location which suits both parties 4. Compromise on royalty and extent of control

MR. VALLYA, BANGALORE BASED BUSINESS TYCOON INTERESTS 1. Ensuring that the Franchise is granted by Donut Delight. 2. Expanding his business into the restaurant business. 3. Franchise Disclosure Document (FDD): One of the primary requirements would be to ensure a full-fledged FDD which would encompass all of the following information. This would enable Mr. Vallya to ensure that he makes a safe and informed investment. Mr. Vallya would be able to ascertain the market history of the firm and to evaluate the hidden risks, check the financial stability of Donut Delight and its executives, estimate all costs relating to initial setup, security deposit, inventory investment, lease/rental costs of equipment, royalties and advertisement fees etc. Further, Mr. Vallya can be sure about the steady growth of the Donut Delights business and also be informed about their growth plan. Information regarding Parents, Predecessors and Affiliate Litigation History Bankruptcy Initial Franchise Fee Restrictions on Source of Products Renewal, Termination, repurchase, modification or Transfer of franchise Agreement Disclosure of relevant financial statements List of Franchisee Outlets 4. To ensure that a considerable amount of autonomy is retained in the functioning of the restaurant as Mr. Vallya would be making a substantial amount of investment in the setting up of the same. 5. To evaluate adequately the impacts of this agreement on the business interests of Mr. Vallya. 6. To insist on sufficient disclosure of critical market related and other confidential information to ensure that he is in a position to make an informed investment. For instance, Mr. Vallya would be against any clause which permits Donut Delight to engage any of his competitors as Franchisees of Donut Delight in the future without terminating the contract with Mr. Vallya. 7. To have sufficient freedom in choosing the location of the restaurant as it would have a direct bearing on his profits as well as his costs. 8. To make use of the goodwill of the Donut Delight to augment his business standing. 9. To ensure that an exorbitant and unrealistic royalty is not charged. 10. To prevent excessive interference from Donut delight in matters relating to training, guidance, etc.
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CONFLICTING INTERESTS OF DONUT DELIGHT 1. To find suitable locations in Bangalore apart from the one next to the Harvard of the East, Nagarbhavi so that they can attract the maximum number of people from their target consumer base. 2. To retain sufficient control in the decision making process so as to ensure that the basic pattern, procedure and mode of operations is not altered by the franchisee. 3. Keeping in mind the reputation of Donut Delight, it wants to ensure that adequate and appropriate royalty is recovered from the profits earned by the franchisee. 4. To ensure that the training and guidance of staff is handled by the professionals of Donut Delight so as to ensure the uniformity of standards across the world. 5. To ensure wherever necessary, that US Laws are made applicable to the Franchise Agreement due to the lack of a comprehensive legislation in India. Especially in the context of an arbitration clause. 6. To ensure that the Franchisee unit is sufficiently insured by the Franchisee against any loss or damage to property.

VIABLE OPTIONS AVAILABLE 1. To take the Franchise from Donut Delight with sufficient disclosure and adequate control 2. To take the Franchise from Donut Delight with sufficient disclosure but compromise on the degree of control 3. To not take the Franchise from Donut Delight and take a franchise in the restaurant business from other firms competing internationally against Donut Delight. BEST ALTERNATIVE TO A NEGOTIATED SETTLEMENT To abort the negotiation and take a franchise in the restaurant business from other firms competing internationally against Donut Delight. LEGAL ARGUMENTS 1. The primary requirement of Mr. Vallya would be to ensure that the requirements under the Franchise Disclosure Document (FDD) as mentioned above are fulfilled by the agreement. 2. All disputes must be subject to the jurisdiction of Indian courts as the restaurant unit would be in India and would be doing business in India.

EXTRA-LEGAL ARGUMENTS 1. It is important that Donut Delight chooses Mr. Vallya as the Franchisee because he has proven himself as an extremely successful businessman in India and especially in Bangalore. He is well versed with the market trends and consumer preference pattern prevalent in India and this experience can be of immense help and guidance to Donut Delight as it is a new establishment in India. 2. Notwithstanding that Donut Delight has a considerable amount of goodwill, the target population of Donut delight looks up to Mr. Vallya with respect for his achievements and his association with Donut Delight would have a tremendous effect on the sales of the restaurant. In other words, Mr. Vallyas association with a competitor of Donut Delight might also have an adverse impact on the business interests of Donut Delight. RELATIONSHIP BUILDING As Mr. Vallyas business expands not just over various territories but also over a range of businesses, Donut Delight may be able to utilize this platform for a more vigorous marketing and advertisement strategy in India. ISSUES IN SETTLEMENT 1. How to ensure that Donut Delight grants the franchise to Mr. Vallya? 2. What would be the best location of setting up an outlet and how can that be ascertained? 3. What should be the extent of control? 4. What should be percentage of royalty? 5. How to ensure sufficiency of disclosure? RANGE OF SETTLEMENT 1) Take the Franchise from Donut Delight SET I 2) Sufficient disclosure 3) Adequate control and autonomy 4) Minimum royalty and initial costs

1. Take the Franchise from Donut Delight SET II 2. Sufficient disclosure 3. Compromise on control and autonomy 4. Pay required royalty and initial costs