Are you a LatAm-based entrepreneur currently involved in, or considering entering into, a franchise agreement?

Resolving disputes that may arise between franchisors and franchisees efficiently is crucial to maintaining the stability and success of a franchise arrangement. Common approaches to franchise dispute resolution include mediation, arbitration, internal resolution mechanisms (such as designating a franchise advisory council or representative to address disputes) and litigation. To learn about how to establish an international franchise in the region or expand your business to other countries, you can read Brown Rudnick’s article on that topic by clicking here.

When dealing with franchisees in Latin America, a franchisor should not assume that its choice of law and forum selection will be upheld by local courts.  Also, the laws of a franchisee’s home jurisdiction can present challenges for a franchisor attempting to enforce its dispute resolution provisions.

Below are principles that some countries in the region follow in connection with choice of law and venue provisions for franchise agreements:

Brazil

In Brazil, franchises are governed by the Brazilian Franchise Law No. 8.955/1994, which allows parties to a franchise agreement to stipulate to foreign law and also to adhere to mediation and arbitration methods of dispute resolution, in Brazil or abroad.  Foreign decisions or arbitration awards are in principle enforceable in Brazil.  

Colombia

Franchise agreements in Colombia are primarily regulated by Law No. 256/1996, which outlines the requirements that franchisors and franchisees must adhere to when entering into franchise agreements in Colombia.  Colombia's franchise law does not specifically address conflict resolution provisions in franchise agreements.  In practice, parties to a franchise agreement often include clauses specifying the preferred method of resolving disputes that may arise during the course of their business relationship. 

Costa Rica

The Costa Rica Dealer Act mandates the application of Costa Rican law to franchise disputes and voids any franchise/dealer agreement providing otherwise.  The Dealer Act allows for disputes to be resolved by arbitration in Costa Rica or abroad as long as Costa Rican law is applied as the substantive law.

Honduras

Franchises in Honduras are primarily regulated by the Commercial Code of Honduras and other commercial laws.  While Honduras does not have specific legislation dedicated solely to franchising, franchise agreements are governed by general contract law principles. In Honduras there is a risk that a choice of law would not be enforceable if the agreement is deemed to have been executed in Honduras.  Consequently, both parties should actually execute the franchise agreement outside of Honduras.  Alternatively, the franchisor should deliver the franchise agreement to the franchisee in Honduras as an offer and the franchisee should execute the agreement and return it to the franchisor outside of Honduras.

Mexico 

The Mexican Franchise Law allows the franchisor and the franchisee to choose which law will govern the franchise agreement.  The franchisor and the franchisee may submit to the jurisdiction of Mexican or foreign courts concerning disputes arising from the franchise agreement.  Also, the franchisor and the franchisee may agree on arbitration. Foreign decisions or arbitration awards are in principle enforceable in Mexico.

Puerto Rico 

Puerto Rico’s Dealer’s Act (“Law 75”) voids any choice law clause that stipulates the application of foreign law in disputes that involve a distribution/franchise relationship and prohibits subjecting any agreement to a venue outside of Puerto Rico.  Law 75 also explicitly gives the dealers/franchisees an unwaivable right to require a court to determine whether an arbitration clause in a contract was entered into “freely and voluntarily by both parties” before the arbitration clause can be given effect.

Law 75 creates a rebuttable presumption that an arbitration clause was required by the principal/grantor and that any such arbitration agreement is an “adhesion contract.” However, the U.S. Federal Arbitration Act (“FAA”) applies in Puerto Rico.  Consequently, any provision of Law 75 that is inconsistent with the FAA will be preempted by the FAA and arbitration provisions will be enforced as required by the FAA.  It is up to the arbitrators, not the courts, to decide which law will apply to the arbitration proceeding. To learn the advantages of having a Compliance Manual that conforms to U.S. law, you can read Brown Rudnick’s article on that topic by clicking here.

With the notable exception of Belize, most jurisdictions in Latin America are party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which facilitates the recognition and enforcement of foreign arbitration awards among signatory countries.  Therefore, courts in the region are in principle obligated to enforce international arbitration clauses included in franchise agreements, and a franchisor should be able to enforce an arbitration award obtained in a member country across signatory countries. 

If you are interested in developing a framework that optimizes conflict resolution within a franchise arrangement in the region, or currently face a conflict in the context of a franchise agreement, let us know.  Our team of international lawyers, many of whom are admitted to practice law in Latin American countries, can assist you.