As the effective date of Argentina’s new Franchise Law approaches, businesses are beginning to comprehend its unexpected parameters.
For years, franchises operating in Argentina were governed only by contract principles. But, in October 2014, the Argentine Congress passed a new Argentine Civil and Commercial Code (Law No. 26,994), with provisions (in Book 3, Title IV, Chapter 19) governing franchise relationships (the Franchise Law). The new Franchise Law, although partially modeled after franchise laws in other countries (e.g., US, Mexico and Brazil), is somewhat unusual and unclear, as highlighted below.
The new Franchise Law will apply to all franchise agreements newly entered into after January 1, 2016.
Also, while the Franchise Law will not alter or modify past provisions in existing agreements, it will regulate issues that are of a matter of public concern ("ordre public") in these older agreements. Thus, for example, if a franchisor attempts to terminate an older franchise agreement prior to the newly mandated four-year minimum initial term in the Franchise Law, a franchisee would have the right to oppose and request continuation of the older agreement through the minimum initial term.
Some of the most unusual provisions include:
- As in the US, a "franchise" under the Franchise Law requires (i) the grant by the franchisor of the right to use a proven system (including, trademarks); and (ii) technical and commercial assistance by the franchisor. However, unlike the US definition, there is no requirement that a franchise fee be paid by the franchisee.
- There is an express prohibition that the franchisor cannot have a controlling ownership interest (directly or indirectly) in the franchisee's business. This prohibition could be problematic in the event that a franchisor desires to exercise a right of first refusal (common in most franchise agreements) if it is a controlling interest in the franchisee that is proposed to be transferred and, instead, purchased by the franchisor.
- There is a differentiation in the Franchise Law between "wholesale franchises" and "development franchises." Wholesale franchisees are those under which a franchisor grants a territory to a franchisee, who has the right to appoint subfranchisees. Development franchises are area development franchises for which subfranchising (without franchisor consent) is explicitly not permitted. Oddly, the term of a development franchise cannot be for less than 5 years and no such requirement exists for wholesale franchises.
- The term of the franchise agreement cannot be less than four years – even if a shorter term is agreed to (or if the term is not determined), it is understood to mean four years. This may create problems for franchisors that want to grant shorter term contracts to existing franchisees (e.g., to test a brand in the market, or to reconcile the term of a new franchise agreement with that of the remaining term of an existing franchise agreement that may be for less than four years).
- There are "minimum" statutory obligations that a franchisee must comply with – namely, to allow the franchisor to make inspections of the franchise, to refrain from engaging in acts that could jeopardize the goodwill of the franchise system, and to maintain as confidential the franchisor's proprietary information – but, oddly, the law does not provide for the consequences of a franchisee failing to comply with these minimum obligations.
- Helpfully for franchisors, the Franchise Law provides that there is no employment relationship between the parties to the franchise contract. It also states that employees of the franchisee have no employment relationship with the franchisor. And it goes on to provide that the franchisor is not liable for the obligations of the franchisee or responsible to the franchisee for the profitability of the franchise. It is certainly unusual to see legislation that so supports the positions of franchisors.
- The Franchise Law statutorily provides for exclusivity for franchisor and franchisee: (i) a franchisor cannot authorize another franchise unit in the same territory; and (ii) a franchisee cannot operate itself (or through an intermediary) a competitive business in the territory (or, its "area of influence"). While these requirements under the Franchise Law seem like they could be harsh, these restrictions could be rendered virtually meaningless under the Franchise Law as the law provides that "the parties may limit or exclude the extent of the exclusivity."
- The maximum duration for a "post-term" non-compete is one year. The Franchise Law provides for no exceptions in this regard.
- For international franchises, the franchisee has the right to defend and protect its rights to operate the franchise in Argentina, and, the franchisor must appoint the franchisee as its attorney-in-fact in Argentina with respect to defending such rights. Further, the franchisee is entitled to intervene in any proceeding with respect to such rights. This requirement is particularly concerning for a franchisor, as it appears to give a franchisee the express right to defend, for example, the franchisor's trademarks in Argentina – which could lead to loss of those trademarks.
Some of the most unclear provisions include:
- Prior to signing a franchise agreement, a franchisor must provide the franchisee with economic and financial information covering the last two years for units that are similar to those offered to the franchisee. This information can be about other units in Argentina or abroad (i.e., the franchisor's home country or, technically, from any country). But, it is unclear whether this disclosure requirement means that newer franchise systems (that have less than two years' worth of economic and financial information) can open in Argentina by disclosing just the limited financial information that they do possess.
- "Without cause" terminations are seemingly permitted, however, after the initial term elapses. And, recall that the Franchise Law calls for agreements to be for at least four years – so, if the parties agree to a longer period, then a termination without cause before the expiration of such longer period will be invalid. Any termination without cause after the initial (or, as applicable, renewal) term elapses must be given with a prior notice equivalent to one month per each year of the initial (or, as applicable, renewal) term, subject to a maximum of six months prior notice. And lack of required notice triggers the right of the party not given notice to seek indemnity for loss of profits – but it is unclear over what duration the profits should be calculated (i.e., the remaining term of the agreement, the entire term of the agreement, from the time the party should have received notice through the actual termination).
So, what happens if a franchisor or franchisee violates either the unusual or unclear or other provisions in the new Franchise Law? Would there be invalidation of the contract or certain monetary penalties? Is injunctive relief available? Our understanding is that in cases that are of a matter of ordre public, even if the parties have agreed differently from the requirements of the Franchise Law, and the Franchise Law does not explicitly allow for that different treatment, the Argentina courts will apply the provisions contained in the Franchise Law. Additionally, while the consequences for noncompliance are not spelled out in the Franchise Law, if the parties provide for certain noncompliance penalties in the franchise agreement, such penalties will govern (unless at issue is a matter of public concern in which case the Argentine courts may determine the degree of noncompliance penalties).
As indicated by the highlights above, there are a number of uncertainties that exist in the new Franchise Law. Additionally, it is apparent that the provisions will require international franchisors to modify certain aspects of their future franchise agreements and to change their business practices in Argentina as well.