Franchise activity: Definitive suspension of the Spanish National Franchisors Register

According to Spanish Retail Act (article 62.2) all franchisors that intend to develop in Spain the franchise activity must communicate to the Franchisors’ Register the starting of their activity within three months.

Such Register is regulated by Royal Decree 201/2010 (February 26) which also foresees the information to disclose, the obligation to update it within three months of any modification and inform, during each month of January, about any closing or opening of premises in the previous year. The information should be disclosed electronically.

This said, during 2018 there have been some technical difficulties at the Register provoking the provisional suspension of such disclosure obligations. During that period, the Register did not admit any notification regarding franchisors.

From June 2018, nevertheless, the Minister of Economy, Industry and Competitiveness has decided to definitively suspend the activity of the Franchisors’ Register. This decision has been adopted with the intention of supporting companies in the franchise sector and to cancel as many obstacles as possible in the development of the commercial activity. Therefore, franchisors are no longer able to disclose such information to the Register and information on Franchisors is not longer available.

The decision does not affect, however, other mandatory obligations such as the disclosure information to the potential franchisees at least 20 days before the signature of the agreement, the pre-agreement or before any payment made.

Official information (in Spanish) can be found at the website: https://sede.micinn.gob.es/solicitudFranquiciadores/

The relationship between franchisor and franchisee in a franchise agreement has a certain complexity as we all know well. In Spain, it can also be deduced from our internal legislation (primarily the Retail Act and Royal Decree 201/2010).

In fact, we have not in Spain specific regulations on the content of the franchise agreements, so its elements (how to regulate supplies, trademarks, know-how transmitted, technical assistance, relations with other franchisees and the network, exclusivity and territory, non-compete clauses, promotion and advertising, sales via the Internet, amongst others) will find accommodation in rules dispersed. The main source of rights and obligations will be, therefore, the contract itself. And we will need it as well together with other contractual documents in order to try to prevent and solve conflicts.

The Act on Mediation in Civil and Commercial matters (5/2012) and the Arbitration Act (60/2003) grant us in Spain some clues for the solution of possible difficulties. In order to anticipate, to prevent and to solve potential conflicts we should use the franchise agreement since the beginning of its drafting and the following relationship between franchisor and franchisee with, in my opinion, three steps involved:

1. the use of mediation for cases in which the conflict has raised but the parties want to solve it either for the continuity of the relationship or to terminate it by mutual agreement,
2. establishing a proper communication system between franchisor and the network with the intent to avoid, as far as possible, the existence of the conflicts or the provision of an internal solution (in some brands it has been developed with success the “defender of the franchisee”);
3. the use of arbitral resolution of conflicts formulas that can provide the parties more flexibility than ordinary courts.

But why mediation and arbitration can be useful in the franchise agreements? How to anticipate to the possible conflicts and take them into account?

First, in order to submit a franchise agreement to mediation and arbitration it would be just necessary that the matters are disposable by the parties. They are excluded, therefore, those cases considered as loi de police or public order (for instance, the compulsory disclosure information before the signature). The mediation is essentially a voluntary process and so are the submission to arbitration, the choice of the arbitration court and the procedure to regulate the procedure.

Second, mediation and arbitration will benefit from the absence of formalities. In mediation, because franchisor and franchisee establish the essential elements for finding a solution by themselves. In arbitration, because even if the covenant has to be accepted in writing, this requirement is accepted without excessive rigidity. Moreover, in both cases, publicity of the case is lower than that obtained through the courts but, in return, the possibility of appeal is very limited (although it can also be seen as an advantage in the short duration of the procedure).

Third, and since in a franchise agreement abound elements of different nature, the solution agreed by the parties (mediation) can be highly recommended. In the same way, the special knowledge of the particularity of these contracts may probably find a better follow-up and a greater commitment with an arbitrator, than with an ordinary judge with very different issues and excessive workload.

Given these elements, we can summarise some recommendations when dealing with conflicts in a franchise agreement. Obviously there will be adapted to each case but, at least, it seems essential to be considered as a possibility for these agreements.

1. The use of arbitration may be advisable in those cases where the technical knowledge of the franchise is essential. The faster and greater specialization of the arbitrators may benefit of cost reduction. In this case it should be chosen arbitrators, institutions and procedures that are appropriate to franchise, avoiding any suspicion of lack of independence and ensuring adequate representation of the parties.
2. A good starting point might be a mechanism that favours the internal communication within the network allowing the flowing of information, the knowledge of the positions of the franchisees and the appropriate answering from the Franchisor. Even the creation of a department or a representative channelling internal conflicts could be considered.
3. The use of mediation as a way to solve possible conflicts may be advisable due to its flexibility. In this case it is advisable to provide it expressly in the contract with its essential elements such as the nomination of the mediator, the place, the language and the basics of the procedure. To leave these elements to be defined when the conflict arises does not seem a good idea.
4. Finally, the pre-contractual information disclosed to the franchisee should include the essential elements of the system chosen, in particular to avoid that its contractual provision could be considered as abusive.

The law requires that the party seeking in Spain to develop the activity of transferring a franchise must communicate its data to the Register of Franchisors within 3 months from the start of the activity. Failure to comply with this obligation may involve sanctions between 3,001 and 15,025 euros.

