Content: 1. Introduction to its regulation by the Civil and Commercial Code. 2. Definition and key features of franchise agreements. 3. Legal content: franchisor and franchisee´s obligations
1. Introduction to its regulation by the Civil and Commercial Code
Argentina enacted a new Civil and Commercial Code by Law Number 26,994, (Código Civil y Comercial de la Nación or CCCN), effective as from 1 August 2015. The CCCN repealed both the Civil Code and the Commercial Code, as amended, which had ruled Argentine private law for more than one hundred years.
Under the abrogated Codes, franchise agreements were not statutorily regulated. Therefore, all franchise businesses operating in Argentina were governed by the stipulations agreed upon by the parties in their particular agreements and by case law.
The new CCCN covers franchise agreements in Articles 1,512 through 1,524. As a general principle, the CCCN in its Article 962 sets forth that legal norms about contracts only apply in the absence of parties´ stipulations, unless their imperative nature results from their way of expression, content or context. Should disagreement about the nature of a provision arise out of a contract, a judge will be who ultimately interprets the norm and settle the dispute.
As for contractual law, the CCCN also has regulated the so-called adhesion contracts (or contracts entered into by adhering to predisposed general clauses also known as standard-form contracts (CCCN, Articles 984 through 989). Franchise agreements may be considered one of these adhesion contracts since for the most part the franchisee may not negotiate nor draft any of the content but to adhere to the general clauses unilaterally drafted by the franchisor. Thus, more stringent provisions will apply to the franchise agreement, as to the clear, complete and legible wording of the clauses, ambiguity of its content, abusive clauses, etc. In this line, clauses referring to documents or information not provided by the franchisor, distorting obligations of the franchisee, extending the rights of the franchisor, or clauses not reasonably predictable, may be deemed unwritten.
2. Definition and key features of franchise agreements
The CCCN, in its Article 1,512, defines commercial franchise (franquicia comercial) as follows: "There is commercial franchise when a party, named franchisor, grants to the other, named franchisee, the right to use a proven system, aimed to commercialize certain goods or services under the commercial name, commercial symbol, or trademark of the franchisor, who provides a set of technical knowledge and continuous technical or commercial assistance, on a direct or indirect consideration by the franchisee". The franchisor must be the exclusive owner of the set of intellectual rights, trademarks, patents, commercial names, copyrights and others included in the system under franchise, or have the right to use and transmit those rights to the franchisee. The franchisor cannot have direct or indirect controlling equity interest in the business of the franchisee".
When entering into franchise agreements, there are no mandatory particular execution formalities or registration requirements. However, having the contract registered before the National Institute of Industrial Property (Instituto Nacional de la Propiedad Industrial – INPI) may have significant tax benefits for the parties (see our Legal Blog with more on franchising in Argentina).
According to the legal regulation, the core feature of franchise agreements is the existence of a proven business system under the franchisor´s commercial name or trademark, being the franchisor the owner of such commercial name or trademark or having the franchisor the right to assign them to the franchisee1.
The same Article 1,512 of the CCCN brings a particular prohibition: the franchisor cannot directly or indirectly control the franchisee´s business. However, Article 1,513, Sub-Article b) of the CCCN, allows the development franchisee to control sub-franchises. Said Article 1,512´s prohibition tends to establish a complete independence between the parties of the contract and seems to have been introduced to support the provision of the Article 1,520, sub-article b) stating that the franchisor will not be construed liable for the labor obligations of the franchisee, except in case of fraud2.
Following the Article 1,512´s general definition, the Article 1,513 outlines certain types of franchise agreements:
a) Wholesale or master franchises: these franchises are those under which a franchisor grants a territory (national, regional or provincial) to a franchisee. The franchisee has the right to appoint sub-franchisees; and
b) Development franchises: these franchises are those under which a franchisor grants a franchisee the right to open multiple dependent or controlled businesses, either regionally or nationally, for a term no less than five years. In these cases, assignment of the agreements and sub-franchises are prohibited, unless the franchisor consents to.
3. Legal content of franchise agreements
The CCCN sets forth that the parties must abide by certain statutory obligations. This minimum legal content3 the franchise agreements must comply with is the following:
3.1. Franchisor´s obligations
According to Article 1,514, the franchisor must meet certain obligations:
Disclosure
Under Sub-Article a): previous to the agreement´s signature, to furnish the franchisee with a two-year period of economic and financial information on the evolution of similar units, operating or having operated for a sufficient time either in Argentina or abroad.
Know-how transfer
Under Sub-Article b): to communicate to the franchisee the set of technical knowledge arising out of the franchisor's experience and tested by the latter, capable of producing the effects of the franchise system;
Operation Handbook
Under Sub-Article c): to deliver to the franchisee a handbook of operation with concrete specifications on how to develop the activities foreseen under the agreement;
Technical assistance
Under Sub-Article d): to provide technical assistance for the best operation of the franchise;
Goods and services supply
Under Sub-Article e): if the contract contains the provision of goods or services, by the franchisor or designated third parties, to ensure that such provision is made in adequate quantities and at reasonable prices, according to local or international trade practices;
Trademark protection
Under Sub-Article f): to defend and protect all of the rights granted to the franchisee under the contract.
Under Sub-Article g): in international franchises, the defense obligations referred to in Sub-Article f) will be contractually in charge of the franchisee, specially empowered to that extent, without prejudice to the franchisor´s obligation to timely provide the franchisee with the documentation and other elements necessary for that purpose. In any case, the franchisee is also entitled to intervene as an interested contributor in defense of those rights, either in administrative or judicial procedures, as established by procedural law and to the extent allowed by such law.
3.2. Franchisee´s obligations
Article 1,515 brings the minimum franchisee's statutory obligations, as follows:
Compliance
Under Sub-Article a): to efficiently develop the activity included in the franchise, meeting the specification of the handbook of operation and those instructions conveyed by the franchisor fulfilling its technical assistance duty;
Information and control
Under Sub-Article b): to provide information, reasonably requested by the franchisor, to know the development of the activity and to allow inspections agreed upon or deemed appropriate;
Protection of the franchisor´s rights
Under Sub-Article c): to refrain from acts that might compromise the identification or prestige of the franchise system, including the rights comprised therein, and cooperate in protecting those rights;
Confidentiality
Under Sub-Article d): to maintain the confidentiality of the information integrating the conveyed technical knowledge and ensure such confidentiality for any individuals - employees or not - needing to know the privileged information for the development of the activities. Confidentiality obligations shall be valid after the expiration of the agreement, with no time limit.
Payment
Under Sub-Article e): to comply with the considerations agreed upon, including contributions to the development of the market or technologies related to the franchise if any.
Failing to meet any obligation may give grounds to terminate the contract with cause (see more on termination of franchising agreements in Argentina on our Legal Blog).
Footnotes
1 Article 1,513, Sub-Article c) of the CCCN, states that a business system is the set of practical knowledge and experience accumulated by the franchisor, non-patented, duly tested, secret, substantial and transmissible. The system is secret when it is not generally known or easily accessible – either as a whole or in the configuration of its components -. The system is substantial when the information contained therein is relevant for the selling of goods or rendering of services. The system is transmissible when its description is sufficient to allow the franchisee to develop its business in agreement with the guidelines created or developed by the franchisor.
2 This limitation of labor liability purports to exclude those cases of joint liability provided for in the Contract of Employment Law (Law Nº 20,744, Article 30).
3 Parties in their agreements may widen the scope with additional obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
