The Franchise Contract under the Civil and Commercial Code
On August 1, 2015, the Civil and Commercial Code (hereinafter “CCC”) entered into force, introducing specific legal regulation on the franchise contract from Sections 1512 to 1524.
The CCC provides a legal definition of the franchise contract establishing that it is performed when one party – the franchisor – grants another party – the franchisee – the right to use a special system designed to sell certain goods or services under the trade name of the first one against direct or indirect benefit of the latter.
Regarding the main obligations of the parties to the franchising contract, the CCC establishes that the franchisor must provide economic and financial information on the previous evolution of the system offered to the franchisee as well as technical knowledge and continuous marketing advice. In the event that the franchising includes the provision of goods or services by the franchisor or third parties, it must be ensured that it will be in adequate quantities and at reasonable prices, in accordance with local and international customs. In addition, the recent legislation provides that the franchisor must be the exclusive owner of all intellectual property rights or be entitled to use and transfer them under the terms of the franchising contract, which should be internationally protected. Finally, in order to ensure franchisee’s independence, the franchisor shall not have any kind of shares in the other party’s company.
In connection with the franchisee’s contractual duties, he must effectively develop the franchised activity complying with the technical instructions of the franchisor and, in turn, provide any information on its development, facilitating inspections from the other party. Moreover, the franchisee shall refrain from acting against the prestige or identification of the system subject of the franchise as well as avoid disclosing confidential information about technical knowledge provided by the franchisor.
According to the CCC, the parties must comply with a duty of exclusiveness, unless they decide to restrict or remove it from the franchise contract. Otherwise, the franchisee is unable to perform competitive activities against the interests contemplated in the contract, and the franchisor is forbidden to authorize the operation of another franchised system in the exclusive practice area of the franchisee unless it is expressly authorized.
Moreover, unless otherwise agreed, the CCC establishes that the franchisee shall not assign his contractual position or his non-economic rights to a third party. However, this provision does not apply to franchisees that act as wholesalers, in the event they intended to grant sub-franchises authorized by the franchisor. Regarding products or services contained in the franchise, the franchisor shall not sell them directly to third parties.
Regarding forbidden clauses in the franchise agreement, the CCC incorporates some clauses, including the following: (i) prohibiting the franchisee to meet and network with other franchisees; (ii) forbidding the franchisee to acquire goods under franchise from other local franchisees who meet the contractual characteristics and qualities set by the franchisor; (iii) denying the right of the franchisee to justifiably challenge the fulfillment of the franchisor’s obligations in connection with intellectual property rights and the independence of the franchisee.
With regard to liability, the franchisee and franchisor are independent parties, since there is no employment relationship between each other. Consequently, the franchisor is not liable for the obligations of his counterpart, nor franchisee’s workers could bring labor claims against the franchisor except in the case of any labor fraud. As regards the system subject of the franchise contract, the franchisor is not responsible for its profitability although he is responsible for the defects that shall cause actual harm to the franchisee, except for the latter’s negligence.
As for the extension of the franchise contract, the national legislation states that it can not be set for less than four years except in special cases, such as judicial recesses and congresses where the parties are allowed to reduce the franchise term for a shorter period. If, after the contract termination, the parties still perform their obligations, it is presumed that it have been impliedly extended for two more years, except complaint of the parties with a notice of thirty days in advance. When that extension expires, the franchise becomes an undetermined term contract.
In order to conclude with this analysis, it is important to mention what the CCC provides regarding franchise’s termination. The franchise contract terminates upon death or incapacity of either party. In the particular case of three-year-term agreements (e.g. judicial recesses and congresses, as previously mentioned), the law establishes that it automatically terminates upon the contractual deadline. In all other cases, the CCC prohibits the unilateral termination of the contract before the due date. However, after the expiration of the original term any party is allowed to terminate the contractual relationship without expression of cause, although they shall give prior notice to the other party in accordance with the formal requirements established by the CCC.