Buying a franchise: courts and arbitration in Portugal

Before joining a franchise network, it is natural to focus on getting your business up and running. However, the clause governing how disputes will be resolved deserves attention before you sign. A disagreement over payments or a breach of contract could force you to bring proceedings in a distant court or fund an arbitration. This guide explains how to assess these terms in a franchise agreement in Portugal.

1. Understand the Portuguese legal framework

Portugal has no specific franchise law, nor does it require a pre-contractual disclosure document with content and deadlines specific to franchising. That does not mean there is no protection: general contract rules apply, including freedom of contract under Article 405 of the Civil Code and the duties of good faith in negotiations and performance under Articles 227 and 762.

Where an agreement contains pre-drafted terms that have not been individually negotiated, the rules on standard contract terms, introduced by Decree-Law No. 446/85 of 25 October, may apply. These rules impose duties to communicate and explain the terms. Providing complex terms only at the point of signing may raise legal issues; the assessment depends on the circumstances.

Voluntary arbitration has its own legal framework under Law No. 63/2011 of 14 December. Broadly speaking, disputes involving interests of a financial nature may be referred to arbitration, unless the law reserves them exclusively for the state courts or compulsory arbitration. An arbitration agreement must meet the statutory requirement to be in writing.

A franchisee normally acts as a business operator, rather than a consumer, in this relationship. You should therefore not assume that you can use the protections or consumer arbitration centres available for private purchases.

2. Identify the mechanism chosen in the agreement

Look for terms such as ‘dispute resolution’, ‘competent court’, ‘arbitration agreement’, ‘governing law’ and ‘mediation’. Also read any documents referred to in these clauses.

Distinguish between three routes:

• State courts: the dispute is decided within the judicial system. The clause may specify a court with territorial jurisdiction, within the limits permitted by law.
• Arbitration: one or more arbitrators decide the dispute. The decision is binding and the grounds for challenging it are limited; do not expect an appeal equivalent to one in ordinary court proceedings.
• Mediation: an impartial third party helps the parties reach an agreement without imposing a decision. It does not automatically replace court proceedings or arbitration if no agreement is reached.

If negotiation or mediation is a mandatory first step, check how it begins, how long it can last and what happens if one party fails to respond. Avoid mechanisms that could indefinitely block access to dispute resolution.

Governing law and the place of dispute resolution are not the same thing. An agreement may choose Portuguese law while providing for arbitration in another country. The seat of arbitration has its own legal consequences and is not necessarily where all meetings take place. In a cross-border relationship, ask for these choices to be assessed together.

3. Calculate the cost of enforcing your rights

A seemingly neutral clause can make pursuing a claim financially difficult. Do not accept the assertion that arbitration is always cheaper or quicker: the outcome depends on the institution, its rules, the amount in dispute and the complexity of the case.

If the agreement provides for institutional arbitration, ask for the institution’s exact name, the applicable rules and the schedule of fees. If the arbitration is to be arranged specifically for the dispute, check how the arbitrators will be appointed and how their fees will be set.

Prepare an estimate covering:

• Court fees or arbitration administration charges;
• Arbitrators’ fees, where applicable, and lawyers’ fees;
• Expert reports, translations and travel;
• Advance payments needed for proceedings to move forward;
• Potential liability for the other party’s costs.

Compare the cost of a sole arbitrator with that of a three-member tribunal. Also ask how advance payments are handled if the other party does not pay its share. The key question is whether you can afford to defend your rights without jeopardising day-to-day operations.

4. Negotiate a clause that both parties can use

Ask your lawyer to check that the clause is clear, valid and balanced. A choice of court that causes serious, unjustified inconvenience may raise issues under the rules on standard contract terms; however, you should not assume that it is invalid.

Propose specific terms: a language you understand, an accessible location, clear rules for appointing arbitrators and a negotiation stage with a fixed time limit. Also check how you can seek urgent measures to protect your rights without being tied to a prolonged attempt to reach a settlement.

Check for consistency with the other documents involved in the transaction. Related agreements may specify different courts, splitting a single problem into several proceedings. Keep the final version, the annexes and written answers to your queries.

Practical takeaway: before signing, make sure you can answer four questions: who decides, where, under which rules and at what cost? A franchise network benefits from dispute resolution mechanisms that both parties can actually use.