Franchising in Colombia: reviewing the non-compete clause

Buying a franchise can limit your freedom to participate in other businesses, even if they do not use the same brand. Before committing your investment, it is therefore worth reviewing the non-compete clause: which activities it restricts, who is bound by it and for how long. Protecting shared know-how matters in franchising, but that protection should be distinguished from an excessively broad ban on pursuing other business ventures.

1. Understand the obligation you are accepting

A non-compete clause seeks to prevent the franchisee from carrying out certain competing activities. It is not the same as a confidentiality obligation: confidentiality protects information that is not public, whereas a non-compete clause may prevent a business activity even if no secrets are disclosed.

Nor is it the same as territorial exclusivity. Territorial exclusivity may reserve an operating area within the network; a non-compete clause restricts the franchisee’s own business activities or holdings.

Look for restrictions throughout the contract, not just under that heading. They may appear among the general obligations, the buyer’s declarations or the schedules. Pay particular attention to wording such as:

• ‘Participating directly or indirectly in similar businesses’.
• ‘Holding any interest in competing companies’.
• ‘Carrying out activities related to the franchise’s business’.

These phrases need to be clearly defined. A passive shareholding in a company does not involve the same degree of participation as running a competing outlet. Ask for the contract to distinguish between the two.

2. Understand the clause within Colombia’s legal framework

In Colombia, a franchise agreement is an atypical contract: there is no comprehensive, franchise-specific legislation governing all its terms. It is governed by the parties’ agreement, within legal limits, and by the general rules of the Commercial Code and Civil Code. Good faith also matters during negotiations and performance of the contract.

Restrictions on competition must also be assessed against Colombia’s competition law framework, which includes Law 155 of 1959, Decree 2153 of 1992 and Law 1340 of 2009. It is not enough to claim that a restriction is valid simply because it appears in a signed contract, or that every non-compete clause is prohibited: its scope and context require legal assessment.

Colombia also has no specific general obligation to provide a franchise disclosure document within a standard period before signing. The document published by the Ministry of Commerce, Industry and Tourism (MinCIT) in 2021, which proposed such a document and a period of twenty working days, was a draft regulatory proposal and should not, in itself, be treated as law in force.

Law 1429 of 2010, concerning business formalisation and job creation, is not a specific law governing franchise agreements. Do not assume that automatic legal protection exists to replace a review of the restrictions you are accepting.

3. Define the activities, people, territory and duration covered

Before signing, turn each prohibition into a specific question and ask for a clear answer in the contract.

Restricted activities. Does the clause prohibit selling the same products, operating an equivalent concept or participating in any food, retail or services business? The more general the description, the harder it will be to know what you can do. Propose identifying the activities that genuinely compete with the franchise model you are buying into.

People bound by the clause. If you are buying through a company, check whether its shareholders or directors must also give personal undertakings. A reference to relatives or associated companies does not automatically make them parties bound by the agreement, but it could make you responsible for conduct outside your control. Ask for the scope to be clarified.

Territory. Check whether the restriction covers a specific area, the whole of Colombia or online activities. A geographical reference that does not address online sales may lead to conflicting interpretations.

Duration. Distinguish between obligations that apply during the contract and those intended to continue afterwards. There is no universal non-compete period applicable to all Colombian franchises. Seek legal advice on the justification for, and limits of, the proposed duration.

4. Document your current activities and negotiate exceptions

Prepare an inventory of your businesses, holdings and projects before accepting the restriction. You do not need to present every activity as a conflict; you need to identify which ones could fall within the wording.

If you already run a related business, request an express exception in a signed schedule to the agreement. Describe the permitted activity and its limits; verbal approval is not enough to prevent later disagreements.

It is also worth agreeing a procedure for seeking approval for future investments: who decides, what information they need and how they communicate their authorisation. Do not treat silence as approval unless there is a clear contractual rule that has been legally reviewed.

Practical takeaway: do not sign up to a prohibition that you cannot explain using concrete examples. Give your legal adviser details of your current activities and insist that any negotiated exceptions are incorporated into the contract.