1 RELEVANT LEGISLATION AND RULES GOVERNING FRANCHISE TRANSACTIONS
1.1 What is the legal definition of a franchise?
Franchise is defined as the system by which a franchisor grants to a franchisee the right of trademark or patent use, associated with the right to exclusive or semi-exclusive distribution of products or services and, optionally, also the right of use of technology of implantation and administration of a business or operational system developed or owned by a franchisor against direct or indirect remuneration, however without being characterised as an employment relationship.
1.2 What laws regulate the offer and sale of franchises?
The main Brazilian regulation applicable to offer and sale of franchises is Law n. 8,955 of December 15, 1994 ("Brazilian Franchise Law"). The Brazilian Franchise Law governs all franchise chains established and operated in the Brazilian territory. Additionally, Normative Act 16/2013 issued by the Brazilian Patent and Trademark Office ("BPTO") demands the recordation of international franchise agreements for the effectiveness of specific provisions.
1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a "franchisee" for purposes of any franchise disclosure or registration laws?
The Brazilian Franchise Law is not a relationship law and, consequently, the legal environment for franchise is quite liberal. The parties may freely stipulate in the franchise agreement all terms and conditions of the franchise relationship, including territory exclusiveness. Therefore, although the concept of "business format franchising" usually involves the establishment of multiple units operated by multiple franchisees, if a brand owner decides to appoint only one franchisee in Brazil, said relationship should follow all applicable rules that normally apply to a franchise relationship, irrespective of the number of franchise units initially envisaged by the brand owner.
1.4 Are there any registration requirements relating to the franchise system?
The local disclosure document does not require registration with any regulator. The franchise agreement, however, must be recorded at the BPTO. The record is indispensable for the following purposes: (i) to make the agreement effective against third parties; (ii) to permit the remittance of payments to the foreign party; and (iii) to qualify the licensee for tax deductions. In addition to the recordation of the franchise agreement at the BPTO, for the purposes of remuneration remittances, the registration of the agreement at the Brazilian Central Bank ("BACEN") is also required.
1.5 Are there mandatory pre-sale disclosure obligations?
Yes. The main purpose of the Brazilian Franchise Law is to introduce transparency to the future franchise relationship, introducing an obligation to franchisor to provide a franchise disclosure document ("FDD") to prospective franchisees 10 days before the execution of any agreement or payment of any amount to the franchisor or other designated recipients.
1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?
Yes. Sub-franchisees must also be provided with an FDD 10 days before the execution of any agreement or the payment of any amount to the franchisor, master franchisee or other designated recipients. Although the Brazilian Franchise Law does not specify who is required to make the necessary disclosures to a sub-franchisee, it is common practice that the party that directly relates to the sub-franchisee (normally a master franchisee) performs such obligation.
1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?
The FDD must be provided to the prospective franchisee in written form, drafted in clear and accessible terms. Although not mandatory, we recommend that the FDD be updated annually. There are no legal statutes requiring continuing disclosure to existing franchisees.
1.8 Are there any other requirements that must be met before a franchise may be offered or sold?
It is important to highlight that the franchised trademarks must be, at least, filed at the BPTO before a franchise may be offered and/or sold in Brazil. Therefore, in addition to the filing of the franchised trademarks at the BPTO, the disclosure of a written FDD 10 days before the execution of any agreement or payment of any amount by the prospective franchisee is the exclusive requirement determined by law.
1.9 Is membership of any national franchise association mandatory or commercially advisable?
Although not mandatory, franchisors and franchisees may join the Brazilian Franchise Association ("ABF"). The ABF is a non-profit entity which has been establishing itself as the most representative entity for the franchising sector at the Federal Government, other administrative spheres, and official national and international entities.
1.10 Does membership of a national franchise association impose any additional obligations on franchisors?
The payment of a membership fee is the most relevant obligation imposed on franchisors. For more information, please go to www.portaldofranchising.com.br.
1.11 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?
