Franchising in the Philippines: Review the Personal Guarantee

The franchise you buy may be held by a company, but you could still be personally liable if you sign as a guarantor. Beyond your initial investment, it is important to understand which obligations could put your own savings and assets at risk. In the Philippine franchise market, clear limits on liability are an essential part of buying carefully—not just a formality at the end of a contract.

1. Establish the capacity in which you are signing

Signing as an authorised representative of a company is different from signing as a personal guarantor. In the first case, you act on behalf of the company. In the second, you may be personally undertaking to pay if the principal debtor fails to meet its obligations.

If you operate as a sole trader, the business has no legal personality separate from yours. A company, by contrast, generally has liabilities separate from those of its owners, but personal liability can arise through a separate guarantee or on other legal grounds.

Read the whole agreement, not just the signature page. Check whether you are described as a guarantor, co-debtor or someone with joint and several liability. With joint and several liability, you may be required to pay the entire obligation covered by the arrangement, not merely the share you assume corresponds to your ownership stake.

Request before signing:

• All attachments and separate guarantee agreements.
• Loan documents and details of any security required.
• Clarification of whether each signatory is signing only as a representative or accepting personal liability.
• A copy of the document authorising you to sign on behalf of the company.

If your spouse is also asked to sign, first clarify whether their signature simply records consent or also creates an obligation. Do not assume the two have the same effect.

2. Understand the law on guarantees and franchising

The Philippines has no single comprehensive franchise law. The Civil Code is important for contracts and guarantees, while Republic Act No. 8293, or the Intellectual Property Code, governs licensing and technology transfer arrangements within its scope.

For franchise agreements where the franchisee is a micro, small or medium-sized enterprise, Executive Order No. 169, series of 2022, sets out minimum terms and conditions. It also provides for registration with the Department of Trade and Industry (DTI), which is the franchisor’s responsibility. It does not automatically remove personal guarantees or cap the amount of liability you can assume.

Under Article 2047 of the Civil Code, a guarantor undertakes to fulfil an obligation if the principal debtor fails to do so. Where the guarantor is jointly and severally bound, the rules governing that more direct form of liability apply.

Under an ordinary guarantee, a guarantor may have the right to require the creditor to pursue the principal debtor’s assets before seeking payment from the guarantor. However, there are exceptions, including waiving this protection or accepting joint and several liability. An assurance that you are signing ‘only a guarantee’ is therefore not enough.

There is also no general requirement to provide a standard disclosure document before selling a franchise. Take the initiative to request the full documentation and have your own lawyer review its actual effect.

3. Identify your maximum potential liability

A guarantee can extend well beyond the initial franchise fee. Depending on its wording, it may cover ongoing royalties, debts for products supplied, interest, penalties, damages and debt recovery costs.

Prepare a table with four columns: who can demand payment, which obligations are covered, the maximum amount, and when the guarantee ends. Keep the guarantee given to the franchisor separate from any guarantee given to a bank; both may apply at the same time.

Ask the following questions:

• Does it include debts that have not yet arisen?
• Does it cover future outlets or new agreements?
• Can your liability increase without your further consent?
• Does it include all legal fees and debt recovery costs?
• Is there a specific date or condition for release from the guarantee?

For example, you may intend to cover only one outlet, while the wording extends to all the company’s current and future obligations. That is a mismatch to resolve before signing, not after debts have built up.

4. Propose clear limits

Not every franchisor or lender will agree to remove a guarantee. However, you can ask for it to be limited to a specified amount, outlet, obligation and period.

Also propose that your written consent be required before the guarantee can be extended. Ask for a clear procedure for notifying you of missed payments, an opportunity to remedy a default, and a document confirming your release once the agreed conditions have been met.

Do not rely on verbal promises that no one will pursue you for payment. The guarantee itself—not just the main franchise agreement—must reflect what has been agreed.

Practical takeaway: Before buying, ask your own lawyer to establish who can demand payment from you, how much you could owe, and when your liability ends. If any of these three points is unclear, do not sign yet.