In the area of commercial distribution, however, only agency agreements are specifically regulated (1). Neither distribution nor franchise (franquia) agreements have specific legislation in Portugal largely because whilst this market continues to grow steadily, franchising as a business concept has not yet reached full maturity. However, certain legislative provisions are especially relevant to franchise agreements and an overview of these is considered here.
In the absence of statutory provisions, the parties to franchise agreements are free to determine their own governing rules and clauses as long as these are consistent with generally applicable contractual principles. In particular, the pre contractual liability principles requiring the parties to act in good faith during their negotiations need to be considered. These principles require the parties to provide all and any necessary information prior to execution of the franchise agreement failing which statutory civil liability may arise under Portuguese law.
Various laws depending about the nature of the franchise business govern the material content of a franchise agreement. Trademark law, employment law, consumer protection laws, company law, amongst others, must always be taken into account when drafting the agreement. In addition, certain mandatory rules and basic elements of Portuguese law should be borne in mind, in particular:
- Unreasonable clauses and contracts can be modified or entirely rejected by the Portuguese Courts. For example, a court may adjust a franchise agreement, which has been concluded on unreasonable terms. So while the general freedom of contract principles referred to above apply highly restrictive conditions placed on a franchisee are at risk subsequently of being modified to render them more reasonable. Since it is difficult to predict the manner in which a court will amend an agreement, it is generally in the interests of the franchisor to ensure that the franchise agreement is drafted in a manner which is reasonable from the point of view of both of the parties.
- The Law of General Contractual Clauses (‘LGCC’) applies in Portugal to all contracts in respect of which any part is deemed to be or include general conditions of contract, in other words, these are not subject to negotiation. A Franchisor presenting an agreement containing general conditions which are not expressly negotiated may be caught by these provisions. This legislation specifically provides that irrespective of the governing law chosen by the parties, the LGCC provisions shall apply where the contract is more closely connected with Portugal than any other country. Given that the franchise, assets and the establishment are located in Portugal these provisions would apply. The provisions set out a number of clauses and elements which are not permitted and others which must be included or expressed in a certain way, for example, the agreement may not exclude the right to damages which is permitted by law or include penalty provisions for defaults which are disproportionate to the damage or loss suffered. As indicated above at point 1 these types of clauses may be deemed to be unreasonable and are liable to be modified or rejected altogether by the Portuguese Courts.
- Whilst the parties are generally free to choose foreign governing law clauses it is important to ensure that the franchise agreement is executed in accordance with local practice. The Portuguese courts have demonstrated a tendency to reject foreign governing law clauses where they are not satisfied that the parties expressly negotiated and agreed this and where the take the view the agreement was not properly executed or signed.
- Non-competition clauses should not be too restrictive or unreasonably limit the freedom of action of a party thereto.
- Franchising activities are also subject to EU competition rules which are directly applicable in Portugal on the regulation of vertical agreements and concerted practices. Price fixing is prohibited to ensure transparency and to prevent damaging restrictions on competition. Vertical and horizontal price fixing are not permitted which means that a franchisor may not stipulate the prices to be charged in the chain, nor may entrepreneurs in the chain agree among themselves on applicable prices.
Many countries have specific legislative provisions governing the disclosure obligations of franchisors. While there are no such special provisions in Portugal, general contractual principles prohibit the use of false and misleading expressions concerning one’s own business operations or those of another party which are of a character tending to affect the supply of, or demand for a commodity. These principles may also be regarded as applying to franchise agreement negotiations, i.e. the franchisor must provide an accurate description of its operations. If a franchisor infringes this requirement and gives a prospective franchisee an untrue or too favourable impression, then this may constitute grounds for rescinding or terminating the entire agreement.
As indicated above, franchising operations in Portugal are also naturally bound by the legislation of the European Union governing franchising. In particular, Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practises (Vertical Distribution Agreements Block Exemption Regulation), which also governs franchising agreements, which fall under EU competition rules, is the most important of the EU legislation. There are no specific national rules in Portugal concerning whether an agreement falls under EU competition rules. Neither have there been any specific Portuguese interpretations about applying the Vertical Distribution Agreements Block Exemption Regulation, thus general EU principles apply in Portugal.
As with many other EU member states the Portuguese Franchising Association (PFA) has issued a Code of Ethics, in line with the European Franchise Federation’s Code, which the members of the Association are required to comply when concluding agreements. This code of ethics is a useful guide when drafting agreements for all franchising chains, even when the chain does not intend to join the Association. By complying with the Code, a chain has at least some comfort that its agreement and operating practices are of a high ethical standard and this is also helpful before the Portuguese courts in the event of a dispute.
Finally, it is worth mentioning termination. In the event of a breach of contract, termination is permitted without a right to an indemnity beyond general contractual principles of damages for losses and what has been contractually agreed between the parties. Some legal commentators have, however, argued that the rules (2) on termination of agency agreements should apply to franchise agreements arguing that the goodwill indemnity payment which is due to the agent on termination of the former is also due under the same conditions (where new clients/business has been generated) on termination of a franchise agreement. There is some case law to support this view in other EU countries; however, the Portuguese courts have generally rejected this. The view taken by the courts has been that the franchisee is generally participating in an existing organisation thereby benefiting from an established client base or following, its name, brand, know-how, methods and marketing and should not be entitled to the goodwill payment on termination. Decisions on this point are not always consistent and further clarity by way of specific legislation would be welcome.
It is clear that from the steady growth of the franchising industry In Portugal that specific legislation in this area is needed not only in relation to disclosure obligations but also to clarify the specific nature and particularities of this type of agreement. Certain elements of a franchising agreement may cause it to be identified with other types of legal agreements which has resulted in the courts drawing parallels between franchise agreements and other commercial arrangements, such as commercial agency, distribution, licenses and transfer of technology, as well as other, less common methods of expanding internationally (e.g., joint ventures and area representation). These types of comparisons, in the absence of a clear legal structure, can be unhelpful at times as they cause discrepancies and uncertainties. Legislation would assist in providing foreign franchisors wishing to enter the market with increased legal certainty and more uniform practices and procedures.
Claudia Santos Cruz, IDI Franchising Country Expert for Portugal.
(1) Decree law no. 178/86, dated 3 July 1986.
(2) Article 33 Decree-Law 187/86 of 3 July 19986, as amended by Decree-Law 118/93 of 13 April 1993.