The Brazilian Franchise Law sets forth that the disclosure document should be in language which is precise and clear to the prospective franchisee. Since Portuguese is the official language in Brazil, it is possible to assume that it should be in Portuguese. However, we believe that the parties in international franchising may decide to adopt the English language for the disclosure document as long as, in order to avoid translation of such document, the Brazilian party knows English fluently and expressly acknowledges that fact.
2 BUSINESS ORGANISATIONS THROUGH WICH A FRANCHISED BUSINESS CAN BE CARRIED ON
2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?
Although Brazilian law does not properly impose restrictions, we confirm that there are some legal requirements to be observed by any legal entity (or individuals) domiciled abroad that holds equity interests in a Brazilian company.
Foreign entities, for example, must be enrolled with the Federal Taxpayer Registry for Corporate Entities ("CNPJ") and with BACEN. For that purpose, as well as for receiving summonses on its behalf, such foreign legal entity has to appoint a Brazilian-resident individual to act as its attorney-in-fact.
There are specific restrictions on the participation of foreign investors in certain sectors and types of company, such as the aerospace industry and cable TV.
2.2 What forms of business entity are typically used by franchisors?
Along with corporations ("S/A"), limited liability companies ("LLC") are the most common corporate entities in Brazil. Under the Brazilian Civil Code (Law n. 10.406/2002), both types of company enjoy the same tax treatment, though the costs of setting up an LLC are less significant, as they are not subject to the considerable expenses of publishing certain relevant corporate acts that an S/A incurs.
2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?
Yes. Registration, licences and formalities normally vary depending on (i) the type of entity to be incorporated, and (ii) its field of activity. In order to set up an LLC, there are some basic licences and authorisations that all companies are required to obtain, regardless of the field of activity in which they operate, as detailed below:
- Federal Taxpayer Registry for Corporate Entities – "CNPJ" of the Foreign Investor (for the foreign partners of the Brazilian company);
- registration of the articles of association with the Trade Board ("Junta Comercial") that will generate the "NIRE", an identification number of the Registry of Companies;
- CNPJ of the Brazilian Company;
- State Taxpayer Registry for Corporate Entities ("Inscrição Estadual" – "IE");
- Municipal Registry and Operating Permit ("Inscrição Municipal" – "IM" and "Alvará"); and
- Social Security Registration ("Instituto Nacional de Seguro Social" – "INSS" and "Fundo de Garantia do Tempo de Serviço" – "FGTS").
3 COMPETITION LAW
3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises.
Law n. 12,529/2012 (the "Competition Law"), effective as of May 29, 2012, regulates competition in Brazil and establishes rules concerning the abuse of a dominant position. The Competition Law lists those anticompetitive practices that may constitute a breach of the economic order and, therefore, may have an impact on franchise agreements.
The following provisions may have relevance in a franchise agreement:
- limiting or restraining market access by new companies;
- creating obstacles for the establishment, operation or development of a competitor company or supplier, purchaser, or financier of a specified product or service;
- imposing on distributors, retailers or representatives of a specified product or service retail prices, discounts, payment conditions, minimum or maximum volumes, profit margins or any other marketing conditions;
- refusal to sell products or services normally available for sale; and
- tying the sale of one product to the acquisition of another or to the use of an additional service.
The Administrative Economic Protection Counsel ("CADE") is the administrative government body competent for examining and assessing the occurrence of actions that may impair or limit free competition or result in the control of significant market shares.
Anticompetitive practices, especially the provisions listed above, are only characterised as such in the event that they are likely to unjustifiably limit competition, concentrate economic power, dominate markets, arbitrarily increase profits or impose abusive practices. In light of the above, CADE considers specific aspects such as the peculiarities of the business, the product or service involved, the size of the market, the commercial sector and the nature of the transaction. Franchise agreements have been considered pro-competitive and the restrictions usually imposed are intended to protect the network.
Since international franchise agreements must be submitted for recordation with the BPTO, the governmental agency's approval can be considered a prima facie confirmation that the franchise agreement complies with the antitrust regulations because if this were not the case, the BPTO should have forwarded the agreement to CADE for analysis prior to its regulation.
