1. The term of the contract
The Civil and Commercial Code of Argentina (Código Civil y Comercial de la Nación or CCCN) imperatively determines as a general principle that the minimum term of the franchise agreement must be four years. Provided that the parties agree upon a shorter term or no term at all, the contract is deemed to have been entered into for four years. Notwithstanding this legally mandatory minimum term, a shorter term may be agreed upon under special circumstances, such as trade fairs, conferences, activities developed within premises or ventures with a foreseen shorter duration, or the like (Article 1,516).
When it comes to development franchises and as an exception to the general principle, the minimum term must be five years (Article 1,513, Sub -Article b)).
According to Article 1,517 of the CCCN, franchises are exclusive for both parties, unless the parties stipulate otherwise limiting or excluding exclusivity. Provided that exclusivity not be limited or excluded by contractual provisions, the CCCN establishes that the franchisor cannot authorize another franchisee in the same territory, except with the consent of the existing franchisee.1
Additionally, the franchisor may not directly commercialize to third parties goods or services under the franchise within the franchisee´s territory or area of influence (Article 1,518, Sub-Article b).
Accordingly, the franchisee must perform the franchised activities at the premises specified within the territory granted or, otherwise, in the area of influence. Further, the franchisee cannot operate – directly or indirectly- franchise units or activities that may be construed competitive.
3. Other clauses
Under Article 1,518, unless otherwise agreed by the parties, the following provisions will apply to franchise agreements:
Unless otherwise agreed upon, the franchisee may not assign its contractual position or the rights emerging from the contract while the agreement is in force, except for pecuniary obligations. This provision does not apply for wholesale or master franchises, where the franchisee may grant sub-franchises (article 1,518, sub-article a)).
The right to the clientele corresponds to the franchisor. The franchisee cannot move the location of its attention or manufacturing premises (Article 1,518, Sub-article c).
The franchise contract is by definition onerous, being the parties free to agree on the franchise fee (Article 1,512, Article 1,513, Sub-Article a), and Article 1,515, Sub-Article e)).
Article 1,519 declares null and void the clauses preventing the franchisee:
a) To justifiably challenge the franchisor's intellectual property, trademarks, patents, commercial names, copyrights and others included in the franchise;
b) To purchase goods included in the franchise from other franchisees within the country, provided they meet the qualities and contractual characteristics; and
c) To meet with or establish non-business relationships with other franchisees.
4. Liability of the parties
According to the Article 1,520 of the CCCN, the parties to the franchise agreements are independent and no legal relationship exists between them2. As a consequence and following the cited disposition:
a) The franchisor is not liable for the franchisee´s obligations, except legal provision to the contrary;
b) The franchisee´s employees do not have labor relationship with the franchisor, without prejudice to the application of the norms on labor fraud;
c) The franchisor does not answer for the franchise system 's profitability. However, the franchisor is liable for defects in the franchise system, causing proved damages to the franchisee and not arising out of gross negligence or willful misconduct of the franchisee (Article 1,521).
5. Termination of the Franchise Agreement
Under Article 1,522, the termination of franchise agreement is governed by the following rules:
a) Death or incapacity of any of the parties if human persons
b) Termination by just cause
The agreement cannot be terminated without just cause within the term agreed between the parties. Notwithstanding, failure to comply with certain obligations may derive in anticipated termination by just cause, according to Article 1,084 of the CCCN (Article 1,522, Sub-article b). The CCCN does not bring any specific regulation for breach of the franchise contract. The general regimen for breach of contracts applies to franchise agreements and so the contract may be terminated in case any of the parties fails to comply with its obligations, as long as the event of non-compliance is essential (CCCN, Article 1,084) and previous request to meet the unfulfilled obligation for a term of no less than fifteen days has been served (CCCN, Article 1,088). The innocent party may also seek indemnity for damages or payment of the non-compliance penalties provided for in the franchise agreement.
c) Expiration of its term
Under the CCCN´s provisions, the expiration of the contract of franchise´s term does not terminate the agreement by itself unless the interested party denounces the contract, serving the counterparty with a termination notice at least thirty days in advance of the expiration date (CCCN, Article 1,516). In the absence of said prior notice, the contract is tacitly extended by operation of law for a one-year period; by means of a second renewal, the term becomes indefinite (CCCN, Article 1,516, last paragraph). Contracts entered into for a period shorter than three years – based upon special circumstances as defined by Article 1,516 - are not tacitly extended and consequently terminate on the expiration date (CCCN, Article 1,522, Sub-Article c).
Irrespective of the length of the term of the franchise contract and further to the above explained denounce of the agreement, the party willing to terminate it by the expiration of the original term or any of its extensions, must serve its counterparty with a prior notice of no less than one month per year of duration, up to a maximum of six months. In no case will just cause be required. Failure to give the required prior notice, give the counterparty right to claim compensation for loss of profits. In this case, the indemnification should be calculated as an estimation of the profits the innocent party would have made during the length the anticipation period should have had (CCCN, Article 1,522, Sub-Article d) and Article 1,493).
Non-competition is a contractual obligation, both during the contract´s effectiveness and after its termination. Non-competition covenants to be effective after termination of the contract, irrespective of the cause, are valid for up to one year within a reasonable territory (CCCN, Article 1,522, last paragraph).
7. Tax considerations
Provided franchise agreements are registered when appropriate before the INPI and according to the regulations applicable to the transfer of technology´s contracts, the franchisor will benefit from a lower legally presumed net income for income tax withholding regime purposes and the franchisee will be allowed to the deduct the payments as expenses with certain limits (Transfer of Technology Law Number 22,426 (Ley de Transferencia de Tecnología) and its Regulatory Decree Number 580/91; Foreign Investment Law Number 21,382 (Ley de Inversiones Extranjeras) and its Regulatory Decree Number 1,853/93; Income Tax Law Number 20,628 (Ley de Impuesto a las Ganancias and its Regulatory Decree Number 1,344/98; INPI´s Resolution Number P-328/2005).
Any piece of legislation may always be improved to cover better the needs weighed when enacted. The franchise agreement´s provisions are not the exception. However, the regulation of the franchise contract in the CCCN is a positive step bringing more predictability for this field and improving the business environment for all the interests at play in the franchise business.
For an introduction to the franchise´s regulation by the Civil and Commercial Code of Argentina and read about the contract´s definition and key features and the franchisor and franchisee´s obligations, you are welcome to visit the relevant article in our Legal Blog.
1. Case law has admitted the resolution of franchise agreements when the franchisor has authorized the opening of new business within the exclusive area of the franchisee. In these cases, compensation for loss of earnings from setting up of the new franchisee to the end of the term of duration of the agreement has been acknowledged (National Chamber of Commerce, Court B, 30/6/2003).
2. The franchisee must clearly show its independence in its invoices, contracts and other commercial documents, without interfering with the common identity of the franchise network, in particular with its names, common signs and uniform display of its premises, goods or means of transport. (Article 1,520, final paragraph).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.