Non-compete Clauses in Guatemalan Franchises: How to Agree the Terms

When franchising a business in Guatemala, it is reasonable to want to prevent someone from learning your system and using it to set up a competing business. However, an overly broad restriction can lead to disputes and make it harder to attract good franchisees. In franchising, a non-compete clause should address a specific risk, rather than become a blanket restriction on working or investing.

1. Identify what you need to protect

Before requesting a clause, describe the commercial advantage you will be sharing: a service methodology, a combination of processes, technical know-how or a way of organising operations that is not publicly known. The question is not simply ‘Could they compete with me?’ but ‘What could they gain from our relationship that would help them do so?’

Distinguish between three tools that serve different purposes:

• Confidentiality: limits the disclosure or use of protected information.
• Trade mark licence: sets out how the brand identity may be used and when that permission ends.
• Non-compete clause: seeks to restrict certain competing activities, subject to conditions that require legal review.

A non-compete clause does not replace the other two. Nor does it turn commonly held knowledge into the franchisor’s exclusive property.

Prepare a brief setting out the asset you want to protect, who will have access to it, how it could be misused and the harm that could result. If you cannot identify a specific risk, reconsider whether you need the restriction or whether narrower measures would suffice.

2. Understand Guatemala’s legal framework

Guatemala has no specific franchise law. A franchise agreement is treated as an atypical commercial contract: its obligations are established by agreement between the parties, within the limits of the legal system.

Relevant legislation includes the Commercial Code, Decree 2-70, and, on a supplementary basis, the Civil Code, Decree-Law 106. The Industrial Property Law, Decree 57-2000, governs matters including trade marks, their licensing and the protection of trade secrets. It does not provide comprehensive regulation of franchise agreements.

Freedom of contract does not mean that every restriction is automatically valid or enforceable. A restriction on economic activities requires an assessment of its scope and compatibility with applicable rules, including any relevant competition legislation. The franchisee’s signature alone does not settle that question.

Nor is there a specific statutory non-compete period for franchises that you can copy as a guarantee of validity. Avoid presenting a duration taken from a foreign template as a Guatemalan requirement. Ask a local lawyer to assess restrictions during the relationship separately from those that apply after termination, and to explain the risks involved in seeking to enforce them.

3. Define the restriction before drafting it

Give your legal adviser a specific commercial proposal, rather than a general instruction to ‘prevent all competition’. Define the following elements:

Restricted activity. Describe the products, services and characteristics of the competing business. Prohibiting all food-related activities, for example, goes much further than protecting a particular café concept.

Parties bound by the clause. Identify who is signing and what obligations they are accepting. Do not assume that the agreement directly binds family members, employees or associated companies that are not parties to it. If you consider an additional undertaking necessary, it will need its own review and consent.

Territory. Justify the geographical area by reference to your commercial presence and the risk you want to address. A nationwide restriction should not be chosen simply because the agreement is signed in Guatemala.

Duration. Distinguish between the contract term and the period after it ends. For the latter, explain what interest would remain after the relationship ends and why it needs protection for a limited time.

Exceptions. Review the prospective franchisee’s existing businesses, passive investments and activities that do not genuinely compete. Recording exceptions at the outset allows you to assess potential conflicts without surprises.

For example, if a prospective franchisee already runs a bakery, establish whether that activity is compatible with your café before proceeding. Do not wait until signing to discover that the proposed restriction covers their main source of income.

4. Design a procedure you can put into practice

Support the clause with a process for seeking clarification about activities whose status is unclear. Specify who receives enquiries, what information they need and how they communicate approval or a refusal with reasons. Keep a record of these decisions to ensure a consistent approach.

You should also plan how to respond to a potential breach: gather lawfully obtained evidence, request an explanation and consult your legal adviser before taking action. Do not confuse suspicion with a proven breach or assume that a contractual penalty will be recoverable in every circumstance.

Check that this obligation is consistent with the provisions on confidentiality, brand use, termination and dispute resolution. Explain its scope to the prospective franchisee early enough for them to review it and obtain independent advice.

Practical conclusion: before franchising, prepare a brief covering the risk, restricted activity, parties bound, territory, duration and exceptions. Use it to commission a proportionate, legally reviewed clause, rather than copying a blanket prohibition.