As mentioned above, the Competition Law lists the anticompetitive practices that may constitute a violation of the economic order and therefore should be considered by the franchisor when enforcing the agreement. As a result, tying provisions (those that fix the price of products commercialised by franchisees, establish supply arrangements, or make compulsory the acquisition of certain products due to specific standards of quality) may be considered admissible in the context of rule of reason. They may be abusive and their validity may be questioned if such restrictions are unduly enforced by the franchisor without reasonableness. For instance, extending the franchisee non-competition obligation to non-competing goods could be construed as anticompetitive practice, depending on the circumstances.
CADE may authorise certain contractual restraints provided that: (i) they are intended to increase productivity, quality of goods/services and/or generate technological or economic efficiency and development; (ii) the resulting economic benefits are equitably distributed among the participants in the contract on one side, and the consumers on the other; (iii) they do not cause the elimination of a substantial number of competitors from the relevant market of goods/services; and (iv) they are limited to the extent necessary to the fulfilment of their goals.
Further, Law n. 9279/96 (the "Brazilian Industrial Property Law"), which regulates rights and obligations relating to industrial property, sets forth that the party who discloses, exploits or uses, without authorisation, confidential knowledge, information or data usable in industry, commerce or the providing of services, except that which is of public knowledge or which is obvious to a person skilled in the art, to which he has had access by means of a contractual or employment relationship, even after the termination of the contract, shall be deemed to have committed a crime of unfair competition practice.
3.2 Is there a maximum permitted term for a franchise agreement?
No. There is no legal limitation related to the validity of franchise agreements.
3.3 Is there a maximum permitted term for any related product supply agreement?
No. There is no legal limitation related to the agreements executed between franchisors and the suppliers of the franchise network.
3.4 Are there restrictions on the ability of the franchisor to impose minimum resale prices?
As a general rule, tied restrictions imposed by the franchisor in the franchise agreement must be carefully analysed, so that we may confirm if such restrictions can be considered abusive under Brazilian law.
3.5 Encroachment – are there any minimum obligations that a franchisor must observe when offering franchises in adjoining territories?
Considering that there are no legal restrictions related to the offering of franchises in adjoining areas or streets, the Brazilian Franchise Law determines that the franchisor discloses to prospective franchisees whether the franchisee is guaranteed exclusivity or a right of first refusal in any particular territory or activity and, if so, under what conditions.
3.6 Are in-term and post-term non-compete and non-solicitation of customers covenants enforceable?
Non-compete covenants (which also include non-solicitation of customers) are very common in franchise agreements in Brazil. Although the Competition Law establishes that any act that obstructs the establishment and operation of businesses in the local market is an infringement of the economic order, covenants that prohibit franchisees from competing directly or indirectly with the franchisor during or after the term of the franchise agreement should be legally valid and enforceable due to the special features of a franchised business.
4 PROTECTING THE BRAND AND OTHER INTELLECTUAL PROPERTY
4.1 How are trade marks protected?
Any trademark whose right of use is granted by the franchise agreement must be registered or at least be subject to a pending application with BPTO. The franchisee will only have rights to use the franchised trademarks as long as the franchise agreement is in force. Once the agreement is terminated or has expired, the franchisee does not hold any rights over the trademark.
4.2 Are know-how, trade secrets and other business-critical confidential information (e.g. the Operations Manual) protected by local law?
Yes. Know-how, trade secrets and confidential information are entitled to intellectual property protection in Brazil under the laws addressing unfair competition. Such protection is specified in article 195 of the Brazilian Industrial Property Law.
4.3 Is copyright (in the Operations Manual or in proprietary software developed by the franchisor and licensed to the franchisee under the franchise agreement) protected by local law?
Yes. Copyright is protected by Law n. 9,610/1998. Computer programs fall under the concept of creative effort, and are therefore subject to protection by copyright, under Law n. 9,609, dated February 19, 1998 (the "Software Law").
