On December 26, 2019, President Bolsonaro enacted Law no. 13.966/19, the new Brazilian Franchise Law (BFL), which revoked and replaced the former 1994 franchise law (Law no. 8.955/94).
Although no groundbreaking change was made in the Brazilian franchising system, the new law updates several terminologies and concepts, inserts some new mandatory information in the franchise disclosure document (FDD) and brings new rules to the franchising system in Brazil.
With a vacatio legis of 90 days, foreign franchisors have until March 26, 2020 to adapt their franchise structure and documents to Law no. 13.966/19.
Here are the main changes you or your clients should be aware of:
Franchise disclosure document
Aiming to increase transparency in the franchisor-franchisee relationship, the new BFL adds a set of information that the franchisor must disclose to prospect franchisees prior to the execution of any binding document or payment of any sort.
But before we get to those, one essential change to bear in mind concerns the language of the FDD. As the previous law required that the document should be written in a “clear and accessible” language, international franchisors adopted as practice drafting the document in English and having the prospect franchisee sign an affidavit acknowledging and warranting his/her proficiency in English and the full comprehension of the franchise disclosure document. This is no longer possible. Now, the BFL requires expressly that this document is written in Portuguese, in an accessible and objective fashion.
As to the new required information, the franchisor must now disclose:
1. A list of all franchisees, subfranchisees and subfranchisors that have left the system in the past 24 months, as opposed to past 12 months, which was required under the former law;
2. Any non-compete obligation between the franchisor and the franchisees and among the franchisees themselves, as well as their duration and penalties in case of breach.
If the non-compete obligation imposes a territory restriction in the franchisee’s activities, then a detailed description of this restriction must be given to the prospect franchisees.
Considering the relevancy of e-commerce for any business today, it is important to disclose any limitation that franchisees may face when selling their goods and services online;
3. Any type of support given by the franchisor and the need of incorporating new technologies to the franchise;
4. The contractual initial term and any extension requirements, if applicable.
Not seldom franchisors establish in their franchise agreements minimum performance requirements for a contract renewal. Now, these conditions must be brought to attention of the prospect franchisee as a specific item in the disclosure document;
5. The existence or not of any Franchisee Council or Association.
Important to note that, after the bill moved to the Senate, an amendment was proposed to make Franchisee Councils or Associations mandatory for franchises with over 50 units. This amendment was further rejected by the Senate’s Economical Affairs Committee;
6. Any hypothesis where penalties, fines and sanctions may be applied to the franchisee in case of breach, and their respective amount.
This obligation reflects the concern of the lawmaker in bringing to prospect franchisee’s prompt attention any contractual aspect that may financially impact him/her.
But on the flipside, one may argue that this obligation could make Brazilian courts more open to enforce fines and penalties, since the franchisees would be unmistakably aware of the financial consequences of their eventual breach;
7. Minimum purchases to be made by the franchisee from the franchisor or its designated suppliers, as well as the possibility and conditions of refusal;
8. Any assignment or succession rules. If there aren’t any rules set forth or simply assignment or succession is not allowed, the FDD must expressly state so; and
9. Croquis, composition, physical arrangements and detailed descriptions of the franchise unit, equipment and apparatus.
Along with the layout and the architectonical features of the unit which was already required under the former law, the BFL requires now the franchisor to take a step further and provide more information about the franchise unit and its within.
Subletting
Unlike the previous statute, the new BFL recognizes the possibility of the franchisor to sublet a unit location to the franchisee and even profit from it, as per sole paragraph of article 3.
However, the law provides two conditions for that to happen: (i) the additional amount charged by the franchisor must be provided in the disclosure document, and (ii) it must not represent an excessive burden to the franchisee.
Naturally, the concept of excessive burden is open and must be analyzed on case-by-case basis. However, the law provides a guiding principle by stating that the economic and financial balance must be maintained during the subletting.
Lastly, article 3 extends to the franchisee the franchisor’s right to demand in Court the renewal of the main lease agreement. This franchisor’s right is granted by Brazilian Leasing Rental Law (Law no. 8.245/91), in the quality of tenant. In every commercial leasing agreement with more than 5 years, the tenant has the right to request the automatic agreement’s extension to protect its business. With the new BFL, the lawmaker wanted to protect the franchise unit, by extending this right to the franchisee. The only exception is if the franchisee is in breach of either the sublet or franchise agreement.
Language and jurisdiction in international franchises
Article 7 of the new BFL establishes for the first time a legal difference between local and international franchises and the distinction relies on one straight rule: the territory in which the franchise agreement produces effects.
On the one hand, the law determines that local franchise agreements are agreements that produce effects solely in the Brazilian territory, as opposed to international franchise agreements, which are defined as producing effects in two or more jurisdictions.
The parameters are set forth by paragraph 2 and, to differentiate one type from the other, one must take into consideration the place of execution, the nationality and domicile of the parties and the location of the franchise unit. If all these features remit exclusively to the Brazilian territory, then one has a local franchise agreement and vice versa. This important for two reasons.
The first refer to the language. The Brazilian law requires that local franchise agreements are written in Portuguese, while international agreement may be written in foreign language, provided that a sworn translation is given to the franchisee at the franchisor’s expense. It is important to remind that, before the new BFL, a simple translation would be enough. Now, a sworn translation is required.
Secondly, in international franchise agreements, the new BFL allows the franchisor and the franchisee to choose from either of their domicile’s jurisdiction.
This provision comes to settle a former controversy, as the previous law was silent on that regard. Although several court decisions ruled in favor of a foreign jurisdiction-electing clause, article 7 comes to solidify this possibility, but not without a twist. The law allows the franchisor and the franchisee to select the jurisdiction of either of the parties’ domicile. So, in theory, the not so uncommon hypothesis of selecting a neutral jurisdiction is no longer accepted under BFL.
As we can see, a lot of modifications were made by the new BFL, requiring the attention of foreign franchise companies inserted in the Brazilian market.
Particularly, the new mandatory information deserves a special care because, unlike the previous law, the current BFL determines that, not only giving out fake information in FDD, but also omitting any legally required mandatory information may lead to the nullity of the franchise agreement and the return of any payments made by the franchisee with a price-level adjustment.
So, to avoid further problems down the road, diligent franchisors must review their franchise documents to make sure they follow the new law and that all new franchisees but also renewing ones are given all the legally required information.