Buying a franchise: assessing contractual penalties in Portugal

A contractual penalty can turn an operational lapse into a significant cost for your business. Before joining a franchise network, understanding the initial investment is not enough: you need to know how much you could pay if you breach an obligation, how that breach is established and what opportunity you will have to put it right. This assessment should take place before signing, while there is still room to negotiate.

1. Understand the legal framework for penalties

Portugal has no specific statutory framework for franchise agreements. The general rules of the Portuguese Civil Code apply, including freedom of contract under Article 405 and duties of good faith during negotiations and performance under Articles 227 and 762.

So-called penalty clauses are governed by Articles 810 to 812 of the Civil Code. They allow the parties to agree in advance the amount of compensation payable in the event of a breach. However, the label used in the contract is not conclusive: an ‘administration fee’ linked to a breach may need to be assessed to establish its true nature.

Article 812 allows a court to reduce a manifestly excessive contractual penalty on equitable grounds, including where an obligation has been partly performed. This does not mean that a franchisee can unilaterally reduce the amount charged or stop complying with the obligation.

Where terms have been drafted in advance and the prospective franchisee has had no opportunity to influence them, Decree-Law No. 446/85 of 25 October, governing standard contract terms, may also apply. This legislation requires terms to be adequately communicated and explained, and places limits on penalty clauses that are disproportionate to the loss to be compensated, taking account of the standard contractual context.

Portugal does not require a specific pre-contractual disclosure document for franchising. This does not remove the general duties to provide information and act in good faith, nor does it allow significant penalties to be hidden in annexes that have not been made available.

2. List all amounts that could become payable

Ask for the complete draft agreement, its annexes and any documents referred to in the contract. Look for terms such as ‘penalty clause’, ‘fine’, ‘compensation’, ‘breach’, ‘interest’, ‘debt recovery costs’ and ‘for each day of delay’.

Create a working table with these fields:

• Obligation: the conduct required of the franchisee.
• Trigger: the event that allows the charge to be imposed.
• Calculation: a fixed amount, percentage or daily charge.
• Limit: whether there is a cap per occurrence or over a given period.
• Remedy: the time allowed to put the breach right.
• Cumulative charges: other amounts or consequences arising from the same event.

Distinguish compensation agreed in advance from late-payment interest, reimbursement of actual expenses and payment for additional services. These are not necessarily the same thing, although they may appear together in a demand for payment.

An uncapped daily penalty deserves particular attention. Ask when it starts to accrue, whether it stops when the breach is remedied or only when the franchisor confirms this, and who bears the cost of delays in that confirmation. The answer should be set out in the contractual documents, not merely given as part of a sales explanation.

3. Test the clauses against specific breaches

Assess each penalty using plausible scenarios: submitting a report late, an isolated failure to comply with opening hours or a delay in replacing equipment. The aim is not to normalise breaches, but to check whether the contract distinguishes between their severity, duration and recurrence.

Imagine that a report is not submitted because the platform provided by the brand is unavailable. Does the contract allow you to demonstrate that this was the cause? Is there an alternative way to submit it? Does the penalty require a breach attributable to the franchisee, or is it intended to apply automatically?

In another scenario, an audit identifies an issue that can be put right. Check whether you will receive a written description of the facts, details of the obligation breached and a reasonable period to remedy the situation before a charge is imposed. Not every breach allows or justifies a remedy period, but that distinction should be clear.

Also check whether the same event can trigger a penalty, additional compensation and a demand to fulfil the obligation. Article 811 of the Civil Code sets out rules on these combinations. Do not assume that all consequences can be added together simply because they appear on different pages: ask for a legal assessment of how they work together.

4. Negotiate a clear procedure before signing

Useful negotiation goes beyond asking for lower charges. Seek a predictable, documented process for identifying, remedying and disputing breaches.

Depending on the risk, propose:

• written notice setting out the facts, contractual basis and calculation;
• a remedy period for breaches that can be put right;
• a distinction between a first occurrence and repeated breaches;
• limits on the accumulation of daily penalties;
• criteria for situations not attributable to the franchisee;
• a dispute procedure and a deadline for responding.

Also confirm whether disputing a charge suspends the obligation to pay it: do not assume that it does. Keep notices, audit reports and evidence of the remedial action taken.

Ask a lawyer to review the clauses with the greatest impact, and take your financial exposure scenarios to an accountant. Practical takeaway: before signing, make sure you can explain each penalty in one sentence: what triggers it, how much it costs and how the breach can be remedied or the charge disputed.