Personal Guarantees in Venezuelan Franchising

When franchising an existing business, you may enter into a contract with a company that has few assets of its own. Asking for a personal guarantee can help secure certain obligations, but it is no substitute for a viable business and does not ensure payment. To build sustainable relationships within the franchise community, clearly define the risk being guaranteed and the extent of the guarantor’s liability.

1. Distinguish between the franchisee and the guarantor

If the franchisee is a company, its contractual obligations are, in principle, those of the company itself. A representative who signs on the company’s behalf does not automatically become a personal guarantor.

A personal guarantee, known in Venezuelan law as a fianza, creates a separate commitment: a person undertakes to the creditor to fulfil another party’s obligation if that debtor fails to do so, subject to the agreed terms and applicable law. Simply stating that a shareholder ‘backs the business’ is therefore not enough.

Before requesting a guarantee, identify the specific risk. This might involve accrued but unpaid royalties, supplies invoiced by the franchisor itself or another clearly identified financial obligation. Not every payment owed by the franchise outlet is due to the same creditor: a debt to an independent supplier is not guaranteed in that supplier’s favour simply because it is mentioned in the franchise agreement.

The first question is not who can sign, but which obligation needs additional security. If you cannot describe it precisely, your guarantee is not yet ready to negotiate.

2. Apply the Venezuelan legal framework

Venezuela has no dedicated franchise law. This does not mean franchise agreements fall outside the law: the Civil Code governs obligations, contracts and guarantees, while the Commercial Code is relevant to commercial relationships. Tax, employment and industrial property rules also apply, depending on the matters involved.

Under the civil law framework, a guarantee is not presumed: it must be expressly agreed and cannot extend beyond its agreed scope. Nor can it impose a more onerous obligation on the guarantor than the principal obligation. These rules make it particularly important to avoid vague wording such as ‘guarantees any present or future commitment’ without defining its scope.

Depending on the legal structure of the guarantee, certain protections may be relevant. These include the beneficio de excusión, which concerns pursuing the debtor’s assets first, and, where there are several guarantors, the beneficio de división, which concerns dividing liability between them. Their applicability, exceptions and any waiver require professional review; they should not be taken for granted in a commercial relationship.

An association’s code of ethics, where applicable through membership or adherence, does not replace these rules. Nor does it turn an ambiguous clause into an effective guarantee. Instruct a Venezuelan lawyer to draft the guarantee and assess the appropriate formalities for documenting it.

3. Negotiate scope, amount and duration

The guarantee should allow both parties to understand their financial exposure. Prepare a term sheet before incorporating it into the agreement:

• Covered obligations: list the obligations being guaranteed and how each debt will be evidenced.
• Maximum amount: specify whether there is a cap and whether it includes legally recoverable interest and costs.
• Currency and payment: align these terms with the principal obligation, following a review of the applicable rules.
• Duration: distinguish between the period during which guaranteed obligations may arise and the deadline for claiming amounts already incurred.
• Amendments: determine what happens if the parties change the original financial obligations.
• Release: describe how the termination or replacement of the guarantee will be recorded.

Do not assume that renewing the franchise automatically extends a guarantee. Nor should you assume that increasing the franchisee’s obligations automatically expands the guarantor’s commitment. Each situation needs express provisions and legal review.

For example, if you want to secure unpaid royalties, avoid also including all the outlet’s trading losses. A clearly defined guarantee is easier to understand and assess than a promise of unlimited liability.

4. Keep the records needed to enforce it

Retain the guarantor’s identification details, the signed guarantee, the principal agreement and its relevant annexes. The roles of company representative and guarantor must be clearly distinguished, even if the same person holds both.

Also assess the guarantor’s financial standing using relevant, lawfully obtained information. An additional signature from someone without sufficient assets may offer only an illusion of security.

Throughout the relationship, keep records of invoices, payment deadlines, payments and communications. A guarantee does not remedy disorganised accounts or, by itself, prove how much is owed. Decide who will maintain the file and check whether contractual changes require the guarantor’s renewed consent.

In practice: before requesting a personal guarantee, prepare a one-page summary setting out the debt covered, the cap, the duration and the conditions for release. If the parties cannot explain those four elements clearly, revise the document before signing.