Franchising in Colombia: reviewing fines and penalty clauses

A franchise may look viable until charges arise for breaches whose financial impact the buyer had underestimated. Before joining a franchise network in Colombia, review which actions trigger penalties, how they are calculated and what opportunities you have to remedy a breach. Asking how much it costs to open is not enough: you also need to understand the financial exposure created by the agreement.

1. Understand what you are agreeing to and which law applies

In Colombia, a franchise agreement is an ‘atypical’ contract: it has no specific, comprehensive contractual regulatory framework. It is governed by the agreed terms, within legal limits, and by the general rules on commercial contracts in the Colombian Commercial Code, alongside the relevant civil law rules. This is how Colombia’s Ministry of Justice explains the position in its guidance on franchise agreements.

The franchisor’s so-called ‘fines’ are therefore not administrative sanctions imposed by a public authority. They are contractual mechanisms whose legal nature and enforceability must be assessed by their substance, not simply by the label used.

A penalty clause may stipulate a payment or other performance in the event of a breach or delay. Article 867 of the Commercial Code governs commercial penalty clauses and sets out limits and circumstances in which a court may reduce a penalty. For example, where the principal obligation has a monetary value that is fixed or can be determined, the penalty cannot exceed that value. Applying this rule to a particular franchise obligation requires legal analysis; it does not mean that any substantial penalty automatically falls away.

Nor should a draft regulation be confused with a current legal obligation. The text on franchising published in 2021 by Colombia’s Ministry of Trade, Industry and Tourism (MinCIT) was presented as a draft: its references to fines and remedies do not, in themselves, establish binding rules.

2. List the conduct that can trigger penalties

Search the entire agreement for terms such as ‘penalty’, ‘fine’, ‘penalty clause’, ‘compensation’ or ‘breach charge’. Also review documents incorporated by reference: a financial obligation may be tucked away in an operating manual.

Organise your findings in a table with these columns:

• Conduct: the action or omission that triggers the charge.
• Evidence: how the breach is established.
• Amount: the fixed sum, percentage or formula that applies.
• Frequency: whether the charge is one-off, daily or per incident.
• Remedy: the deadline and action required to put matters right.
• Cumulative charges: any other charges that could be claimed for the same incident.

Be wary of wording such as ‘any failure to comply with standards’. A delay in submitting paperwork is not as serious as a practice that puts customer safety at risk. Propose objective categories with different consequences.

If the franchisor can change the standards, ask whether it also intends to change the penalties. Negotiate a requirement for written agreement to changes affecting financial obligations, with no retrospective application. Protecting the brand does not justify leaving the franchisee’s entire financial exposure undefined.

3. Negotiate notice, evidence and an opportunity to remedy breaches

A balanced clause should set out the procedure to be followed before payment is demanded. Propose that any notice identify the obligation allegedly breached, describe the facts, attach evidence and explain how the amount claimed has been calculated.

Include a period for submitting a response and, where the breach can be remedied, a reasonable opportunity to put it right. These arrangements need to be agreed: do not assume that a special statutory remedy period applies to all franchises.

Distinguish between breaches that can be remedied and situations requiring immediate action. An incomplete report can be corrected; a health risk may require urgent measures. Even so, the agreement should not treat taking preventive action as automatically admitting that a debt is owed.

It is also worth defining what counts as a repeat breach: must it involve the same conduct? Over what period? Does an allegation that was challenged and dismissed count? Without clear answers, a minor breach could end up being treated as a repeated one.

Finally, specify how remedial action will be documented and who will confirm that the matter is closed. Keep notices, responses and supporting records to demonstrate what happened and when.

4. Calculate the cumulative impact before signing

Work through a specific breach scenario. For example, submitting a report late might trigger a daily penalty, a review fee and an additional claim. The aim is to check whether the agreement allows consequences to accumulate and what limits apply.

Ask your lawyer to review, in particular:

• Whether a penalty can be claimed alongside performance of the obligation and damages.
• Interest on monetary obligations and the applicable legal limits.
• Caps on recurring charges and how long they can continue.
• Any automatic debit arrangements or mechanisms for setting off disputed balances.

Do not assume that a court will correct an unbalanced clause at no cost to you. It is better to negotiate clear, proportionate terms before investing.

Practical conclusion: do not sign until you can explain, for every penalty, what triggers it, how much it could cost and how you can remedy or dispute the alleged breach. That clarity protects your investment and supports responsible relationships within the franchise network.