Contractual penalties in Mexican franchises: what to check

A franchise may look affordable until you check what breaching an obligation could cost. Contractual penalties are agreed sums payable for specified breaches; they are not fines imposed by a public authority. Before entering the Mexican franchise market, identify what triggers them, how they are calculated and what opportunities you will have to put a mistake right before a charge arises.

1. Distinguish penalties from other payments

Not all additional charges are the same. A contract may provide for late-payment interest, reimbursement of expenses, damages and contractual penalties. Even if they appear together in a table, their conditions and legal consequences may differ.

Do not stop at a clause headed ‘penalties’. Look for terms such as ‘breach charge’, ‘compensation’, ‘sanction’, ‘recovery costs’ or ‘automatic deduction’ too. Check annexes and documents incorporated into the contract: they may contain obligations whose breach triggers a payment.

Prepare a summary for each charge, covering:

• The specific conduct that triggers it.
• The person or entity entitled to demand payment.
• The fixed amount or calculation formula.
• The point at which it becomes payable or starts to accrue.
• The documents required to substantiate the breach.
• Any opportunity to remedy the breach before payment is due.

For example, submitting a report late is not the same as failing to pay royalties. If both carry the same financial consequences, ask for an explanation and assess whether the risk is acceptable.

2. Understand the legal framework without assuming every clause is valid

Mexico has specific franchise legislation. Article 245 of the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial, or LFPPI) requires information about the state of the franchisor’s business to be provided at least 30 days before the contract is entered into. This disclosure is usually documented in the Circular de Oferta de Franquicia, known as the COF, or franchise disclosure document.

Article 246 requires the contract to be in writing and to include, among other things, policies, procedures and time limits relating to reimbursements, financing and other payments, as well as grounds for termination. However, it does not set a standard rate or a single maximum percentage for contractual penalties across all franchises.

Their validity and enforceability also depend on the applicable contractual rules in the Commercial Code and, where relevant, the Federal Civil Code as supplementary law. These rules may affect limits on penalties, reductions where obligations have been partly performed and the ability to pursue other remedies at the same time.

For that reason, having a penalty in writing does not mean it can always be collected in full alongside every other charge or remedy. Ask a lawyer to examine the obligation secured by the penalty, the circumstances constituting a breach and the combined consequences. Equally, do not assume you can ignore the clause: challenging it later may take time and money.

3. Model the full cost of a breach

Assess the penalty as a financial contingency, rather than an isolated figure. The biggest issue may be repeated penalties or a combination of charges.

Ask the franchisor to explain in writing how the clause would work in specific situations: an overdue payment, late submission of information or a departure from operating requirements that takes several days to correct. These are scenarios to analyse, not an assumption that every brand charges for such incidents.

For each scenario, ask:

• Is the penalty charged once, daily or per event?
• Is there an overall cap?
• Is it calculated using a fixed sum, sales or some other basis?
• Would interest, debt collection costs or other charges be added?
• Could the same incident also trigger termination of the contract?

A sales-based formula should specify the relevant period and how sales are defined. A penalty charged ‘per event’ should explain what counts as an event; otherwise, a single incident could be interpreted in different ways.

Do not base your decision solely on the theoretical worst case. Also check how much control you would have over the conduct attracting the penalty and what evidence would allow you to demonstrate compliance.

4. Negotiate a clear procedure before signing

Negotiate not only the amount but also the procedure for applying it. Propose written notice identifying the obligation breached, describing the facts and including the supporting evidence.

Where the nature of the breach allows, request a reasonable period to remedy it. This period must be expressly agreed: do not assume it will be available for every breach. Distinguish between mistakes that can be corrected and breaches that may require immediate action.

It is also worth agreeing how you can submit explanations, who will review the evidence and when the incident will be considered resolved. Ask whether there are contractual consequences if the franchisor breaches its obligations; these need not be identical, but there should still be clear remedies.

Practical takeaway: before buying, prepare a summary of each penalty covering its trigger, calculation, cap and procedure. If you cannot explain how much you would pay and how you could avoid the charge, that clause needs clarification before you sign.