Expansion of the mandatory items list of the Franchising Disclosure Document (Article 2)
As provided in the previous regulatory framework, the franchisor must provide the Franchising Disclosure Document (FDD, Circular de Oferta de Franquia in Portuguese) to the prospect franchisee at least 10 days before the signature of the franchising agreement (or preliminary contract, if any), or the franchisee pays any fee to the franchisor or any entity related to the franchisor.
The new Brazilian Franchising Law introduces new rules to the FDD. While the previous law provided for 15 mandatory items, the New Franchise Law requires 23.
In relation to these additional items, the following information should be highlighted: (i) events that will trigger penalties, fines or payment of damages and their respective amounts; (ii) information on the existence of minimum purchase quotas by the franchisee from the franchisor or those designated by the franchisor, and the possibility and conditions for refusal of the products or services required by the franchisor; (iii) indication of the rules limiting competition between the franchisor and the franchisees, and among the franchisees, during the term of the franchise agreement; (iv) indication of any rules of transfer or succession; (v) indication of the existence of council or franchisees association; and (vi) details about how the product, process or management know-how and confidential information relating to industry will be dealt with upon termination and whether the franchisee will be allowed to compete with the franchise.
Possibility of canceling the Franchise Agreement in case of omissions or misinformation in the Franchising Disclosure Document (Article 4)
The new law provides expressly for the hypotheses of provision of incomplete or false information in the FDD. The law 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.
These changes requires even greater care by the franchisor in relation to the drafting of the FDD and transparency during relationship with the franchisee, to avoid problems and reputational damage caused by lack of transparency.
Consumer relationship from franchisor-franchisee (Article 1)
In the absence of express legal provision, many franchisees filed in court the application of the protective rules of the Code of Consumer Protection – as the reversal of the burden of proof, for example, with the allegation that any subordination or the mere inequality of economic size between franchisor and franchisee features a relationship of consumption. The case law has settled the understanding that there is no relationship of consumption between franchisor and franchisee. Now, the new definition Law states it in Article 1, eliminating any controversy thereon.
Employment relationship from franchisor-franchisee (Article 1)
This provision also aims to draw a line in any discussions about the legal nature of the relationship between franchisor and franchisee. Although during the operation the franchisor assists the franchisee, and that there is an exclusive operation area, the essence of the franchise agreement is that the franchisee (usually a legal entity) performs its activities independently. This autonomy presupposes the absence of hierarchy and subordination between franchisor and franchisee, and removes any employment relationship. However, this point has also been object of many legal discussions. So, the new Brazilian Franchising Law expressly excludes the employment relationship between the parties.
Possibility of subleasing of commercial point by the franchisor to the franchisee and legitimacy for the filing of renewal action (Article 3)
According the Article 51, paragraph 1 of Law no. 8.241/91, the right to renewal can only be exercised by the sublessee. Then, in sublease of property of the franchisor to the franchisee, only the franchisee (Sublessee) had the right to plead the renewal of the agreement. However, this provision created great deal of uncertainty to the franchisor, considering the possibility of losing its commercial point if the franchisee failed to exercise, in a timely manner, the right to renewal.
Due to the peculiar situation, the new definition provides that both the franchisor and the franchisee will have the right to renew the main lease, in any sublease of commercial point where franchise is located.
The law also provides in its Article 3 that if the franchisor charges the franchisee more than the franchisor pays on the main lease, then: (i) this must be expressly written in the FDD and in the franchise agreement; and (ii) the amount must not be excessively onerous.
Validity of the election of Arbitration Court by the parties (Article 7, paragraph 1)
The new definition establishes the validity of the election of arbitration court for the settlement of disputes relating to the Franchise Agreement. This issue has always been questioned in Court, because many franchisees argue that the arbitration clause would be an obstacle to its right to be heard. However, the Superior Court of Justice has already confirmed in several judgments the effectiveness of the arbitration established in consensual and voluntary basis within the relationship typically commercial, as is the Franchise Agreement.
In this context, Article 7, paragraph 1, of the new Brazilian Franchising Law establishes that the trbitration can now be chosen by the parties as a dispute resolution mechanism.
Regulation of public franchise (Article 1, paragraph 2)
Another improvement of the new law is the possibility of state-owned or semi-public companies to adopt the franchise system. The previous law did not provide for such a possibility, which also resulted in discussions about the theme. The article which specified the rules of bidding for public franchises was vetoed by the President of the Brazil, with the understanding that the bidding procedure would create legal uncertainty by the conflict with the state-owned Companies law.
L.O. Baptista is at your disposal to provide further clarification regarding the new Franchises Law.
Contacts:
Esther Jerussalmy Cunha – [email protected]
Reynaldo Guimarães Vallú Neto – [email protected]
