Franchising in Argentina: how to review non-compete restrictions

Buying a franchise can limit the other businesses you run, even after the agreement ends. To make an informed decision about entering the franchise sector, review the non-compete clause before investing. Simply asking whether there is one is not enough: you need to understand which activities it restricts, who it covers, how long it lasts and where it applies.

1. Distinguish restrictions during the agreement from those that apply afterwards

In Argentina, franchise agreements are specifically regulated by Articles 1512 to 1524 of the national Civil and Commercial Code. They should not be assessed as though they had no dedicated legal framework.

Article 1518 provides that, unless otherwise agreed, the franchisee may not carry on competing activities, either directly or through an intermediary, while the franchise agreement is in force. This means that silence in the agreement does not give you the freedom to open a competing business. If you already have another business activity, raise it before signing and document any agreed exception.

Post-contract restrictions are different. Article 1522(d) provides that a clause preventing the franchisee from selling products or services that compete with those of the franchisor after the agreement ends is valid for a maximum of one year and within a territory that is reasonable in the circumstances.

That year is not an automatic ban that always applies: the provision concerns an agreed clause. Nor does it make any geographical scope acceptable. The duration and geographical scope must be reviewed together.

2. Define what competing means in your case

Wording such as ‘not participating in similar businesses’ can lead to disputes unless its meaning is clearly defined. A café, a bakery with seating and a food shop might sell some of the same products without offering exactly the same proposition.

Ask for the contract review to address these questions:

• Activity: which products or services are considered competitive?
• Involvement: does the prohibition cover running, managing, advising or investing in another business?
• Channels: does it include online sales, home deliveries and activities without physical premises?
• People and entities: which obligations does the franchisee company take on, and which do you assume personally?
• Exceptions: are existing businesses or investments without management involvement permitted?

Do not assume that an agreement signed by a company automatically restricts all family members of its shareholders. Equally, do not assume that operating through someone else allows you to avoid an obligation you have undertaken: the legislation expressly covers activities carried on through an intermediary.

Prepare a list of your current activities and specific business plans. If the franchisor agrees that these may continue, make sure they are identified in the agreement or a signed schedule, rather than merely discussed during sales negotiations.

3. Review the territory, duration and financial consequences

For a post-contract obligation, ask for a clearly defined geographical area. This may require a map, named towns or an objective criterion that makes it clear where the restriction applies. A reference to ‘all locations where the brand operates’ warrants attention if the network could expand during the relationship.

Do not assume that your allocated trading area and the non-compete territory are the same without reading the wording. If they differ, ask why and seek advice on whether the scope is reasonable in your circumstances.

Also check which event starts the clock: expiry, termination or another way in which the agreement comes to an end. Ambiguous wording can make it harder to plan your next business activity.

Next, identify the consequences provided for an alleged breach: formal notices, penalties, damages claims and mechanisms for requiring the activity to stop. Do not assume that a written penalty will necessarily be enforceable in every circumstance; seek legal advice on its validity and how it would operate.

Include the opportunity cost in your financial assessment. If your experience and income depend on a highly specialised activity, a restriction could affect your ability to work for yourself in that field again.

4. Negotiate clear terms before committing

Give your lawyer the full draft agreement, its schedules and a description of your other businesses. Reviewing a clause in isolation may overlook definitions or sanctions elsewhere in the agreement.

You can propose a specific definition of competing activities, express exceptions for existing businesses and a clearly defined territory. Any permission to carry on competing activities while the agreement is in force should be clearly agreed and recorded.

Also distinguish non-compete obligations from confidentiality obligations: the end of a non-compete restriction does not mean you can disclose confidential information or freely use the brand.

Practical takeaway: before signing, you should be able to explain what you will not be allowed to do, where and until when. If you cannot answer those three questions with the agreement in front of you, ask for clarification and a professional review before proceeding.