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Franchise law

i Legislation

In Mexico, the franchise agreement will be governed, and subject to the terms agreed, by the parties, as well as by the provisions set out in the IPL and its implementing Regulation and, for aspects not regulated in the IPL, the general rules of the Federal Civil Code and the Commercial Code. The government agency in charge of applying the IPL is the IMPI. Additionally, depending on the franchise, other laws may apply, such as the Data Protection Law.

A franchise is defined in Article 142 of the IPL, which establishes that a franchise exists when, with a licence to use a trademark granted in writing, technical knowledge is transmitted or technical assistance is provided, for the licensee to produce or sell goods or render services in a uniform manner and with the operating, commercial and administrative methods established by the owner of the trademark, to maintain the quality, reputation and image of the products or services distinguished by the trademark.

ii Pre-contractual disclosure

Prior to granting a franchise, and at least 30 business days before executing the franchise agreement, the franchisor must provide the prospective franchisee with the relevant company information in the FDD.

Article 65 of the Regulations of the IPL establishes that the FDD must contain at least the following technical, economic and financial information:

  1. name, corporate name or business name, domicile and nationality of the franchisor;
  2. description of the franchise;
  3. seniority of the original franchisor and, where applicable, of the master franchisee of the business object of the franchise;
  4. intellectual property rights involved in the franchise;
  5. amounts and types of payment that the franchisee must make to the franchisor;
  6. types of technical assistance and services that the franchisor must provide to the franchisee;
  7. definition of the geographical area in which the business exploiting the franchise operates;
  8. franchisee's right to grant sub-franchises to third parties and, if applicable, the requirements the franchisee must satisfy to do so;
  9. obligations of the franchisee with respect to the confidential information provided by the franchisor; and
  10. obligations and rights of the franchisee arising from the execution of the franchise agreement.

After timely delivery of the FDD, no additional requirements must be met before executing the agreement. There is no obligation to register the FDD with the IMPI.

A lack of veracity in the information disclosed in the FDD will entitle the franchisee, in addition to demanding the nullity of the agreement, to claim for losses and payment of damages. This right to claim payment of damages may be exercised by the franchisee within the first year of the execution of the agreement, and the franchisee must be able to prove that the damages arose as a consequence of the lack of veracity in the information contained in the FDD.

Failure to provide the FDD upon request by the prospective franchisee is considered an administrative infraction of the IPL. The IMPI may sanction this conduct with an economic fine, temporary or permanent closure of the premises or administrative arrest.

iii Registration

The franchise agreement should be registered with the IMPI to be binding to third parties. In Mexico, trademark owners must prove use to prevent a cancellation action by any third party, and recordal of the franchise agreement with the IMPI would serve as proof of use, granting the owner protection of the trademark. However, although recommended, there is no legal obligation to record the franchise agreement. To maintain certain aspects confidential, a short version of the franchise agreement may be recorded with the IMPI.

iv Mandatory clauses

According to Article 142 bis of the IPL, franchise agreements must be in writing and contain at least the following minimum provisions:

a the geographical zone;

  • the location, minimum size and investment characteristics of the infrastructure, relating to the premises in which the franchisee shall carry out the activities deriving from the agreement;
  • if applicable, the inventory, marketing and advertising polices, and the provisions relating to the merchandise supply and to contracting with suppliers;
  • the policies, procedures and terms for any reimbursement, financing and other considerations that fall within the parties' charge in the terms agreed in the agreement;
  • the criteria and methods applicable to determining the franchisee's commission and profit margins;
  • the characteristics of the technical and operational training of the franchisee's personnel and the manner in which the franchisor shall provide technical assistance;
  • the criteria, methods and procedures of supervision, information, evaluation and valuation of the performance and quality of the services under the responsibility of the franchisor and the franchisee;
  • the terms and conditions governing sub-franchising, in the event that it is agreed by the parties;
  • the reasons for termination of the franchise agreement;
  • the assumptions under which the terms or conditions relating to the franchise agreement may be reviewed and, if applicable, modified by mutual agreement;
  • unless otherwise agreed, the absence of an obligation for the franchisee to sell its assets to the franchisor or whoever the franchisor designates at the end of the agreement; and
  • any provisions regarding the franchisee's obligation to sell or transfer the shares of its company to the franchisor or to make the franchisor a partner in the company.
v Guarantees and protection

Mexican law contemplates real and personal guarantees. Real guarantees allow creditors to enforce a payment obligation by recourse to the debtor's real estate or personal property, as the case may be. Personal guarantees bind the guarantor to fulfil an obligation (normally payment of money owed) in the event of the debtor's breach. In both cases, the guarantees are aimed at enforcing the creditor's interest by way of a right exercisable over the debtor's property or that of the guarantor.

Each guarantee is specifically regulated. For instance, joint obligors and sureties, as well as mortgages, are regulated by the Federal Civil Code and local civil codes; pledges are regulated by the General Credit Instrument and Transactions Law; and bonds are dealt with under the Insurance and Bonding Institutions Law.

Each guarantee has a specific implementation and, in some cases, a specific enforcement procedure. The convenience of adopting a determined guarantee in a contract should be assessed on a case-by-case basis, in light of the specific covenants to be secured and any other particularities, especially those that might impact the guarantee's enforcement. In Mexican franchise legal practice, the most used guarantee is the personal guarantee.