Franchising in Venezuela: limits on non-compete clauses

Buying a franchise can restrict not only the business you are about to open, but also your existing investments and future opportunities. In franchising, non-compete clauses are intended to protect know-how and business relationships, but overly broad wording can put your assets at risk. Before signing in Venezuela, identify exactly what would be prohibited and negotiate clearly defined limits.

1. Distinguish what each obligation protects

Non-compete, confidentiality and non-solicitation obligations covering staff or customers are different. They should not be bundled together in wording that prevents any commercial activity related to the brand.

Confidentiality restricts the disclosure or use of confidential information, such as recipes, procedures, commercial terms or manuals. A non-compete clause limits certain business activities, even where no information is disclosed. A non-solicitation restriction may affect the recruitment of staff or commercial approaches to particular customers.

Ask for the contract to separate these obligations and explain their scope. A ban on using a confidential procedure is not the same as preventing you from working in any food business, for example.

Also establish who is bound. Is it only the franchisee company, or you personally as well? Does the restriction extend to companies you control, minority investments or family members? Do not accept a generic reference to ‘related parties’ in place of a precise definition. Nor does the contract automatically bind third parties who have not signed it.

2. Understand Venezuela’s legal framework

Venezuela has no comprehensive law specifically governing franchises. The relationship is structured primarily through the contract, subject to the general rules that apply. The Civil Code governs obligations, contractual validity and performance in good faith; the Commercial Code provides the framework for commercial relationships.

The Industrial Property Law is also relevant where trade marks and other rights within its scope are protected, as is the Copyright Law, depending on the materials used. These protections do not, in themselves, justify every restriction on competition.

Commercial restrictions must also be assessed under the Decree with the Rank, Value and Force of an Antimonopoly Law. Both parties signing the agreement is not enough to establish that every restriction is valid: its purpose, scope and effects on competition matter.

There are also specific administrative precedents, such as the Guidelines for the Assessment of Franchise Agreements, issued by Procompetencia in 2000. These should not be mistaken for a comprehensive law or applied in isolation without considering their relationship with the subsequent legal framework. Ask a Venezuelan lawyer to establish whether they apply to your particular agreement.

Do not confuse a trade association’s code of ethics with legislation either. It may create obligations for members or be incorporated into the contract, but it does not replace mandatory legal rules or guarantee that a restrictive clause is valid.

3. Review the activity, territory, duration and exceptions

Draw up a table setting out the proposed wording and its consequences. At a minimum, examine these four elements:

• Prohibited activity: specify particular products, services or business formats. Phrases such as ‘similar businesses’ leave too much to be decided later.
• Territory: identify locations or objectively defined areas. If online sales are included, clarify whether the restriction depends on the customer’s address, the delivery location or another criterion.
• Duration: distinguish the obligation during the contract from any restriction after it ends. No single period should be assumed to be automatically valid in every case.
• Exceptions: document any existing businesses, professional activities and passive investments you wish to retain.

For example, if you already have a stake in an independent café and are about to buy a bakery franchise, do not rely on verbal permission. Describe your existing holding in a schedule to the agreement and specify which activities you may continue.

Also ask for a procedure for seeking approval for new investments: who to contact, which documents to provide, the response deadline and how authorisation will be given. Avoid leaving an important financial decision dependent on consent with no clear criteria or timetable.

4. Assess the cost and negotiate the consequences

A restriction can carry a cost even if no immediate payment is required. Consider income you would forgo, investments you would have to sell and career options that would no longer be open to you. Do not treat a business as an available source of income if the contract would require you to give it up.

Review the consequences of a breach: penalties, damages claims and measures to require you to stop the activity. Ask for clarification on how these interact, avoiding ambiguous wording that seeks to impose cumulative consequences without specifying their basis.

Negotiate a notification procedure and, where appropriate, an opportunity to remedy breaches that can be put right. A minority investment disclosed late does not necessarily raise the same concerns as deliberately operating a competing concept using confidential information.

Before signing, give your lawyer the full contract, its schedules and a list of your current activities. Practical takeaway: do not accept a prohibition that you cannot translate into a clear list of activities, people, places and time limits. Protecting the brand should be compatible with clear, understandable limits on your future business activities.