Brazilian Senate approved in the night of November 6 the bill for the new Franchise Act (PLC 219/15). The new Act is a legal framework that will supersede previous rules, modernize the system and put an end to some of the debate over the previous act (Law No. 8.955/94).
Here are some of the changes brought by the new piece of legislation:
It introduces an express provision stating that there is no consumption relationship between franchisor and franchisee (section 2)
Although it may seem obvious, as the franchisee is not the end consumer of the services and/products provided under a franchise agreement, the new Act makes it clear that no consumer relationship exists between franchisor and franchisee. The need to make this matter (even more) clear has arisen because many franchisees have been seeking in court application of the Consumer Code in support of their claims. Many allege that a certain degree of subordination or even the fact that the parties are companies with different economic sizes would be enough to constitute a consumption relationship and allow for the application of the Consumer Code’s protective provisions.
However, it is well settled in the case law that there is no consumption relationship between franchisor and franchisee. The new franchise act has now a specific provision in this regard (section 2).
It introduces an express provision stating that there is no employment relationship between franchisor and franchisee and/or franchisor’s employees, including during training (section 2)
The purpose of this provision is to end any discussion over what the legal nature of the relationship between franchisor and franchisee is. Although franchisor may provide franchisee with some assistance during conduction of the business and even though there may be a right of exclusivity between them, it is of the essence of a franchise agreement that the franchisee (normally a legal entity) carries out its activities with autonomy. Such autonomy means that neither there is any hierarchical relationship nor any subordination between them.
In other words, no employment relationship exists. This too has already been the object of much legal discussions, so the lawmaker decided to make clear that no such relationship exists.
It lays down the rules for public franchise (section 2 paragraph 2)
The new act also allows government entities or quasi-public corporations to enter into franchise agreements. The purpose here is to allow them to expand their operations, regardless of their industries. The previous act was silent on this subject as well, and this sparked off much debate.
It allows franchisor to sublet the establishment to franchisee and provides for who has standing to sue for lease renewal (section 5)
Who has standing to sue for renewal of lease in case of a sublease between franchisor and franchisee? This question too has already created much controversy. Under the Lease Act (Law No. 8.241/91, section 51, paragraph 1), only the sublessee has standing to sue for renewal of lease. So, whenever franchisor sublet the property to franchisee, by the letter of the law only the franchisee (sublessee) had the right to seek renewal of the lease in court. This provision used to be a cause for much uncertainty to the franchisor, who could end up losing its business location if the franchisee failed to timely file a suit for renewal of the lease. Because in this particular situation renewal of the lease agreement would affect both parties – franchisor and franchisee – the opinion of the prevailing case law was to accept that both of them – franchisor, as lessor, and franchisee, as lessee – have standing to sue for renewal of the lease agreement[1].
The new act also puts an end on this controversial matter. It specifically determines that either party has standing to file a lawsuit seeking renewal of the lease, in case of a sublease – between franchisor and franchisee – of the establishment where the franchise is operated.
It punishes any omission made or false information provided in the franchise offering circular (section 6)
The new act punishes the franchisor’s omission to provide information or provision of false information in the Franchise Offering Circular. In this case, franchisee may either allege that the franchise agreement is null, or seek its annulment, or demand reimbursement of all fees or royalties already paid to franchisor. Although the previous act imposed no punishment on franchisor in case of provision of non-realistic information in the Franchise Offering Circular, it was already settled in the Brazilian case law that the franchise agreement was to be annulled due to franchisor’s default and franchisee was to be paid damages. Again here, the new act leaves no room for doubt and reinforces the Brazilian case law on the matter.
It allows parties to choose arbitration as dispute resolution method (section 9 paragraph 3)
The new act allows parties to resolve disputes arising from Franchise Agreements through arbitration. This is yet another topic that has been much discussed in court. Franchisees most often alleged they were the weaker party to the relationship and, therefore, arbitration would hurt their right to full defense. The Superior Court of Justice, nonetheless, in many occasions have already confirmed that arbitration was a valid, efficient option to resolve disputes involving typically corporate relationships, such as the one under a Franchise Agreement.
Incidentally: “If there is an arbitration agreement inserted in the contract, the state courts lose jurisdiction and the arbitrator has the power-duty to decide on the issues arising from the contract as well as on the existence, validity and enforceability of the arbitration clause. Special appeal granted.”[2] Within this context, section 9 paragraph 3 of the new act reaffirms the prevailing position of the case law on the subject.
We can only hope that the new act improves legal certainty and transparency and makes interpretation of Franchise Agreements an easier task.
[1] See TJSP, appeal (AI) case No. 2170324-04.2014.8.26.0000, reporting Judge Adilson de Araújo, judged on November 25, 2014.
[2] STJ, appeal (RE) case No. 1.597.658- SP, 2013/0098107-2, judged on May 18, 2017, reporting Justice Nancy Andrighi. Likewise: STJ, case No. 146.939 – PA (2015/0145422 02), reporting Justice Marco Aurélio Belizze, judged on November 23, 2016.
