Franchising in Argentina: limits of liability

Before buying a franchise, you need to understand not only how much you will pay, but also which losses you could be liable for. A clause assigning ‘all risks’ to the franchisee warrants careful review. In franchising, the independence of each business sits alongside legal obligations on the franchisor that cannot simply be removed by a blanket contractual statement.

1. Distinguish commercial risk from legal liability

In Argentina, franchise agreements are specifically governed by Articles 1512 to 1524 of the national Civil and Commercial Code. A franchise is more than permission to use a brand: Article 1512 provides for a proven system, the transfer of technical know-how and ongoing technical or commercial support.

Article 1520 establishes the independence of the parties and states that the franchisor is not liable for the profitability of the franchised system. This matters when assessing a purchase: sales falling below expectations do not, in themselves, give you a right to recover your investment from the franchisor.

However, not guaranteeing profitability does not mean being exempt from all liability. You need to distinguish between:

• Commercial risk: insufficient demand, competition or a cost structure that prevents the business from breaking even.
• Breach of contract: a party failing to fulfil an obligation it has undertaken, with consequences that must be assessed on a case-by-case basis.
• System defects: design flaws that may trigger the specific liability provided for in the Code.

Ask your lawyer to identify which situations each exclusion is intended to cover. Broad wording can blur categories that are treated differently under the law.

2. Review exclusions for system defects

Article 1521 states that the franchisor is liable for design defects in the system that cause proven losses to the franchisee, provided those losses do not arise from the franchisee’s gross negligence or intentional misconduct.

This does not mean that every operational difficulty is a design defect. Assessing a claim requires identifying the defect, the loss and the causal link between them, as well as the circumstances in which the business was operating.

Pay particular attention to wording such as ‘the franchisee assumes all consequences arising from use of the system’ or ‘the franchisor shall not be liable under any circumstances’. Do not assume that an exclusion is valid simply because it appears in the agreement: its scope must be assessed against the applicable law.

Before signing, propose that the agreement clearly distinguish between mandatory instructions, recommendations and decisions left to you. That distinction can help establish responsibility if a problem arises.

It is also worth keeping dated versions of instructions received, reports of defects and the franchisor’s responses. Keeping records is no substitute for proving loss, but it avoids relying solely on conversations that may be difficult to substantiate.

3. Separate contractual arrangements from customer claims

The internal allocation of liability does not, by itself, determine the rights of third parties. A clause stating that ‘each party is liable only for its own acts’ will not necessarily prevent a customer from bringing a claim against other participants in the supply chain.

Article 40 of Consumer Protection Law No. 24,240 provides for joint and several liability where harm to a consumer results from a defect or risk associated with goods or the provision of a service. It covers various participants in the supply chain, including anyone whose brand appears on the goods or service, subject to the conditions and defences set out in that provision.

This does not make the franchisor automatically liable for every incident. It does, however, mean that business independence should not be interpreted too simplistically.

When reviewing the agreement, consider a concrete scenario: a customer reports harm linked to a product sold at your premises. Who receives the notification? Who retains the documents? Who participates in defending the claim? How is it subsequently decided who bears the cost? The answers should distinguish between handling the claim and the final allocation of liability.

4. Negotiate indemnities with clear limits

An indemnity clause is intended to protect one party against specified claims or costs by placing that burden on the other. Problems arise when it requires the franchisee to pay even for matters beyond their control.

Review these points before agreeing:

• Events covered: which acts or breaches trigger the obligation.
• Responsibility for the event: how the actions of the franchisor and third parties are treated.
• Costs included: whether the indemnity covers legal fees, settlements, court awards and other expenditure.
• Claims handling: who appoints the legal team and who can agree to a settlement.
• Notification and participation: how the other party is informed and what opportunity they have to become involved.

If the agreement contains liability caps or excludes certain types of loss, ask an Argentinian lawyer to assess their validity and any exceptions. Not all limitations are permissible, nor do they all have the same effect in relation to third parties.

Practical takeaway: before buying, draw up a table listing each risk, who can control it and who should bear it. If the agreement assigns costs to you without giving you information, control or a role in the process, that is a specific point to review before signing.