McDonald's terminates franchise pact for 169 restaurants in north, east India

McDonald’s India Pvt. Ltd (MIPL), the local unit of the American fast food chain, on Monday terminated its franchise agreement with Connaught Plaza Restaurants Pvt. Ltd (CPRL), which runs McDonald’s outlets in north and east India, and is now looking for a new partner to rebuild the brand.

CPRL, a joint venture between MIPL and Vikram Bakshi (managing director of CPRL), runs 169 McDonald’s restaurants. McDonald’s cited “default in payment of royalties by CPRL” as the primary reason for termination.

As a result, CPRL will have to “cease using the McDonald’s system (which includes proprietary rights in McDonald’s names, trademarks, designs, branding, operational and marketing practice and policies, and food recipes and specifications) and its associated intellectual property in relation to these restaurants within 15 days of the termination notice”.

“The termination is a result of a breach, a violation of certain essential obligations that were a part of the agreement typically the default of payment of royalties to MIPL for two years. CPRL was notified of the breaches and was provided opportunity to remedy those; it had failed to do so,” said Ron Christianson, global head of corporate relations, foundational markets, at McDonald’s Corp., adding that the company is looking for a new developmental licensee partner.

“It is a lengthy process but we are committed to the market. We want to rebuild a stronger McDonald’s,” Christianson said.

The company is currently working on the terms to mitigate the impact of the shutdown on all stakeholders including thousands of employees across 169 restaurants. McDonald’s operations in west and south India have not been affected as the master franchisee rights of the burger chain are owned by a separate company, Westlife Development Ltd, through its unit Hardcastle Restaurants Pvt. Ltd.

Amit Jatia, vice-chairman of Westlife Development, declined to comment on the possibility of Westlife opting for McDonald’s franchise for north and east India. Christianson of McDonald’s said that it is too early for the company to comment on potential partnerships.

The move comes almost two months after CPRL shut 43 of the 55 McDonald’s restaurants in Delhi following its failure to renew their licences, amid a legal battle between Bakshi and McDonald’s.

In 2013, McDonald’s voted against the re-election of Bakshi as managing director of CPRL, following which Bakshi challenged his removal at the Company Law Board (now the National Company Law Tribunal, or NCLT), accusing McDonald’s of mismanagement and oppression.

Later in 2013, McDonald’s revoked the joint venture agreement and invoked arbitration. McDonald’s has been pursuing arbitration against Bakshi in the London Court of International Arbitration. However, the NCLT reinstated Bakshi as managing director of CPRL earlier in June.

“This is a completely contemptuous, mala fide and yet another oppressive act indulged in by the McDonald’s Corporation to sabotage the order of the Hon’ble NCLT (which states that McDonald’s Corporation is refrained from interfering with the smooth functioning of Connaught Plaza and all its 169 restaurants open in the assigned territory of north/east India),” Bakshi said in a text message.

“CPRL is considering the appropriate legal remedies that are available under law. How can they (MIPL) do a hit wicket,” Bakshi added, without confirming if the company paid the due royalties.

“The entire legal dispute will turn on the fact whether or not the company paid royalties. If CPRL did not pay the due amount, there is a definite cause for termination on the part of McDonald’s,” said Shamnad Basheer, former chair professor of intellectual property law at West Bengal National University of Juridical Sciences, Kolkata, and founder of the website SpicyIP.

Experts believe that while the shutdown of outlets will naturally hurt the popularity of McDonald’s in north and east India, there may be an impact in other parts of the country as well. “There is expected to be a lot of confusion among consumers. This is definitely a gain for Dominos, KFC and Burger King. Having said that, this seems to be the way forward for McDonald’s. The legal battle has been going on for years, due to which the quality was suffering,” said Abneesh Roy, senior vice-president and research analyst (institutional equities) at Edelweiss Securities Ltd.

Sounak Mitra contributed to this story.