An extract from The Franchise Law Review, 7th Edition

Franchise law

i Legislation

Chile does not have a law on franchising. Therefore, the main applicable law is the contract, which is considered to be law for the parties, according to the provisions of Article 1545 of the Chilean Civil Code. In addition to that, civil and commercial codes will apply, together with the general rules of law and the existing case law on franchising. However, case law will not be binding for a court.

The parties are free to determine both the structure and content of the franchise agreement. In other words, a franchise agreement contract should be subject to general contract rules and certain limitations provided by local law, just as with any other contract.

Practice indicates that most franchising agreements are drafted on the basis of 'international models' and 'current international practice'.

ii Pre-contractual disclosure

Generally speaking, Chilean law considers the parties that enter into a contract to be equals. In consequence, it does not impose more pre-contractual obligations than those that are the result of the application of the principle of good faith. The Chilean Civil Code states that 'the contracts must be executed in good faith'.

Under normal conditions, the parties to a contract only have to comply with the requirements of pre-contractual disclosures that are necessary to credit that both parties are in good faith; in other words, to be in a position to prove that the information granted to the other party is the information necessary to execute the contract in its natural meaning.

The obligations of the parties at the time of negotiating the agreement are not specifically established, and therefore franchise contracts are treated as any other contract. Therefore, what was discussed at the time of the negotiations in principle has no value unless it is possible to prove by means of strong evidence that the discussion was not a simple discussion but an agreement that was made before the execution of the document, and that is to be considered the contract.

In this respect, the Chilean Civil Code, Article 1554, states that:

The promise to enter into a contract does not produce any obligation unless the following conditions are met:
1) That the promise is in writing;
2) That the contract promised is not one of those that the law declares ineffective;
3) That the promise contains a term or condition that sets the time of the conclusion of the contract;
4) That the promised contract is specified therein in such a manner that to be perfect the only thing missing is the tradition of the thing or the solemnities prescribed by law.

Finally, the Civil Code contains rules for the interpretation of contracts (Articles 1560 to 1566), of which the following are examples: 'if the intention of the parties is known, it should be given greater consideration than the literal wording of the contract'; 'the terms of the contract, even if they are general, will be applied only for the contract'; 'the interpretation of a clause that produces effects will be preferred over an interpretation that does not'; 'unless there is a clear intention of the parties against it, the contract should be interpreted in the way that best suits its nature'; 'the clauses of common use are considered part of the contract even when they are not expressly included'; and 'the clauses should be interpreted in a way that favours the whole execution of the contract'.

The local practice indicates that in the case of franchises, memoranda of understanding (MOU) are common. A document of this sort will be useful to channel the discussions and negotiations of the contract. However, in most cases, practice indicates that they will have little weight from a legal point of view. In any case, such a document will in all probability include clauses regulating points such as confidentiality, transfer of information, ownership of information, a possible non-compete clause in case of not reaching an agreement, etc. While such clauses are normally considered an enforceable contract, the MOU or letter of intention is not sufficient for the prospective franchisee to force the franchisor to enter into the final agreement.

iii Registration

As mentioned above, Chilean law does not prescribe any formalities regarding the execution of franchise agreements.

Nevertheless, to facilitate the enforcement of franchise contracts, it is very common for these contracts to be executed before a notary public, the involvement of which provides certainty regarding the date of execution and the parties to the contract.

iv Guarantees and protection

Guarantees are valid and often used in Chilean contracts. According to local law, there are the following three guarantees:

  1. mortgage: guarantees involving real estate;
  2. pledge: guarantees involving different kinds of movable property; and
  3. personal guarantee: guarantee involving the goods of a person, in case the principal debtor does not pay its commitments.

The following formalities are required by law in respect of these different kinds of guarantee:

  1. mortgages: Chilean law requires a public deed, and the registration of this deed in the Registry of Mortgages and Encumbrances of the competent real estate registrar. There are some special cases that require other formalities (i.e., mortgage on certain ships), though these are not common;
  2. pledges: pursuant to local law, there are several kinds of pledge for which the law requires different formalities. The most common pledges are the pledges on shares, credits and the non-possessory pledge, among others. Each of these has its own specific formalities (notarisation, registration, among others); and
  3. personal guarantee: Law No. 18,092 provides that this guarantee shall consist of a written document, signed by the person who grants the guarantee, clearly identifying this document as a 'personal guarantee' to ensure the fulfilment of a specific obligation. This guarantee can be limited to a specific amount. Its notarisation is recommended.