Breaches of franchise agreements: how to prepare your contract

Before franchising a business, decide what will happen if either party fails to meet an obligation. A late payment, conflicting instructions or a failure to provide support should not be handled through improvised responses. A clear contractual procedure helps protect the brand, address genuine problems and maintain relationships across the franchise network without turning every disagreement into a threat to end the relationship.

1. Start with the legal framework, not a generic clause

In Argentina, franchise agreements are governed by Articles 1512 to 1524 of the Argentine Civil and Commercial Code, enacted by Law 26,994 and in force since 1 August 2015. They should not be treated as contracts without specific regulation.

The Code sets out obligations for both parties. Among other duties, the franchisor must transfer technical know-how, supply the operations manual and provide technical assistance. The franchisee must run the business in accordance with the system and provide information reasonably requested about its operation.

The procedure for handling breaches must therefore cover more than the franchisee’s mistakes: it must also allow the franchisee to raise failures by the franchisor to meet its own obligations.

General rules on contracts, good faith and termination for breach also apply. Not every departure from the agreement justifies ending the relationship immediately. The seriousness of the breach, the obligation affected, the communications exchanged and the terms validly agreed must be assessed together.

Before offering the franchise, have the entire procedure reviewed by a lawyer. Wording such as “any breach will result in automatic termination” is no substitute for that assessment and may lead to disputes over its scope or validity.

2. Define obligations that can be verified

To raise a breach clearly, you first need to identify what was promised. Review the draft agreement and its schedules for vague wording such as “appropriate assistance” or “immediate response”, where no responsible person or specific conditions are stated.

Prepare an internal table with the following fields:

• Obligation: what each party must do.
• Reference document: where the obligation is set out.
• Timing: the deadline, frequency or event that triggers the obligation.
• Evidence: the supporting document, record or communication that allows compliance to be verified.
• Person responsible: who receives and handles a concern.

For example, if support is promised to resolve faults in the sales system, specify the reporting channel, hours of coverage and how incidents are prioritised. Distinguish between a commitment to respond and a commitment to resolve the issue: reliance on third parties may make it impossible to guarantee both within the same timeframe.

For management purposes, you can distinguish between minor departures, repeated breaches and critical situations. This internal classification does not replace a legal assessment, nor does it automatically make particular conduct sufficient grounds for termination.

3. Design a notification and remedial process

The agreement should specify how a problem is reported, who may report it and how receipt is evidenced. Do not assume that an informal conversation amounts to a valid formal notice under the contract.

A practical process can be organised into four steps:

1. Record the facts. Describe what happened, when it was identified and which obligation may be affected.
2. Hear the explanation. Check whether the issue stems from incorrect information, conflicting instructions or a cause beyond the control of the party concerned.
3. Request remedial action. State what needs to be done and the applicable deadline under the contract and relevant law.
4. Check the outcome. Record the resolution or any outstanding issues.

Do not set a single deadline for every situation. An administrative discrepancy and a safety issue require different approaches. The deadlines and requirements for a formal notice that may lead to termination should be legally reviewed rather than copied from another contract.

Where people or property are at risk, define preventive measures consistent with the law and the powers granted under the contract. Separate urgent action to contain the problem from any later decision about responsibility.

4. Agree how to resolve disagreements without improvising

Include a review stage involving representatives with decision-making authority. Its purpose is to organise the relevant records, identify solutions and document agreements, not to delay compliance indefinitely.

With local legal advice, also define the mechanism for disputes that remain unresolved: the court with jurisdiction, any mediation and, where legally permissible and appropriate, arbitration. Procedural requirements may vary by jurisdiction.

If a remedial action plan is agreed, record its tasks, responsible parties and deadlines. Avoid allowing informal exchanges to change important obligations without clear approval. If termination is ultimately considered, review its legal requirements and any outstanding obligations separately.

Putting it into practice: before taking on franchisees, simulate a breach by each party. If the contract does not make clear who gives notice, what must be put right and how the resolution is evidenced, the procedure still needs work.