Dhananjay Jog
The Americans are well-known for pioneering new ideas, concepts, and practices in business. It’s no surprise that theirs has been the largest economy in the world for years. One such innovation was the concept of franchising, introduced by Colonel Sanders, the founder of Kentucky Fried Chicken (KFC).
The cleanliness, quick service, and — most importantly — the taste of his chicken attracted customers from far and wide. But how could such a business be scaled? Sanders couldn’t possibly open hundreds of outlets himself, nor could he ship ready-made chicken dishes across the country — they needed to be freshly prepared and served. Thus emerged the concept of franchising: the franchisee would rear and prepare the chickens exactly as directed by the franchisor. Even the feed was specified. From ingredients to cooking methods, and from ambience to signage, every detail was standardised. That’s how KFC came to exist not just in the U.S., but also in Communist China and Russia, 57 Islamic countries, and even in the U.S.’s long-time adversary, North Korea.
A similar franchise arrangement was at the heart of the dispute we will discuss today. The parties involved were the importer and assembler of an ice-cream vending machine (the franchisor) and the dealer who agreed to install and operate it (the franchisee). In this case, there was no requirement to alter the appearance of the franchisee’s premises. He simply had to pay a deposit of Rs. 2.5 lakh, in return for which the franchisor would install the machine. The franchisee would then purchase the raw materials (milk and essence powders, and edible cones), feed them into the machine, and serve flavoured soft-serve ice cream cones to customers for Rs. 5 each.
This arrangement initially proceeded as planned. However, after a few months, the franchisee noticed a decline in the machine’s output — from the initial 500 cones a day to significantly fewer. He attributed the problem to defects in the machine and a decline in the quality of raw materials. Upon raising these concerns, the franchisor deployed a trained employee to operate the machine. This individual, however, resigned within three to four months. Although the machine was eventually replaced, the problems persisted. The franchisee then approached the Consumer Commission, seeking a refund of the Rs. 2.5 lakh deposit and compensation and costs totalling Rs. 50,000.
The franchisor’s chief executive raised preliminary objections, stating that he was merely an employee and could not be held personally responsible. He further argued that since the franchisee was a partnership firm, a single partner could not file a complaint. Also, he contended that a franchise agreement was a commercial transaction and therefore fell outside the scope of the Consumer Protection Act.
In response, we first addressed these preliminary objections. We held that under the agreement, the complainant was entitled to services from the company — primarily, the proper functioning of the vending machine. Since the company failed to ensure this, the complainant qualified as a consumer under the law. The fact that the machine was used for a commercial purpose did not override his right to service. This view was also upheld by the National Commission in the case of Amtrex Ambience Limited vs. M/s Alpha Radios.
The agreement stipulated a daily target consumption of 30 litres of mix, equivalent to 500 cones. With the company fixing the selling price at Rs. 5 per cone, the gross daily revenue would be Rs. 2,500. Assuming a net profit margin of 20%, the daily profit would be Rs. 500, or Rs. 15,000 per month — clearly not a high-profit venture. This further reinforced the complainant’s status as a consumer rather than a commercial investor.
The complainant had sent several letters to the company, followed by a legal notice, all undisputed. The first communication was within four months of installation. Prior to that, he had also raised concerns via telephone. This indicated that the issues began almost from the outset. The machine was replaced within seven months, but problems continued.
We gave no credence to the company’s claim that the machine was too sophisticated for the complainant to operate. A machine producing Rs. 5 products hundreds of times a day cannot be so delicate as to require specialised training. Operating it did not require scientific or technical expertise. We concluded that the machine was inherently defective.
While the respondent claimed to be just a ‘chief executive’ and employee, we noted that the company’s other partners were his wife and two children — none of whom participated in the business. The complainant’s partnership was similarly structured, involving his wife. These arrangements were clearly for legal and tax benefits. We therefore dismissed the company’s objections on these grounds.
With the preliminary objections resolved and the complainant’s consumer status established, we turned to the merits of the case. The franchisor claimed the complainant owed Rs. 86,000 for raw material supplies. Standard business practice requires delivery challans with the recipient’s signature. The franchisor was unable to produce any such signed records, despite being given the opportunity.
Also, Clause 10 of the agreement clearly stated that all supplies were to be made “strictly against cash on delivery.” This indicated that all materials were likely paid for at the time of delivery. Therefore, the claim of Rs. 86,000 dues was found to be unsubstantiated and was rejected.
As a general principle, an agreement between two parties cannot be unilaterally terminated. Although the dispute had reached the Consumer Commission, the agreement technically remained in force. Both parties had acknowledged that the Rs. 2.5 lakh deposit could not be refunded during the agreement term.
However, we observed that by the time the case had run its full course and judgment was due, four years — the duration specified in the agreement — had elapsed. The agreement was never intended to be open-ended. There was, therefore, no legal barrier to refunding the deposit. Also, the agreement specifically mentioned that the deposit would be refunded with 10% interest from the date of receipt upon its expiry.
Accordingly, we directed the franchisor to refund the deposit along with the applicable interest to the complainant. And, we awarded costs of Rs. 5,000. The franchisor was permitted to reclaim the vending machine upon payment of the above sums.
(If you have any question on this matter, want to share your comments on this or an earlier article, or otherwise are a consumer with a question, please feel free to e-mail me at danjog@yahoo.com.)
