Laws and agencies regulating the offer and sale of franchises

Legal definition

What is the legal definition of a franchise?

Chilean legislation does not provide for a special law on franchising. Thus, Chilean law does not give a definition of franchising.

In spite of this, franchising agreements in force in Chile will be ruled by the Commercial Code, by the Civil Code and more particularly by the ‘law of the contract’. In other words, what the parties (ie, franchisor and franchisee) will have agreed in writing will be their ‘law’ for the duration of the contract. Thus the main applicable law will be the contract executed by the parties, since the contract is to be considered as law for the parties. In fact, article 1545 of the Chilean Civil Code states: ‘Any contract legally executed is law for the parties.’

In addition, the Civil Code states in article 1546: ‘Contracts must be executed in good faith, and therefore in consequence submit the parties not only to what is written in the contract, but also to what comes from the nature of the obligation’. There is no doubt that such a provision refers to contracts that have been executed by the parties and that are in force.

Franchise laws and agencies

Which laws and government agencies regulate the offer and sale of franchises?

There is no Chilean franchising law. In addition, franchising contracts are private documents and are not be registered by the parties with any public authority or government agency.

Principal franchise requirements

Describe the relevant requirements of these laws and agencies.

Not applicable.

Exemptions

What are the exemptions and exclusions from any franchise laws and regulations?

Not applicable.

Franchisor eligibility

Does any law or regulation create a requirement that must be met before a franchisor may offer franchises?

No. In fact, a franchisor can offer franchises in Chile at any time, independently of having done business in Chile before the offer. The franchisor will be obliged to comply with the law of the contract. In addition, if the franchisor were to have a structure or legal entity in Chile, the franchisor would also have to comply with Chilean laws as far as its branch or subsidiary is concerned.

In the case of a lack of local structure, and as far as local laws are concerned, it is necessary to add a word regarding taxes. The franchisor will be entitled to receive all amounts produced by the Chilean operation (rents considered as having their origin in Chile). The franchisor will have to pay WHT on these amounts (that will need to be withheld and paid by the franchisee, on behalf of the franchisor) at the time of taking its profits out of Chile.

Franchisee and supplier selection

Are there any laws, regulations or government policies that restrict the manner in which a franchisor recruits franchisees or selects its or its franchisees’ suppliers?

No. The franchisor will simply need to comply with Chilean laws and with the concept of public order.

Pre-contractual disclosure

What is the compliance procedure for making pre-contractual disclosure in your country? How often must the disclosures be updated?

Considering that there is no franchising law in Chile, the form, terms and timing of pre-contractual disclosure will be determined and decided exclusively by the franchisor. In addition, once first contact is made with the potential franchisee or franchisees, the parties agree on the pre-contractual disclosure agreement that could revoke any broader disclosure than the one initially in the franchisor’s mind at the time of making the first approaches.

In conclusion, the matter will have to be examined on a case-by-case basis, with the parties free to decide on how they will operate. The leverage of the franchisor on what to disclose will mainly depend on the strength of its brand and existing network. In addition, local practice indicates that even if the law does not provide for obligations or requirements, comprehensive disclosure will in most cases facilitate the understanding of the parties and will also facilitate the reaching of an agreement or, on the other hand, simply accelerate termination of the negotiations. Finally, as all types of contract have to be negotiated and entered into in good faith according to the provisions of the Civil Code, even if the type of disclosure is as indicated above, the franchisor will have to disclose in good faith, even pre-contractually.

Pre-sale disclosure to sub-franchisees

In the case of a sub-franchising structure, who must make pre-sale disclosures to sub-franchisees? If the sub-franchisor must provide disclosure, what must be disclosed concerning the franchisor and the contractual or other relationship between the franchisor and the sub-franchisor?

Considering that there is no franchising law in Chile, the form, terms and timing of pre-contractual disclosure will be determined and decided exclusively by the franchisor. In addition, once first contact is made with the potential franchisee or franchisees, the parties agree on the pre-contractual disclosure agreement that could revoke any broader disclosure than the one initially in the franchisor’s mind at the time of making the first approaches.

In conclusion, the matter will have to be examined on a case-by-case basis, with the parties free to decide on how they will operate. The leverage of the franchisor on what to disclose will mainly depend on the strength of its brand and existing network. In addition, local practice indicates that even if the law does not provide for obligations or requirements, comprehensive disclosure will in most cases facilitate the understanding of the parties and will also facilitate the reaching of an agreement or, on the other hand, simply accelerate termination of the negotiations. Finally, as all types of contract have to be negotiated and entered into in good faith according to the provisions of the Civil Code, even if the type of disclosure is as indicated above, the franchisor will have to disclose in good faith, even pre-contractually.

The master franchisee will in most cases treat the sub-franchisee as if it were the franchisor. In the case of a master franchising agreement (MFA), it is expected that the MFA will include one or more provisions concerning this matter.

Due diligence

What due diligence should the parties undertake before entering a franchise relationship?

Local practice indicates that from a franchisor perspective, the following elements will be key, even before reviewing any document:

  • choice of the correct franchisee;
  • conviction that the franchisee candidate does perfectly understand what is to be expected from the relationship; and
  • an economic and basic legal review of the candidate individual or, in case of companies, review of the shareholders or controllers of the company.

 

Even if preliminary disclosure is not mandatory, local practice indicates that it will facilitate the communications between the parties and will put the franchisee on a degree of preparation regarding ‘what the franchisor will expect from him’.

