All questions

Franchise law

i Legislation

In the area of commercial distribution, only agency agreements are specifically regulated. Neither distribution nor franchise agreements are subject to specific regulation in Portugal, even though certain legal provisions are especially relevant to franchise agreements. Considering the lack of a specific legal regime applicable to franchise agreements, no licence is required for franchise salespersons.

In the absence of imperative legal provisions, the parties are free to determine their own governing rules and clauses as long as these are consistent with generally applicable contractual principles. In particular, when interpreting and applying contractual rules, Portuguese courts will give due consideration to pre-contractual liability principles that require parties to act in good faith during negotiations.

ii Pre-contractual disclosure

Portuguese courts have often decided in this area that parties are required to provide all necessary information prior to execution of a franchise agreement, failing which statutory civil liability may arise under Portuguese law, in particular under Article 227 of the Civil Code. Notwithstanding the fact that there is no specific legislation applicable to franchising, general rules of trademark law, company law, product liability law, standard contract terms law, agency law, employment law and consumer protection law are fully applicable to franchise agreements. Franchising is also subject to national and EU competition rules.

General contractual principles prohibit the use of false and misleading expressions concerning one's own business operations or those of another party that are of a character tending to affect the supply of, or demand for, a commodity. These principles also may be regarded as applying to franchise agreement negotiations (i.e., the franchisor must provide an accurate description of its operations). If a franchisor infringes this requirement and gives a prospective franchisee an untrue or misleading impression, this may constitute grounds for rescinding or terminating the entire agreement based on pre-contractual liability established in the Civil Code.

iii Registration

Apart from the acquisition of a Portuguese company, establishing a company or a branch is the most common method of business organisation employed in Portugal. The most common types of company in Portugal are the limited liability company (SA) and the limited liability partnership (SQ), which have in common the fact that shareholders' liability is generally limited to their interest in the capital share of the company.

Although less often used, there are other ways of investing in Portugal (e.g., through joint ventures and partnerships). A franchisor may directly license franchisees where it is not necessary to control or supervise franchisees' activity in depth. This has the advantage of reducing the franchisor's set-up costs in the franchisee's location.

A limited liability company is, in principle, required to have at least five shareholders, but a single shareholder is allowed when that shareholder is a company. Registration with fiscal and commercial registry authorities is required for such a company. The minimum capital share is €50,000, which may be paid in cash or in kind.

An SQ tends to be used for smaller investments, with no capital share minimum required by law. A minimum of two shareholders is required, although it is also possible to set up an SQ with only one shareholder, which is designated as a sociedade unipessoal por quotas, or SUQ. Registration with the commercial registry and fiscal authorities is also required for such a partnership.

iv Mandatory clauses

Imperative rules and essential principles of Portuguese law are mandatory and thus also applicable. Franchising operations in Portugal are also bound by directly applicable EU legislation governing franchising.

v Guarantees and protection

In franchise agreements drafted in Portugal, the shareholders of the corporate franchisee often guarantee its obligations, by bank guarantee or, alternatively, by personal guarantee secured against particular assets of the guarantor or against all the guarantor's assets.

Article 6 of the Industrial Property Code establishes that the rights from patents and utility models, as well as designs or models and other trademarks, are subject to seizure and attachment and can be pledged or subject to other seizure of property.

A lender may seek a collateral assignment of the franchise agreement itself that enables the lender to succeed in the rights and interests of the franchisee upon the loan's default.

To avoid such a result, franchisors should object to the use of collateral assignments, whether by generally forbidding such an assignment of the franchise agreement, or by imposing specific conditions on such an assignment. The franchisor may not be left in a position where the lender continues to run the franchisee's business.

Therefore, it is useful to include in the franchise agreement clauses providing for the prohibition of the assignment of rights without the prior consent of the franchisor.