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Franchising in Brazil - new formality requirements for franchise agreements with arbitration clauses

The Superior Court of Justice in Brazil (the highest court for non-constitutional matters) has recently ruled that franchise agreements are "adhesion contracts" and therefore any arbitration clause in a franchise agreement must comply with the formality requirements of Article 4(2) of the Arbitration Act in order to be enforceable.

Adhesion contracts are contracts that are characterized by a lack of equality between the parties where one party typically dictates the contractual terms to the other party. Agreements between consumers and commercial suppliers of goods and services have frequently been treated as adhesion contracts by the Brazilian Courts and the Brazilian Consumer Protection Code contains a consumer-oriented definition of adhesion contracts.

The question as to whether adhesion contracts can also exist between two companies has long been controversial, but what the recent judgment from the Superior Court of Justice seems to be saying is that all adhesion contracts, irrespective of the relations or legal status of the parties will need to comply with Article 4(2) of the Arbitration Act.

For franchise agreements this will mean that an arbitration clause will only be valid if the franchisee:

  • initiates the arbitration proceedings; or

  • expressly agrees to the arbitration by means of an attached written document; or

  • signs or initials the arbitration clause which has been inserted in the franchise agreement in boldface type

One possible exception exists where the franchisor can prove that the franchise agreement has been heavily negotiated and the terms have therefore not been imposed on the franchisee as it often the case in respect of international development deals. However, it may be prudent to comply with the requirements of Article 4(2) of the Arbitration Act irrespective to remove any uncertainty regarding the enforceability of the arbitration clause.

The judgment therefore adds yet another item to an already long list of formality requirements in Brazil.

For more information on this topic, please contact Vicky Reinhardt.