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Franchise law

i Legislation

Specific regulation of franchise law has only been enacted recently in Argentina with the introduction of the National Civil and Commercial Code (CCCN), which entered into force on 1 August 2015 and replaced both the previous Civil Code and the previous Commercial Code (which were two different bodies of law). Up until then, neither the Civil Code, the Commercial Code or any special law provided special rules for franchising contracts. Despite the absence of special regulation, there were no legal obstacles to the execution and enforceability of franchise agreements. Other than the general restriction prohibiting parties from circumventing mandatory provisions, parties had complete freedom to agree upon any terms. Nonetheless, in the absence of special default rules to fall back on (other than the general provisions applicable to all contracts and those similar in nature), issues of legal certainty would become common if parties failed to anticipate any particular situation.

The new CCCN introduced an entire chapter specifically addressing franchise agreements, in line with the regulations for sales representative agreements and concession agreements, which had not been regulated before either. Given the special nature of these agreements, they share many rules.

The current franchise agreement regime comprises provisions addressing many particular issues (e.g., parties' duties and rights, term and termination, labour and antitrust).

As expected with any new piece of legislation, there is still very little interpretative case law (if any). One of the many general issues that still need to be addressed in case law is the nature of some of the provisions: whether they should be regarded as default provisions (i.e., applicable to the agreement in the event that parties do not agree otherwise) or mandatory provisions and a matter of public policy (i.e., parties to the contract may not agree otherwise).

In addition to the main legal effect of that distinction (i.e., whether parties may legally opt out of the provision), there are two important consequences pertaining to franchising contracts that were entered into before the enactment of the CCCN (we will address this issue immediately below) and to matters of international choice of law (see Section VI.ix).

Are the CCCN's new provisions applicable to ongoing franchise agreements? An important issue that will soon be discussed is whether franchise agreements concluded and effective prior to the entry into force of the CCCN should be affected by the newly enacted rules.

The most relevant rule of contracts applicable to this issue is that default rules enacted after a contract has been concluded are not applicable to that contract; on the other hand, new mandatory rules are applicable.

Although the rule appears to be quite simple, its application in real-world situations is not, as the rule depends on whether a legal provision is regarded as default or mandatory and, as discussed above, the CCCN is not consistently clear about that.

ii Pre-contractual disclosure

In addition to any of the usual representations and warranties included in business agreements, a particular disclosure requirement is provided in Argentine law. The franchisor must provide, prior to the execution of the franchise agreement, economic and financial information on the two-year evolution of units similar to the franchise units offered, and which have operated for a sufficient time in the country or abroad. The rationale behind this is that, before deciding whether to enter into the franchise agreement, the prospective franchisee has a legitimate interest in knowing if the business system has been proven successful. The franchisee has to evaluate example cases to project and calculate whether the business will be profitable.

Furthermore, a general rule of good faith (i.e., applicable not only to franchise agreements) should be followed during the pre-contractual negotiations. In this respect, Argentine law provides that during preliminary negotiations, and even if no contractual offer has yet been made, the parties shall act in good faith to avoid unjustifiably frustrating the negotiations. Failure to comply with this duty shall entail an obligation to repair the damage suffered by the party that has relied (without fault on its part) on the execution of the contract.

iii Registration

Argentine law does not have any specific regulatory registration requirement for franchises or franchise agreements. Although there is a particular registration requirement under the Transfer of Technology Act for tax purposes, this does not affect the enforceability of the franchise agreement.

iv Mandatory clauses

As mentioned above, the Argentine franchise agreement regime comprises both mandatory and default provisions. Therefore, any issue not specifically addressed by the parties shall be covered by existing legal provisions, some of which may apply on a default basis (i.e., they apply by default unless both parties agree to opt out), while others are mandatory rules.

Within this legal framework, the Argentine regime does not actually set out which clauses must be included by the parties in the franchise agreement (in fact, it does not even require a written agreement); if the parties were not to set out relevant clauses, or even a written agreement at all, the agreement would simply be governed by the existing legal provisions.

This contractual freedom is limited only by mandatory clauses, from which the parties may not opt out (if they were to seek do so, those provisions would simply be null and void). Although there might be some argument as to whether some provisions should be regarded as mandatory (generally, the issue would be the extent to which a particular duty may be contractually limited), the following are the most relevant mandatory provisions:

  1. the franchisor must provide the franchisee with the technical knowledge to develop the franchise;
  2. the franchisor must deliver an operations manual;
  3. the franchisor must provide technical assistance;
  4. where the franchise implies the provision of goods and services, the franchisor must provide them in sufficient quantities and at reasonable prices;
  5. the franchisor must defend and protect the use of the intellectual property involved in the franchise;
  6. the franchise agreement term may be no shorter than four years (except in special situations);
  7. the franchise agreement may not include the following clauses:
    • the franchisee's waiver on the right to challenge the intellectual property involved in the franchise;
    • a restriction on the franchisee acquiring franchise-specific goods from other franchisees (provided they meet the required contractual specifications and quality); and
    • a restriction on meeting and forming non-economic relationships with other franchisees;
  8. both parties must provide prior notice of termination; and
  9. the parties may not agree upon a non-compete provision, unless it is provided for less than one year (after termination) and within a reasonable territory.
v Guarantees and protection

Parties to a franchise agreement are free to provide for any type of guarantee to secure their obligations. Other than compliance with general rules on the matter, there are no specific rules for franchise agreements affecting the enforceability of guarantees.

In summary, Argentine law provides for two kinds of guarantee: real guarantees and personal guarantees. Real guarantees involve the provision of collateral (either owned by the debtor or any third party) that cannot be transferred or disposed of by the grantor; personal guarantees involve a third party (either an individual or a company) acting (generally) as a co-debtor on a joint and several basis with all its assets. While the first kind provide a more secure guarantee (given that the grantor is not legally or factually able to dispose of the collateral), the second kind provide a broader collateral that may be legally and factually disposed of by the grantor (regardless of any contractual provision). On the other hand, real guarantees are usually more expensive and burdensome to implement when compared to personal guarantees. The nature of the commercial relation and the amounts involved would greatly affect the type of guarantee, which is usually chosen on a case-by-case basis.

Whatever the commercial agreement may be, when large franchise agreements are involved it is fairly common for the franchisor to require the franchisee to obtain a mortgage to secure any ongoing duties (especially payment obligations) under the franchise agreements. Although in the past there have been some doubts about the enforceability of this type of mortgage, the CCCN has expressly provided for open mortgages; (i.e., mortgages securing obligations originated by the parties or a particular commercial relationship, even if not specifically mentioned). The guarantee would cover any obligations accrued within 10 years of its granting, up to the amount provided in the guarantee.