Franchising in Colombia: how to assess fines and penalties

A fine for submitting a report late may seem minor compared with the initial investment. However, accumulated penalties can jeopardise a franchise’s operations. Before joining a franchise network in Colombia, check which actions trigger charges, how they are calculated and what opportunities you will have to remedy or challenge an alleged breach.

1. Understand what the contract can require

In Colombia, franchise agreements are classed as atypical contracts: there is no specific legal framework governing their terms comprehensively. They are governed by the terms agreed between the parties, the general provisions of the Commercial Code and, where applicable, those of the Civil Code. Freedom of contract does not allow parties to disregard mandatory legal provisions or the duty of good faith.

Nor is there a general mandatory pre-contractual disclosure regime specifically for franchises. The draft decree published by the Ministry of Commerce, Industry and Tourism in 2021, which proposed an offering circular and a period of twenty working days, should not be confused with legislation currently in force.

Article 867 of the Commercial Code is particularly relevant to commercial penalties. It governs penalty clauses and sets out limits and circumstances in which courts may reduce them. This does not mean that any substantial charge is automatically set aside: applying the article requires an assessment of the obligation, the wording of the contract and the circumstances of the breach.

A contractual penalty is also distinct from an administrative sanction. The franchisor is not acting as a public authority when seeking payment. Ask a legal adviser to distinguish between agreed fines, late-payment interest, damages and reimbursement of expenses: although all involve money, they do not necessarily serve the same purpose or follow the same rules.

2. Map out the conduct that triggers charges

Do not review only the clause headed ‘penalties’. Look for references to charges, deductions, set-offs and inspection costs elsewhere in the contract and its schedules. Then prepare a table with these columns:

• Conduct: the action or omission that triggers the charge.
• Responsibility: who was required to comply and what compliance depended on.
• Evidence: how the breach is established.
• Calculation: the fixed amount, percentage or formula that applies.
• Frequency: whether the charge is one-off, daily or per incident.
• Remedy: the deadline and conditions for putting matters right.

Wording such as ‘failure to meet brand standards’ is too broad to assess the risk on its own. Ask for the specific standard, the document containing it and the applicable version to be identified. It is also worth clarifying whether several findings from a single inspection count as one incident or as separate breaches.

Distinguish between different situations. A delay in providing documents that can be put right does not necessarily warrant the same contractual treatment as conduct that compromises customer safety. Negotiating separate categories helps protect both the franchisee and the network’s shared reputation.

3. Agree on notice, evidence and an opportunity to remedy breaches

Propose a written procedure to be followed before a penalty becomes payable. At a minimum, it should specify the method of notification, a description of what happened, the obligation breached, the evidence and the calculation of the amount claimed.

Include a reasonable period for responding and, where the nature of the breach allows, putting matters right. Do not assume this opportunity will be available: it should be expressly agreed, along with the circumstances in which it would not apply because of the seriousness or urgency of the issue.

For example, if an inventory report is missing, the contract could provide for notice and an opportunity to submit it before a charge is imposed. If the problem stems from a failure of the platform managed by the franchisor, there should be a way to document that failure and assess its effect on liability.

Also clarify who verifies that the breach has been remedied and when a daily penalty stops accruing. Without that endpoint, resolving the problem may not settle the financial dispute. Keep proof of submission, responses and evidence of compliance.

4. Calculate your exposure and check for cumulative charges

Model scenarios using the formulas in the draft agreement, rather than assuming penalties will never be applied. Calculate what would happen in the event of a short delay, a prolonged delay and several simultaneous breaches. Compare the results with the cash available to run the business.

Pay particular attention to whether a single incident can trigger a penalty, interest, damages and additional expenses. Whether these can be charged together depends on the applicable rules and the agreed terms; do not accept or rule out their validity without legal advice.

Negotiate caps where appropriate and clarify whether the franchisor can deduct disputed amounts from sums it owes you. Also review the remedies available to you if the other party fails to meet its obligations: contractual protection should not be assessed in only one direction.

Practical conclusion: do not sign until you can explain, for each penalty, what triggers it, how much it could cost and how you can remedy or challenge the breach. A clear table and a legal review before signing can turn an intimidating clause into an identifiable risk.