5.1 What are the remedies that can be enforced against a franchisor for failure to comply with mandatory disclosure obligations? Is a franchisee entitled to rescind the franchise agreement and/or claim damages?
Failure to deliver the FDD within the term established by the Brazilian Franchise Law entitles the franchisee to seek the cancellation of the Franchise Agreement and the refund of any and all monies paid by franchisee to franchisor, or to any third party indicated by franchisor, as franchise fees and royalties (duly updated) plus damages.
5.2 In the case of sub-franchising, how is liability for disclosure non-compliance or for misrepresentation in terms of data disclosed being incomplete, inaccurate or misleading allocated between franchisor and master franchisee? If the franchisor takes an indemnity from the master franchisee in the Master Franchise Agreement, are there any limitations on such an indemnity being enforceable against the master franchisee?
Our comments to question 5.1 above also apply to sub-franchising. Therefore, the franchisor is fully responsible for the compliance of the disclosure obligations in connection with its master franchisee and, similarly, the master franchisee will be responsible for the compliance of the disclosure obligations in connection with its sub-franchisees in Brazil.
5.3 Can a franchisor successfully avoid liability for pre-contractual misrepresentation by including disclaimer clauses in the franchise agreement?
As a general rule, disclaimer clauses cannot avoid liability under Brazilian law. The existence of liability caused by pre-contractual misrepresentation would be analysed by the local Courts, on a case-by-case basis.
5.4 Does the law permit class actions to be brought by a number of allegedly aggrieved claimants and, if so, are class action waiver clauses enforceable?
Although class actions are available in Brazil, their scope is limited to situations in which damages are caused to the general public with respect to issues such as consumers' rights, the environment and public order. Furthermore, only a few entities can act as plaintiff in such Court actions – mainly Public Prosecutors, the State, the Brazilian Bar Association and Class Associations.
Therefore, class actions are not an option to discuss strictly private rights, so their applicability in a franchise agreement is highly unlikely.
In any event, considering that common and collective rights can be asserted regardless of any contractual provisions, a class action waiver clause would not be enforceable in Brazil.
6 GOVERNING LAW
6.1 Is there a requirement for franchise documents to be governed by local law? If not, is there any generally accepted norm relating to choice of governing law, if it is not local law?
Brazilian law provides that international franchise agreements may be governed by foreign law and jurisdiction. However, Brazilian law prevents the application of foreign law whenever said application results in a violation of national sovereignty, public order, local practices or any mandatory Brazilian law.
6.2 Do the local courts provide a remedy, or will they enforce orders granted by other countries' courts, for interlocutory relief (injunction) against a rogue franchisee to prevent damage to the brand or misuse of business-critical confidential information?
Our local Courts do provide a remedy for interlocutory relief in case of urgent matters related to franchise, especially involving the use of trademarks after termination, intellectual property, unfair competition practices, repossession of inventory and equipment (if relevant) and non-compete covenants.
The number of available tools has been increased as of March 2016, when Brazil enacted a new Civil Procedural Code. One of the new and most efficient options is to file an autonomous and ex parte request for a preliminary injunction that, if granted, may lead to the immediate closure of the case if the defendant fails to appeal in time. In the case that the defendant appeals, the plaintiff has a 15-day term to file a full claim.
However, in order to obtain a fast response from the Courts, it is necessary for the parties to choose Brazilian law and jurisdiction to govern the agreement. Although foreign decisions can be enforced in Brazil, they need to go through confirmation proceedings in Brazil, which are rather complex and time-consuming, by means of analysis and approval at the Superior Court of Justice, in order to be locally enforceable.
Among the main requirements to be complied with are: (a) the parties must prove that the decision attends to all legal formalities; (b) the decision must be final, with no possibility of further revision; (c) it needs to be notarised by a Brazilian Consul in the country where it was delivered and translated into Portuguese; and (d) in addition, in order to receive the exequatur from the Superior Court of Justice, the foreign decision cannot be contrary to Brazilian public order and local practices. Although the case should not be retried, the approval of the decision may take some time locally.