Thereafter, typical – or standard – due diligence will be necessary.

What must be disclosed

What information must the disclosure document contain?

Local practice indicates that disclosure documents used in Chile are standard and similar to the ones used overseas. In fact, since local law does not provide for any specific rules for franchising agreements or for pre-contractual documents, the franchisor will be bound by good faith and in consequence do its best to give to the potential franchisee as much information as necessary to make a decision and become a franchisee.

Continuing disclosure

Is there any obligation for continuing disclosure?

No. Local law does not provide for any specific rules for franchising agreements or for pre-contractual documents, the franchisor will be bound by good faith and in consequence do its best to give to the potential franchisee as much information as necessary to make a decision and become a franchisee.

Disclosure requirements – enforcement

How do the relevant government agencies enforce the disclosure requirements?

Not applicable.

Disclosure violations – relief for franchisees

What actions can franchisees take to obtain relief for violations of disclosure requirements? What are the legal remedies for such violations? How are damages calculated? If the franchisee can cancel or rescind the franchise contract, is the franchisee also entitled to reimbursement or damages?

In view of the lack of law on franchising, there is no special rule on this matter, so the general rules of the Civil Code will apply. Among these rules, we can highlight the provisions regarding the establishment of consent, good faith, the fulfilment of obligations, etc.

In the case of fraud, the Criminal Code will apply.

Disclosure violations – apportionment of liability

In the case of sub-franchising, how is liability for disclosure violations shared between franchisor and sub-franchisor? Are individual officers, directors and employees of the franchisor or the sub-franchisor exposed to liability? If so, what liability?

In view of the lack of law on sub-franchising, there is no special rule on this matter, so the general rules of the Civil Code will apply. Among these rules, we can highlight the provisions regarding the establishment of consent, good faith, the fulfilment of obligations, etc.

In the case of fraud, the Criminal Code will apply.

General rules on offer and sale

In addition to any laws or government agencies that specifically regulate offering and selling franchises, what are the general principles of law that affect the offer and sale of franchises? What other regulations or government agencies or industry codes of conduct may affect the offer and sale of franchises?

Generally speaking, Chilean law will consider the parties that are to enter into a commercial agreement or contract as equals. In consequence, it does not impose more pre-contractual obligations that those that are the result of the application of the principle of good faith. In this respect the Civil Code states that ‘contracts must be executed in good faith’. Under this normal arrangement, the parties to a contract will only have to comply with the requirements of pre-contractual disclosure that are needed to ensure that both parties are acting in good faith (ie, to prove that the information granted to the other party was as necessary to execute the contract freely and under its usual meaning).

The obligations of the parties at the time of negotiating the agreement are not specifically established and therefore franchising contracts are to be treated like any other commercial contract. Thus what was discussed at the time of the negotiations will in principle have little effect or value unless it is possible to prove that the discussion was not a simple discussion but an oral agreement that was taken before the execution of a final document and towards the execution of that final document.

In this respect, article 1554 of the Civil Code states:

The promise to enter into a contract does not produce any obligation, except if the following occurs:

(a) that the promise is made in writing;

(b) that the contract promised is not of one of those that the laws declare ineffective;

(c) that the promise contains a term or condition that sets the time of conclusion of the contract; and

(d) that the promised contract is specified in such a manner that the only missing elements for its perfection are the handling of the good (object) or the solemnities prescribed by the laws.

 

In addition, articles 1560 to 1566 of the Civil Code contain rules for the interpretation of contracts. Some examples are:

  • if the intention of the parties is known, it should be considered more important than the literal words 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 effect will be preferred over an interpretation that does not;
  • unless a clear intention of the parties against it, the contract should be interpreted in the way it better fits its nature;
  • the clauses of common use are considered part of the contract even when they are expressly included; and
  • the clauses of a contract should be interpreted in a way that favours the complete execution of the contract.

 

Therefore, at the time of offering and selling a franchise, the franchisor will need to be as transparent as possible. This does not mean that at the first contact everything is to be disclosed. But a memorandum of understanding (MOU) setting out the clear intentions of the parties and a clear timeline to be followed will be advisable. The MOU as such will not be easy to enforce (ie, it will hardly permit the franchisor to force the potential franchisee into a final franchising contract). However, clear and forceful clauses regarding the timeline to be followed, with milestones to be accomplished, confidentiality, non-competition, etc, are of the essence of an MOU and should be enforceable in case of infringement. In addition, as far as the timeline is concerned, if the negotiations are fruitful and it is necessary to have more time for the execution of the final franchising contract, it would be advisable to execute a promise of a franchise, leaving to the execution of the final franchising agreement only the fulfilment of a condition or arrival of a fixed and expected deadline.

General rules on pre-sale disclosure

Other than franchise-specific rules on what disclosures a franchisor should make to a potential franchisee or a franchisee should make to a sub-franchisee regarding predecessors, litigation, trademarks, fees, etc, are there any general rules on pre-sale disclosure that might apply to such transactions?

Not applicable.

Fraudulent sale

What actions may franchisees take if a franchisor engages in fraudulent or deceptive practices in connection with the offer and sale of franchises? How does this protection differ from the protection provided under franchise sales disclosure laws?

The general legal rules will apply, mainly the Civil Code, the Commercial Code and the Criminal Code. In addition, in certain defined circumstances, unfair competition laws could also apply.

Law stated date

Correct on

Give the date on which the above content is accurate.

This information is accurate as at June 2020.