Argentina is the second largest country in South America, with a well educated and principally urban population of over 40 million. Although it continues to suffer from economic and political instability, Argentina remains an interesting market for franchisors prepared to a take long view, given the strong regional growth in this part of the world.
Franchisors should therefore take note, as the Civil and Commercial Code ("Code") entered into force on 1 August 2015 and applies to Argentinian franchising contracts entered into on or after 1 January 2016.
Prior to this, franchise contracts were governed only by general principles of contract law. Whilst the Code only strictly applies to franchise agreements entered into after 1 January 2016, it will also regulate issues that are deemed to be a matter of "public concern" in older franchising contracts, such as a franchisor's right to terminate a franchise agreement prior to the expiry of the newly mandated minimum four (4) year initial term in the absence of breach by the franchisee.
So, what's new?
Unfortunately, the Code follows the trend set in a number of other jurisdictions around the world, which have introduced "half baked" franchise regulations, introducing a number of unhelpful ambiguities or uncertainties to the regulation of the franchisor/franchisee relationship. For example:
Ownership - the new legislation prohibits the Franchisor from having a controlling interest in the Franchisee's company, either directly or indirectly. This may mean that certain standard provisions in an international franchise agreement may not be enforceable, such as a right of first refusal to buy the Franchisee's business if it is the controlling interest that is intended to be transferred.
Disclosure - prior to signing a franchise agreement, the Franchisor is required to provide to the Franchisee certain economic and financial information in relation to the Franchise Business so that the Franchisee can assess its viability and make an informed decision on the value of the opportunity being offered to them. This information must cover a minimum period of two (2) years and must be in respect of similar units as those offered to the Franchisee. This information can be about units in Argentina or abroad. It is currently unclear whether a franchise system that has been in operation for less than two years can open a franchise in Argentina due this requirement or whether it would be sufficient for the Franchisor to disclose the financial information it has to date.
Term - the minimum term of a unit franchise agreement must be four (4) years, unless it falls into a special category. This essentially bans the creation of short term franchises and may prohibit a Franchisor from testing the franchise system in the market as part of a pilot franchise operation. Where the Franchisee has been granted area development rights for the territory, the minimum initial term is five (5) years, whereas a master franchise agreement does not have a minimum initial term.
Termination - a franchise agreement may not be terminated early by either party before the end of the statutory minimum term in the absence of breach. After the statutory minimum term has expired, either party can terminate the contract by giving written notice to the other party based on the length of the contract, i.e. the terminating party must give one (1) month's notice per contract year up to a maximum of six (6) months. In relation to consequences for breach of the Code, unless sanctions or penalties are prescribed by the franchise agreement, it would appear that the sanctions are at the court's discretion.
But it's not all bad………
Unusually for franchise regulations, the Code imposes certain obligations and restrictions on the Franchisee, such as safeguarding the Franchisor's reputation, facilitating access, compliance with technical instructions, provision of any information regarding the development of the franchisee's business and confidentiality. However, the Code does not prescribe any consequences for a failure to comply with these statutory obligations. There is also a requirement for mutual exclusivity, which the parties may expressly exclude this from the contract. Perhaps of most interest, given the current situation in the US with the ongoing dispute between McDonald's and the National Labor Relations Board, is the pro-franchisor position taken in the Code, which provides that no employer-employee relationship arises between the Franchisor and the Franchisee and that the Franchisor will not be liable for any employment claims brought in respect of employees of the Franchisee.
It remains to be seen what impact the Code will have on franchising in Argentina and how strictly the courts will apply its provisions and punish those who find themselves in breach. What is clear is that international franchisors will need to modify certain aspects of their standard franchise agreements and to change their business practices in order to do business in Argentina.
For more information on this topic, please contact Gordon Drakes and Vicky Reinhardt
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