Such homologation procedure currently takes from two to 24 months, if the decision complies with all procedural requirements of the rendering country. Once homologated, such decision is then forwarded to the Federal Court in the State where the defendant has its headquarters, to begin its enforcement procedure, which usually takes from four months to two years, varying according to the complexity of the case.
7 REAL STATE
7.1 Generally speaking, is there a typical length of term for a commercial property lease?
Based on article 51, II of Law n. 8,245/1991, commercial property is normally leased for a period of five years.
7.2 Is the concept of an option/conditional lease assignment over the lease (under which a franchisor has the right to step into the franchisee/tenant's shoes under the lease, or direct that a third party (often a replacement franchisee) may do so upon the failure of the original tenant or the termination of the franchise agreement) understood and enforceable?
Although this conditional lease assignment over the lease might be difficult to negotiate with landlords (especially in the case of shopping malls), if the parties were able to negotiate such condition in the lease agreement, it will be duly valid and enforceable under Brazilian law.
7.3 Are there any restrictions on non-national entities holding any interest in real estate, or being able to sub-lease property?
There are no legally established restrictions in that sense in Brazil.
7.4 Give a general overview of the commercial real estate market. Specifically, can a tenant reasonably expect to secure an initial rent free period when entering into a new lease (and if so, for how long, generally), or are landlords demanding "key money" (a premium for a lease of a particular location)?
After the real estate market boom in Brazil, the prices seen in common practice have significantly increased for the past three years but are now starting to decline. Based on this commercial scenario, landlords do not usually accept the negotiation of an initial rent free period, even when entering into a new lease agreement.
Although not expressly authorised by Law n. 8,245/1991 (which is the law that regulates lease agreements in Brazil), our local Courts have the understanding that shopping malls, acting as landlords, are authorised to demand payment for ressperata, which may be understood as "key money", as a precedent condition for the execution of the lease agreement for the mall.
8 ONLINE TRADING
8.1 If an online order for products or request for services is received from a potential customer located outside the franchisee's exclusive territory, can the franchise agreement impose a binding requirement for the request to be re-directed to the franchisee for the territory from which the sales request originated?
Considering that the Brazilian Franchise Law is not intended to govern the private franchisor-franchisee relationship, we confirm that the franchise agreement can impose such binding re-direction requirement.
8.2 Are there any limitations on a franchisor being able to require a former franchisee to assign local domain names to the franchisor on the termination or expiry of the franchise agreement?
Provided that the domain names registered by franchisee are directly related to the franchise business and/or franchisor's IP rights, there will be no limitations on the requirement of said assignment.
9.1 Are there any mandatory local laws that might override the termination rights that one might typically expect to see in a franchise agreement?
There are no mandatory local laws that might override the termination rights typically detailed in franchise agreements.
10 JOINT EMPLOYER RISK AND VICARIOUS LIABILITY
10.1 Is there a risk that a franchisor may be regarded as a joint employer with the franchisee in respect of the franchisee's employees? If so, can anything be done to mitigate this risk?
It is relatively common for plaintiffs to insert the franchisor as a co-defendant in a Labour Court action. However, Labour Courts have established that franchisors are neither jointly nor secondarily liable, provided that they refrain from directly intervening in the business administration of the franchisee. In a typical franchise agreement there is no hierarchical subordination of the franchisee's employees in relation to the franchisor.
Notwithstanding, to minimise risks it is recommended that the franchise agreement expressly contains a clause of non-responsibility of the franchisor with respect to the labour and tax activities of the franchisee.
10.2 Is there a risk that a franchisor may be held to be vicariously liable for the acts or omissions of a franchisee's employees in the performance of the franchisee's franchised business? If so, can anything be done to mitigate this risk?
The franchisee is directly responsible for its employee's acts or omissions, as defined in article 932, III of the Brazilian Civil Code.
Nevertheless, with regard to consumer protection, it is worth mentioning that the Brazilian Consumer Code ("CDC") sets forth joint and strict liability of all the parties involved directly or indirectly in the supply chain of products and services to consumers. Considering that said liability arises irrespective of fault, the end consumer can file a claim against any of the economic agents that have participated in the circulation of a product or service that has caused harm or has a defect.
