Non-compete clauses in franchising: how to agree them in Argentina

When franchising an existing business, it is reasonable to want to protect the system you have developed. However, preventing a franchisee from competing is not the same as banning them from all commercial activity. An effective clause identifies what needs protecting, distinguishes between the term of the agreement and the period after it ends, and sets clear limits. Within the franchising community, this precision helps protect shared know-how without unnecessarily restricting a new franchisee’s future career.

1. Start with the current legal framework

In Argentina, commercial franchising is specifically regulated by Articles 1512 to 1524 of the national Civil and Commercial Code. It should not be treated as a contract without its own regulatory framework, nor should draft legislation be relied on as though it were law in force.

Article 1522 provides that a clause preventing a franchisee from competing by selling their own or third-party products or services 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 a statutory limit, not a duration to apply automatically. Nor does it make any territory chosen by the parties reasonable. Drafting the clause requires an assessment of the activity, the business’s actual reach and the specific circumstances.

During the contractual relationship, Article 1518 includes a rule that, unless otherwise agreed, the franchisee must not compete with the franchisor. It is therefore advisable to distinguish expressly between obligations during the agreement and restrictions after it ends: their basis and scope should not be confused.

2. Identify the activity you want to restrict

Before requesting a clause, prepare a description of the commercial risk. Simply writing ‘protect the brand’ or ‘prevent competition’ is not enough. You need to explain what the franchisee could do that would genuinely compete with the franchised business.

For example, a specialist food business should consider whether it wants to restrict the operation of a directly competing concept or any food-related venture. The latter is much broader and calls for particularly careful review.

Prepare a summary covering these points:

• Core activity: the products or services that define the franchise system.
• Direct competition: offerings that meet an equivalent need for the same customers.
• Forms of involvement: running a business personally, managing another business or holding a stake in a competing company.
• Existing activities: businesses the prospective franchisee already operates that need to be assessed before entering into the agreement.

Avoid wording such as ‘any related activity’, as this merely postpones the dispute until the franchisee leaves. If exceptions are needed, identify them clearly and have them legally reviewed. A minority investment with no operational involvement, for example, warrants a different assessment from running a competing outlet.

3. Define the territory, duration and separate obligations

A post-contract restriction should allow three questions to be answered without creative interpretation: what activity does it cover, where does it apply and when does it end?

For the territory, gather evidence of the business’s catchment area: where customers come from, the delivery area and its actual commercial presence. This information supports a discussion about reasonable boundaries; it does not, on its own, justify a nationwide ban on competition simply because the business has an online shop.

For the duration, specify the event that starts the clock and comply with the statutory maximum. Avoid mechanisms intended to restart the period indefinitely. The final wording should be reviewed with specialist legal advice.

Also distinguish between obligations that are often conflated:

• Non-compete: restricts a specified competing activity.
• Confidentiality: protects confidential information and know-how shared with the franchisee.
• Ceasing use of the brand: prevents the franchisee from continuing to present themselves as an authorised member of the network once the relationship has ended.

These are not interchangeable. The expiry of a non-compete restriction does not authorise someone to use another party’s brand or disclose protected information. Conversely, protecting trade secrets does not automatically justify an unlimited restriction on someone’s ability to work.

4. Review the clause before offering the franchise

Do not leave this conversation until signing. Explain to the prospective franchisee what restrictions would apply while they operate the franchise and after they leave. Ask them to identify existing activities that could create conflicts, without allowing that review to become informal permission to compete.

Then check that the commercial proposal and the agreement do not contradict each other. If a parallel business activity was accepted during discussions, settle how it will be treated in writing before entering into the agreement.

Finally, test the clause against specific scenarios: closure of the outlet, an agreed exit, sale of the franchisee’s stake and the opening of a different business. If the parties cannot anticipate what would happen, the wording still needs greater precision.

Practical conclusion: take your legal adviser a summary of the restricted activity, the proposed territory and its justification, the duration and any proposed exceptions. A focused, understandable clause protects the relationship better than a blanket prohibition.