Franchising disclosure in Argentina

Under Argentine Law, franchise agreements are governed by the Civil and Commercial Code of the Nation (Código Civil y Comercial de la Nación, or CCCN by its Spanish acronym).

The franchisor´s disclosure obligations are contained in a single provision: the Article Number 1,514, Subarticle a), of the CCCN. It reads that the franchisor must:

“a) provide, prior to the signature of the agreement, economic and financial information over the evolution of two years of units similar to the one offered in franchising, which have operated enough time, either in the country or abroad.”

Constructing the above-quoted legal provision, together with the other relevant applicable provision of the CCCN, and in a way coherent with the legal system as a whole, franchising disclosure in Argentina presents the following characteristics:

1. The franchisor´s disclosure obligation is precontractual (CCCN, Article Number 1,514, Subarticle a);

2. As an obligation the franchisor must comply with before entering into any franchise agreement, the CCCN´s regulations related to preliminary dealings will apply to disclosure (CCCN, Articles Number 990 through 993), being of key importance the bona fides duty. Under Article Number 991 of the CCCN, during preliminary negotiations, and even when no offer has been made, the parties must act in good faith, so as not to frustrate the deal without justifications;

3. Under Argentine contract law and as a general principle, the provisions the CCCN sets forth apply only in the absence of parties´ stipulations. Such provisions are just default rules unless its imperative nature arises out of their way of expression, content or context (CCCN, Article Number 962). Ultimately, it will be a judge, when deciding on a concrete dispute, who will determine if a certain norm is imperative or not;

4. Specifically, in relation to Article Number 1,514, Subarticle a), of the CCCN, setting out the franchisor´s disclosure obligations, it is not clear if the same is an imperative norm or just a default rule. It does not expressly state that the parties may not agree otherwise[1]. Nor is it possible to just derive out of its content or context that the mere violation of such provision may turn the contract void, or that such disposition is based upon public policy principles not allowing the parties to override them by contrary agreements.

Nothwithstanding the above, and as by definition the franchise system purports to be a tested business system (CCCN, Article Number 1,512, and related provisions), in order to allow the franchisee to reach an informed business decision on entering into the agreement or not, we consider that there must always be a franchisor´s disclosure on the fundamentals of the business system that is being offered, and hence the disclosure obligation may not be entirely waived, under penalty of nullity.

However, in our opinion, the parties may agree upon the scope of the information to be provided. Deepening the analysis, one thing would be that the franchisee straightforwardly waives its right to receive the disclosure information, and thereby none is given; and another completely different thing would be to represent and acknowledge that the information produced and received is the only available for similar business units, and explained the reasons for such limited information.

Moreover, it would be key not only just disclose the information, but to provide the franchisee with certifications of such information, issued by a certified public accountant and/or auditor. And also offer the franchisee the possibility to independently verify such information, acknowledging the procedures the franchisee has effectively undertaken, or its decline to act accordingly.

Provided negotiations are conducted fairly, and all the exchanged information is the only data available to evaluate the business, complete and accurate, the disclosure obligation should be deemed met, even though the information provided does not have the exact parameters the CCCN sets forth. As long as the disclosed information is thorough and accurate, the franchisee may still decide to enter into the agreement, despite the business system has not been tested to the extent described in the CCCN[2]. If so, the franchisee may not challenge that consent as defective and claim later on the nullity of the agreement if the business goes wrong (CCCN, Article Number 265).

Further, under Article Number 1,067 of the CCCN, parties to a contract are prevented from contradicting any prior conduct relevant to the law. This is an application of the Civil Law principle of “nonvenire contra factum propium”, or the Common Law doctrine of “estoppel”.

5. The disclosed information should be provided to the franchisee with sufficient anticipation for the franchisee to properly evaluate it. As the CCCN nothing says on the issue, it should be prudent and fair to follow the rules of the Unidroit´s Model Franchise Disclosure Law (2002). This soft law, in its Article Number 3, establishes that the franchisor must give every prospective franchisee a disclosure document, to which the proposed franchise agreement must be attached, at least fourteen days before the earlier of:

“(A)      the signing by the prospective franchisee of any agreement relating to the franchise, with the exception of agreements relating to confidentiality of information delivered or to be delivered by the franchisor; or

(B)      the payment to the franchisor or an affiliate of the franchisor by the prospective franchisee of any fees relating to the acquisition of a franchise that are not refundable or the refunding of which is subject to such conditions as to render them not refundable, with the exception of a security (bond or deposit) given on the conclusion of a confidentiality agreement.”

6. As a conclusion and regarding the franchisor´s disclosure obligations, following the bona fides principle, the franchisor should make available to the franchisee as much information as possible to evaluate the deal, and disclaim in the agreement all of the issues and aspects upon which the franchisor has limited knowledge, or none at all (e.g. when the franchisor does not track the expenses of the franchise units). If all the representations made in the agreement are complete, thorough and accurate, the disclosure obligation should be deemed met. The franchisee has agreed to enter into the contract upon those facts, and the consent cannot be considered flawed. Needless to say that the franchisor will be liable when the information transmitted is false, with the intent to induce the franchisee into error.

To know more about franchising in Argentina, please, read the following posts on our Legal Blog:Franchising in Argentina: introduction, definition, features and parties’ obligations, and Franchising in Argentina clauses on term, exclusivity and others.

For additional information on these or any other issues related to doing business in Argentina, please, sign up for our Legal Blog or contact us at any time.

 

Mario E. Castro Sammartino

[1] Among other sources, the CCCN has followed Unidroit´s instruments on franchising´s normative definitions. In this regard, Unidroit´s Model Franchise Disclosure Law (2002) contains an express prohibition of waiving disclosure rights (Article Number 10).
[2] On the scope of the information, the Unidroit´s Model Franchise Disclosure Law (2002), on the one hand, states the information to be furnished the franchisee with, and the period of time that such information should cover (the franchisor´s financial statements for the previous three years); but, on the other hand, it also prescribes that “… Franchisors, the creation of which goes back less than three years, are under an obligation to disclose the same documents prepared since they began their activity;” (Article Number 6, Sub Article (N) (i) (c). Therefore, under this model law, it is allowed to enter into franchise agreements, even though the franchisee system is new and not sufficiently tested yet.

Mario Eduardo Castro Sammartino

Our publications exclusively express the author´s opinion and do not purport to be legal counsel on any case. Should you need it, you must consult with your trusted lawyer or may contact us at your convenience. If you liked the article, please, share it.

 

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