Therefore, the franchisor could be deemed liable towards end consumers for acts of the franchisee's employees.
To minimise such risk, it is recommended that the franchise agreement expressly foresees that the franchisor will not be responsible for any act or omissions by the franchisee or its employees.
In any event, article 88 of the CDC grants to the franchisor the right to recover from the franchisee the amount of damages paid to consumers, as long as the franchisee was the party directly responsible for the infringement.
11 CURRENCY CONTROLS AND TAXATION
11.1 Are there any restrictions (for example exchange control restrictions) on the payment of royalties to an overseas franchisor?
International franchise agreements must be recorded with the BPTO and BACEN to allow payment of franchise fees and royalties to parties outside Brazil.
As a general rule, the parties may freely set out the percentage of remuneration insofar as it stays within the price commonly practised in the respective field and in the national and international market. The remuneration may be established as a percentage of the net sales or by means of a fixed amount based on each unit produced.
Nevertheless, royalties involving subsidiary and parent companies are limited by the corresponding ceiling of fiscal deductibility specified by Ministerial Ordinance n. 436/58, which varies between 1% and 5% of the net sales of contractual products, depending on the field of activity involved.
11.2 Are there any mandatory withholding tax requirements applicable to the payment of royalties under a trade mark licence or in respect of the transfer of technology? Can any withholding tax be avoided by structuring payments due from the franchisee to the franchisor as a management services fee rather than a royalty for the use of a trade mark or technology?
The Withholding Income Tax ("IRRF") will always apply on royalties paid under franchise agreements. Therefore, once the parties execute a franchise agreement the royalties will be paid in consideration of the use of the whole system. The IRRF is legally due from the foreign franchisor: the franchisee shall collect IRRF on behalf of the franchisor (taxpayer), although the financial burden for such tax may be contractually shifted. The tax is levied at a general tax rate of 15% of net revenues, which may be higher or lower depending on where the franchisor is resident or domiciled (e.g. in a tax haven or jurisdiction with which Brazil has executed a double taxation convention).
The abovementioned rule for IRRF over royalty payments also applies to the payment of a services fee, whatever its nature.
11.3 Are there any requirements for financial transactions, including the payment of franchise fees or royalties, to be conducted in local currency?
Brazilian law authorises that the franchise agreement determines royalties in foreign currency.
12 COMMERCIAL AGENCY
12.1 Is there a risk that a franchisee might be treated as the franchisor's commercial agent? If so, is there anything that can be done to help mitigate this risk?
Agency agreements are strictly regulated by Law n. 4.886/65 (with amendments introduced by Law n. 8.420/92) and by the Brazilian Civil Code. The main characteristic of agency agreements is that the property of the products is not transferred to the party that will receive them for sale, marketing or distribution. Generally, the products are deposited or delivered on consignment to the distributor, which shall receive a commission or another agreed fee for the sale of such products.
Conversely, franchise relationships are much more complex than agency relationships, since franchising normally involves the granting of several rights to the franchisee, as well as the transferring of know-how.
Therefore, a real franchise operation would hardly be considered an agency in Brazil, since both commercial structures are ruled by specific laws and are significantly apart from each other.
13 GOOD FAITH AND FAIR DEALINGS
13.1 Is there any overriding requirement for a franchisor to deal with a franchisee in good faith and to act fairly in its dealings with franchisees according to some objective test of fairness and reasonableness?
The general rules and principles of the Brazilian Civil Code also apply to franchise agreements. According to articles 113 and 422 of the Brazilian Civil Code, all contracts are subject to the principles of good faith, which means that the parties must proceed with fairness and mutual trust when establishing and executing contractual provisions.
Thus, beyond the obligation not to harm, the principle of good faith establishes the party's obligation to cooperate with fairness and honesty during all phases of the transaction in order to ensure that the other party obtains the expected results.
