Franchising in Spain has been constantly increasing in the last years and is one of the most popular options to operate in the Spanish market. The franchise is an agreement where the franchisor grants to the franchisee a right to commercialize products or services in a specific market, providing know-how, guidelines on processes, and the right to use trademarks, in exchange for a financial compensation.
Franchise contracts are regulated in the Royal Decree 201/2010 regarding the commercial activity of franchising and the Retail Act (Ley de ordenación del comercio minorista), but the parties have a broad margin to determine the terms and conditions applicable to their business relationship. The franchise contract does not require any specific form or mandatory clauses, and it does not need to be notarized or drafted in Spanish language, but it must refer at least to any of these rights:
- The use of a common commercial name, or other intellectual property rights and a uniform presentation of the premises or means of transport.
- Communication of technical knowledge or know-how, which must be owned by the franchisor, substantial and unique.
- Provision of commercial and technical assistance throughout the duration of the agreement.
The most important obligations of the franchisor imposed by Law are those related to the presale disclosure.
Franchisor must provide information about the following:
At least 20 working days prior to the signing of the franchise contract, or any other preliminary agreement or payment, the franchisor must provide information about the following:
- Identification of the franchisor.
- Information regarding the ownership or licensing rights on the trademarks used by the franchise, including information about its duration and any claims affecting them.
- A general description of the sector of activity in which the franchise operates.
- Franchisor´s experience, including the main evolution stages of the franchise network.
- Contents and features of the franchise, a general explanation of the business, know-how, commercial or technical assistance provided by the franchisor, and an estimate of the necessary expenses and investments to start the business. If the franchisor provides information about sales or profit forecasts, they must be based on experiences or studies that can be fully justified.
- Structure and extent of the franchise network in Spain, a description of the organization and the number of establishments in Spain, their location and indication whether they are operated under the franchise regime or directly by the franchisor. The franchisor should also inform about the number of franchisees that have ceased to belong to the network in Spain in the last two years and the cause of their termination.
- Essential elements of the franchise agreement, which shall contain the rights and obligations of the respective parties, the duration of the contract, the conditions for termination and, where appropriate, renewal of the contract, financial considerations, exclusivity agreements, and limitations on the franchisee’s transferability of the franchised business.
The information must be provided in writing, in an accurate and non-deceptive manner. This transparency duty is essential for the franchisee´s consent to the perfection of the contract to be considered valid. Therefore, the franchisee could claim at the court the termination of the contract, and any proven damages, if there is evidence of the lack of information, or if the information was false, and this contributed to his decision to integrate in the franchise network. Infringement of this presale disclosure obligations may also imply administrative sanctions to the franchisor, as established in 7/1996 Retail Act.
Currently there is no obligation to register a franchise in Spain. Royal decree 201/2010 established a Franchisor Registry, but this obligation was repealed by Royal Decree-Law 20/2018. Some regional regulations could, however, require registration at a regional level, but only when the franchisor intends to operate exclusively in that specific region.
A Franchise agreement normally includes a control system to ensure the quality of products and services provided, protect the goodwill of the franchise owner and uniformity across the network. Franchising is based on a system that the franchisor has previously implemented successfully. Thus, franchisees must comply with both the franchise agreement and the franchise operations manual to achieve a comparable level of performance. The franchise contract normally regulates the procedure to implement franchisor instructions and the right to carry out inspections, including the visit to the franchisee´s premises to verify qualify, uniformity and compliance of business standards. It is important however that the franchisor obligations are limited, and well defined, to avoid these instructions to be considered as a direct management of the franchisee´s business or employees, which could give rise to vicarious liability regarding employment obligations, or towards any prejudiced party.
EU Competition law also imposes certain limitations on the instructions and control the franchisor may exercise over the franchisee regarding the fixation of product prices. It is possible for the franchisor to set recommended or maximum resale prices, but fixing a minimum price is prohibited in Spain and such a limitation should be considered void.
The main obligations of the franchisor towards the franchisee are:
- Providing training and technical assistance. – If the franchisor does not provide it effectively it could justify the termination of the agreement by the franchisee. It is important to define precisely in the franchise agreement the assistance and training which is compulsorily provided by the franchisor, to differentiate it from any additional services that may be offered in the market for a cost.
- Licensing Know-how and Intellectual property. – The use of these rights should be clearly defined in the franchise agreement, and it is advisable to provide evidence of the content, duration and validity of any such rights. Spanish courts have considered the use of know-how by the franchisee to replicate the business outside the franchise network to be unfair competition according to the Spanish unfair competition Act 3/1991.
Key franchisee´s responsibilities are:
- Payment of fees and royalties. – Franchisee must pay any fees related to the integration in the franchise network, royalties for the use of intellectual property and any other fees established in the contract. Most franchise agreements calculate part of remuneration of the franchisor as a percentage on the revenue, sales, or profits of the franchisee. Consequently, the franchisee would normally have the obligation to provide the franchisor with relevant commercial and financial information about its business and give access to its accounting to verify the reality of the economic results.
- Exclusivity. The franchisee must respect the obligations of exclusivity imposed in the franchise agreements to ensure uniformity and quality standards in the franchise network. However, this exclusivity of supply should be carefully analyzed. To be permitted by EU competition block exemption regulations it should be proportionate and justified by the efficiency produced in the market. Some practices, such as prohibiting cross-supplies between franchisees, or an obligation of exclusive supply for more than 80% of the total purchases of the franchise during more than 5 years, may be considered void.
- Non-competition. – Non-competition clauses are lawful and enforceable in Spain. Nevertheless, EU Regulation 330/2010 establishes certain requirements for clauses restricting competition in the franchise agreements. For example, the competition restriction can only limit active sales to the territory of the franchisee or limit active sales to an exclusive customer group reserved to the franchisee, but may not impose restrictions to passive online sales, or any other form of passive sale. Therefore, the franchisee can sell products over the Internet even when the acquirer is outside its exclusive territory, provided that the franchisor is not actively involved in the promotion of products or services in that territory but is only fulfilling a customer request.
- Right of first refusal. – Franchisee normally has the obligation to inform and obtain the prior consent of the franchisor before selling the business to any third party. This right allows the franchisor to control the entrance in its network and maintain quality standards of the services. Franchise agreements also normally include a right of assignment of the franchisee´s premises rental contract to maintain iconic locations in case of closure of franchisee´s establishment.
Article written by David del Valle, lawyer at UHY Fay & Co
You can contact us if you would need any advice about the regulation of franchise agreements in Spain.
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