However, before deciding to develop a franchise in Spain, franchisors (especially those coming from outside the European Union), will hold several “activities” such as market research, seeking franchisees, pre-contracts, confidentiality agreements, disclosure of pre-contractual information … Then, when does the activity start, ie, what is the starting moment for the three months delay for the Franchisor to register?

According to the norm, “franchise commercial activity ” is defined as the activity under a contract that gives a company the right to operate a business under a franchise system and under certain conditions.

As I said, in a franchise relationship there is a prior phase consisting of market research, development of business plans adapted to the country, development of templates… most of them even carried outside our country and not necessarily concluding with the “activity ” itself (franchisor may conclude, for example, that the activity is not viable or that is not the proper moment, or any other reason implying that the business is not concluded).

A second moment  may involve the active searching for potential franchisees to Spain and the beginning of a commercial relationship: promoting the franchise, participation in fairs, interviews, etc. In these cases franchisees may be interested in receiving more information, the signature of pre-contracts, letters of intent, confidentiality agreements will be signed, payments will be made, etc. all with regard to the development of the Franchise in Spain, but without having yet signed the franchise agreement. However, to the extent that the Register of Franchisors has an informative purpose of maintaining an updated franchisors census and that the potential franchisee may wish to compare all the data received with those declared to the Register, it seems reasonable to argue that the registration obligation arises from the moment the first potential franchisee signs any agreement, confidentiality agreement, compromise, letter of intent, etc. that can originate in the future the franchise agreement in Spain.

When considering signing a franchise agreement, you should know well what it is. Our experience advising in Spain to domestic and foreign franchisors and franchisees, evidences many problems that could have been prevented by following some simple recommendation and seeking the prior expert advice. Note that as a prospective franchisee you are before an important decision. Much of what will happen later in the way you manage your business and interact with the franchisor depends on the decisions you take at this time. Please seek the advice with an independent expert. You will only get great benefits.

Based on these ideas, we present an outline of what seems more relevant. If you want to deepen, it is available a more detailed and updated explanation which can be downloaded free here (* please see the legal disclaimer at the end of the post *).

1. What is a franchise and what to consider in advance.

Before signing a franchise agreement, please note:

a). The franchising is a commercial form for the sale of products or services that involves the transfer of a successful formula. This includes knowledge, technical or marketing assistance and the use of a trademark (which is usually called “know-how”).

b). Before signing any contract, or before handing over any money, it is imperative that the franchisee receives a pre-contractual information on the essential elements of the franchise. This should include data from the franchisor, the franchise, the market concerned, the network of stores, etc. It may contain further economic information that shall be verified. The attached document has further details.

c). The franchisor must be registered in the Franchisors’ Registry. As a potential franchisee you can verify it here.

2. What requires a franchise

When signing a franchise agreement and while negotiating please take into account the following:

a). Apart from trade and economic issues, the potential franchisee should consider:

– That the pre-contractual information received is complete. Sometimes, we have observed that supplied information is standardized without any particularity and without meeting the legal requirements.

– The franchisee is registered in the Register of Franchisors. There you can see his experience, the number of shops run and any other relevant information.

– That the trademark is duly registered on behalf of the franchisor or, at least, that he has the faculty to transfer it to third parties (the franchisee). For Spanish and EU brands you can consult for free the availability of a specific trademark at the Spanish Patent and Trademark Office.

b). The franchise agreement is a complex contract which includes multiple obligations and rights of the parties. It is usually previously drafted by the franchisor and quite frequently it is not possible to introduce many changes. It is highly recommended therefore to be analysed in detail by an expert to know what obligations are agreed. It is not advisable to sign forms or pre-established drafts you can find in the Internet: they will not reflect your real interests because they have not taken into account your concrete situation.

c). In many cases, moreover, there will be a master franchise agreement or master franchisee: the person you will sign with. This is frequent in contracts with foreign brands and also requires special care because this will involve both the brand owner as the manager of exploiting the franchise in our country (Master Franchise).

3. What it is not a franchise agreement.

It may occur that you are considering signing a contract called “Franchise” but that does not meet the minimum conditions to be such an agreement. Note the following:

a). It is not a real franchise agreement (even if the agreement receives that name) the mere authorization to use a trademark. And this is also valid, even if the establishments with a certain similarity.

b). It is not a franchise agreement the mere exploitation of a business idea. The franchise agreement requires something more: a set of elements such as know-how, a business plan, a commercial or technical assistance, a common brand, etc.

c). Beware of those who want to exploit an idea that has not been previously experienced by themselves in a business. If they have not previously verified that idea, it is difficult to convey any “know-how”.

d). And finally, there is not a franchise agreement when there is only an authorisation by the manufacturer to sell their products. This is also true, even if this authorization is an exclusive one.

LEGAL DISCLAIMER. This scheme is presented to help you as a first approach. Please do not rely on it alone to make decisions because it is not a full legal advice for you. The use of attachment is free. It is reproduced with permission by Law Business Research Ltd. It was first published by Getting the Deal Through: Franchise 2016. If you want additional information visit www.gettingthedealthrough.com.