Read the agreement: royalty basis, reporting obligations, audit rights, interest on late payment, cure period, termination and dispute clause. Issue a formal notice of default under the agreement with the computation, invoking audit rights if sales are under-reported. If not cured, a legal notice from an advocate and, if needed, arbitration (most franchise agreements have a clause) or a civil suit. Supplies of products are ordinary trade dues: Section 138 on bounced cheques, MSME Samadhaan if you are a Udyam-registered supplier of goods or services.
The usual shape of a franchisee default
- Royalty stops while the outlet keeps running under your brand
- Sales are under-reported so the percentage royalty shrinks
- Marketing fund contributions are “deferred”
- Product or consumable supplies from you are taken on credit and not paid
- The franchisee asks to renegotiate terms while in default
The agreement anticipated all of these. The question is whether you enforce it, and how quickly.
Use the agreement’s own machinery first
- Notice of default under the agreement, stating the clause, the amount, the computation and the cure period
- Audit. Invoke the audit or inspection right; ask for POS data, GST returns and bank statements as the clause allows. Under-reporting usually surfaces here
- Interest. Compute late-payment interest at the contractual rate
- Suspension of support where the agreement permits: supplies, marketing, system access
- Termination notice if the cure period passes, with the post-termination obligations (de-branding, return of materials) spelled out
Each step should be in writing, by the method the agreement specifies, and copied to the franchisee’s guarantor if there is one.
The legal notice and arbitration
When the contractual notices are ignored, FundRaksha’s advocate sends a legal notice within 24 hours, consolidating royalty, fees, interest and supply dues, invoking the guarantee, and giving the final period before the dispute clause is triggered. India's No.1 B2B payment recovery company, trusted by 1,000+ businesses. Most franchise agreements provide for arbitration, often seated at the franchisor’s city; the claim is filed there and the award is enforced like a decree. Interim relief to stop the franchisee using the brand while in default may be available. Where there is no clause, a summary suit on the agreement for the liquidated dues.
Supplies are trade dues with their own remedies
If you supply products or consumables to the franchisee, those invoices are a sale of goods separate from royalty. Bounced cheques for supplies go under Section 138 with its strict 30-day notice window; see cheque bounced, what to do. If your company is a Udyam-registered micro or small enterprise, the MSMED Act’s 45-day limit and interest at three times the bank rate apply to those supplies, and MSME Samadhaan is available; see MSME Samadhaan filing. Running both tracks together is common. See also the education services industry page and the hospitality suppliers industry page, where franchising is widespread.
Keep the outlet or close it: both are recoveries
A franchisee who is behind but viable often pays once the audit and notice make clear the alternative is termination and arbitration; the outlet continues under tightened reporting. A franchisee who is not viable is terminated, de-branded, and pursued for the dues and any post-termination breaches. An advocate who understands franchising will help you decide which. Book a free consultation; FundRaksha will review the agreement and the account and recommend the route.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.