1) The Civil and Commercial Code of the Nation (CCCN) on franchise profitability in Argentina

According to Article 1520 (c) of the CCCN, a franchisor is not liable for the profitability of a franchise. However, this is so provided specific conditions are met, as emphasized in a recent judicial decision.

2) The pre-contractual duty of information and franchise profitability in Argentina

To enable potential franchisees to make informed decisions, franchisors have a significant pre-contractual duty to disclose relevant information before entering into the franchise agreement.

Article 1514 (a) of the CCCN outlines this obligation:

“Obligations of the franchisor: The franchisor’s obligations are:

a) Provide, before signing the contract, economic and financial information regarding the performance of similar units to the offered franchise over two years, having operated for a sufficient time, either domestically or abroad…”

When this pre-contractual duty of information is properly fulfilled, the franchisor’s non-liability for franchise profitability in Argentina is fully applicable.

On the duty of pre-contractual information of the franchisee, see “Las obligaciones y cargas de información precontractual en el contrato de franquicia. Preguntas que suscitan” (La Ley, Journal of May 17, 2022. Page 1. Co-author: Osvaldo J. Marzorati).

3) The ruling “Buriel Gastronómica S.R.L. v. Mostaza y Pan S.A.“

A noteworthy ruling by the National Commercial Judge of First Instance No. 18, issued on December 16, 2024, in re“Buriel Gastronómica S.R.L. v. Mostaza y Pan S.A.” established a significant legal precedent regarding various aspects of franchise agreements.

In this case, the franchisee plaintiff sought:

a) The annulment of the franchise agreement and related contracts (including a mortgage loan agreement with the franchisor, and a lease agreement with one of the franchisor’s partners), alleging their consent was vitiated by error or fraud due to misleading pre-contractual information regarding profitability, required investment, and support. It also sought damages.

b) Alternatively, if the annulment were denied, the franchisee requested a review of the contracts to restore the contractual balance, claiming abusive and bad-faith conduct by the franchisor.

The first instance court ruled partially in favor of the franchisee, rejecting the annulment claims but ordering adjustments to the franchise and lease agreements.

Key takeaways from the ruling regarding franchise profitability in Argentina include:

 (i) “…That the system must be “proven” does not mean that the franchise must necessarily be successful, or that it must guarantee a certain profitability. On the contrary, Art. 1520 inc. c) of the CCCN expressly prescribes that the franchisor is not liable to the franchisee for the profitability of the system granted in the franchise. The franchisor may eventually be liable for design defects of the system, which cause proven damages to the franchisee, not caused by gross negligence or fraud of the franchisee (art 1521 and 1729 of the CCCN), but not for the success of the business management“;

(ii) “… the success of the franchisee’s business partly depends on the franchise business system designed by the franchisor and partly on the personal skills of the franchisee entrepreneur (Capucci, ob. cit). In addition, of course, on exogenous issues that may influence (supervening macroeconomic issues, pandemics, etc.)”;

(iii) “… the omission or inaccurate provision of information in the pre-contractual stage may give rise to liability for damages for breach of the mandates of good faith and commercial loyalty, or of nullity for defect of consent when error or fraud has been incurred, although always bearing in mind that the franchisee is an independent merchant who, as a professional, must be skilled and prudent (v. Heredia, ob. cited).”

4) Conclusions

While not yet definitive because the ruling has been challenged by all the parties, this ruling serves as a crucial warning to franchisors regarding potential legal liabilities related to franchise profitability in Argentina.

While franchisors do not guarantee franchise profitability in Argentina (which depends on numerous factors beyond system design), they must exercise extreme caution in preparing franchise offerings and fulfilling pre-contractual disclosure obligations. This includes providing detailed, accurate, and verifiable information regarding profitability estimates and potential investment returns.

Mario E. Castro Sammartino

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