The observance of good faith clearly drives the offering stage of franchise transactions, where the franchisor is obliged to provide prospective franchises with an FDD, describing in detail the main information on the franchised business.
The standards of the principle of good faith shall subsist through all phases of the transaction and even survive termination, which means that the contracting parties must observe and act in accordance with such standards during negotiations, before and during the term of the agreement, as well as after its termination.
14 ONGOING RELATIONSHIP ISSUES
14.1 Are there any specific laws regulating the relationship between franchisor and franchisee once the franchise agreement has been entered into?
As mentioned above, the Brazilian Franchise Law is not intended to govern the relationship between franchisor and franchisee. Thus, after the franchise agreement is executed, the franchisor-franchisee relationship will mostly be regulated by the franchise agreement itself, according to the general rules and principles of the Brazilian Civil Code.
15 FRANCHISE RENEWAL
15.1 What disclosure obligations apply in relation to a renewal of an existing franchise at the end of the franchise agreement term?
There is no mandatory renewal in franchise agreements. The parties are free to include renewal conditions in the franchise business, if any. However, once such conditions apply, they must be disclosed in the FDD, which must also contain a draft of the Franchise Agreement and of any preliminary agreement.
15.2 Is there any overriding right for a franchisee to be automatically entitled to a renewal or extension of the franchise agreement at the end of the initial term irrespective of the wishes of the franchisor not to renew or extend?
No. Considering that there is no mandatory renewal in franchise agreements, there is no overriding right for a franchisee to be automatically entitled to a renewal or extension of the franchise agreement.
15.3 Is a franchisee that is refused a renewal or extension of its franchise agreement entitled to any compensation or damages as a result of the non-renewal or refusal to extend?
The Brazilian Franchise Law does not regulate the relationship and, therefore, it does not deal with breach, non-renewal or other reasons for termination. Considering that the law does not require mandatory renewal, if the franchise agreement does not provide for automatic renewal, it will end upon expiration of the term set by the parties. If the agreement provides for automatic or conditional renewal, those provisions will prevail.
16 FRANCHISE MIGRATION
16.1 Is a franchisor entitled to impose restrictions on a franchisee's freedom to sell, transfer, assign or otherwise dispose of the franchised business?
Yes. As franchises are deemed intuitu personae agreements, the franchisor may impose restrictions on a franchisee's freedom to sell, transfer, assign or otherwise dispose of the franchised business. In this sense, the franchisor is also able to include restricting clauses on the agreement, requiring its approval for the transfer of assets, equity or even preventing it from happening at all. The main purpose is to maintain the administration and guidance of the franchisee business as initially agreed with the franchisor.
16.2 If a franchisee is in breach and the franchise agreement is terminated by the franchisor, will a "step-in" right in the franchise agreement (whereby the franchisor may take over the ownership and management of the franchised business) be recognised by local law, and are there any registration requirements or other formalities that must be complied with to ensure that such a right will be enforceable?
As long as said "step-in" right is detailed in the franchise agreement, it will be recognised by Brazilian law and, consequently, it will be enforceable in Court. In practical terms, if the franchisee business is based on a lease agreement, said "step-in" rights must be detailed both in the franchise and lease agreements, to guarantee that the landlord agrees to the assignment of the lease to the franchisor. There are no registration requirements or other formalities that must be complied with for enforceability purposes.
16.3 If the franchise agreement contains a power of attorney in favour of the franchisor under which it may complete all necessary formalities required to complete a franchise migration under pre-emption or "step-in" rights, will such a power of attorney be recognised by the courts in the country and be treated as valid? Are there any registration or other formalities that must be complied with to ensure that such a power of attorney will be valid and effective?
Although there are no registration requirements or other formalities that must be complied with for the enforceability of "step-in" rights duly detailed in the franchise agreement, a power of attorney ("PoA") in favour of the franchisor could be granted by the franchisee through the franchise agreement, as long as said PoA is granted for specific and determined rights. There is no additional registration or formalities to be observed to ensure the validity of said PoA.
Originally published in The International Comparative Legal Guide to: Franchise 2-017.
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.