The proposed regulation of franchises, a legal problem in Colombia
By: Daniel Peña Valenzuela & Juan Simon Larrea – Peña Mancero Abogados Colombia
The Colombian government intends to issue a regulatory decree to regulate the franchise agreement in Colombia under the framework of an entrepreneurial-fostering law. This has given way to a new debate on the constitutionality of this type of regulation by means of a regulatory decree and the establishment of limits to the autonomy of the will by the executive branch.
Franchise agreements have existed for decades in Colombia. Even though they were not contemplated in our statutes or regulation, they were still broadly used mainly on the basis of international templates and the free will of the parties involved. The big international brands have their stores and commercial establishments open to the Colombian public in full competition with other international players and also with local merchants. Almost no activity or branch of commerce escapes from this business scheme.
Local entrepreneurs have found in franchising a collaborative relationship model that allows them to expand their businesses without having to assume the total investment to participate in regional markets, other cities and to grow their income. The franchising offer is not risk-free for those who have achieved brand recognition, as well as the development of know-how, and in general, have managed to package a successful business model. Nor is the franchise market risk-free for those who take on the business of another with independence, but also with close ties to replicate the success. Not infrequently the expectation and the reality of the business, both for the franchisor and the franchisee, do not materialize.
In this business scenario and without the existence of a specific and proper regulation of the franchise agreement in the Code of Commerce (dating back to 1971) or in subsequent amending laws, Law 2069 of December 31, 2020 has intended to establish a regulatory framework fostering entrepreneurship, growth, consolidation and sustainability of companies.
Within this framework, the government is empowered to present, via regulatory decree, the technical conditions that define the franchise, the obligations and the liability regime of the franchisor and the franchisee. In other words, it is intended that the Colombian government regulate a category of commercial contract that has no regulation of its own in the Colombian legal system.
The first major debate focuses on the fact that this regulatory power is unconstitutional. For the government, limiting the contractual exercise of the autonomy of the will by means of a regulatory decree and not by means of a bill, as it should be in accordance with the constitutional provisions that guarantee the freedom of enterprise. Article 333 of the Constitution states that economic activity and private initiative are free. Its requirements, as in this case to limit its exercise and to regulate the content and fundamental characteristics of the franchise agreement, are reserved by law. Article 151 of the Constitution, in paragraphs 21 and 24, stipulates that only the Colombian Congress may issue laws on economic intervention. Even more so when it expressly refers to the intellectual property regime, patents and trademarks or other forms of intellectual property that are inherent to the franchise, since a structural element of this contract is the license of the trademark, trade name and commercial name. Therefore, it is the Colombian State, through the legislature, and not the executive branch, who has the exclusive power or competence to delimit the scope of economic and/or contractual freedom.
As of the date of writing this article, the Colombian Constitutional Court has not passed any judgment with respect to the aforementioned defects of Law 2069. Rather, recently, the draft regulatory decree has been published by the Ministry of Commerce, Industry and Tourism. Through this draft several objectives and purposes are intended:
(a) To define the franchise contract.
b) To establish the characteristics, elements and requirements of the franchise contract.
It is clear that the requirements are restrictive and contain broad limitations in practice for franchises that had been operating with full exercise of contractual autonomy, in the exercise of commercial custom, under the postulate of good faith between the contracting parties. To mention one of the requirements of the pre-contractual phase, the Franchise Offering Circular is one of the different documents that will be requested in order to carry out the business. It requires that, at least twenty working days prior to the date of execution of the franchise contract or the date of initial payment, the franchisor must deliver in writing a set of information that must be clear and truthful.
It is important for the Government to consider that this regulation may be an obstacle to foreign investment, as well as establish unbalanced conditions compared to other similar contracts such as trademark licensing, distribution and commercial agency. The additional requirements may affect the legal traffic of goods and services vital for the economic reactivation of the country and excessive burdens on individuals at the time they plan to plant a franchise. For now, the decree is subject to comments and we will see if the government weighs correctly the different interests at stake: (a) the protection of franchisees, (b) legal certainty, (c) respect for private autonomy in business between individuals, and (d) the stimulation of foreign investment and economic reactivation.
Let´s wait and see.