Spain: Franchising – definition and particularities

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published on 30 November 2023 Reading time approx. 5 minutes


Franchising in Spain is technically defined as follows: Franchising is a type of contract in which one company (the franchisor) assigns to another (the franchisee) the right to market certain products or services within a certain geographical area and under certain conditions. This is in exchange for financial compensation.

   
This article is part of the article series “Franchising”. It is a cross border collaboration and is intended to highlight the key elements of a franchising agreement in selected countries. To the article series “Franchising” »

  

The two main figures of franchise

  • The franchisor: charges a marketing fee for the franchisee company to use the franchisor's brand name, trade name and shop design. In most cases, these elements cannot be modified to maintain the franchisor's quality standards. In addition, know-how, business experience and technical and commercial assistance are also provided for the duration of the agreement.
  • The franchisee: The franchisee is the owner of the business and the one who makes the necessary investments for its start-up. Thus, they pay a fee to the franchisor to use their brand. This payment is like a “right of entry” into the business. The contract may even establish periodic amounts depending on the volume of sales and/or technical and commercial assistance. 
  
An inherent benefit of this type of business is undoubtedly brand recognition, since the customer is already accustomed to the brand's services in other establishments. This means that the entrepreneur can to some extent save a significant amount of time and money on advertising and marketing.
  

How is the franchise contract defined?

Law 7/1996 of 15 January 1996 on Retail Trade (hereinafter, LCM) states that commercial activity under a franchise system is that which is carried out by virtue of an agreement or contract whereby one person, known as the franchisor, transfers to another, known as the franchisee, the right to operate its own system for marketing products or services.
  
Franchising can be defined generically as an atypical, mixed, bilateral and synallagmatic commercial distribution contract, in which the franchisor transfers to the franchisee a complete business method of its own through the transfer of its distinctive elements (trademarks, signs, emblems), know-how, supplies and technical assistance (professional training, various consultancy services, advertising design, etc.). 
  

What are the characteristics of a franchise?

  1. It is a commercial contract, both objectively and subjectively, since the object of the contract are acts of commerce, intermediation or sales activities for profit and since the parties involved in the contract are traders in accordance with Art. 3 of the Commercial Code.
  2. It is atypical because in Spanish law it has no possibility of being subsumed in the contractual schemes of Spanish codes.
  3. It is mixed because of the juxtaposition and addition of typical institutions.
  4. It is also bilateral in that it is concluded between two clearly defined parties, the formalisation of which gives rise to reciprocal rights and obligations for both parties.
  5. It is synallagmatic and onerous, because the characteristic note of synallagmatic obligatory relationships is present: the interdependence or causal link between two duties of performance, in such a way that each of them, in relation to the other, functions as a countervalue or consideration.
  
It is more problematic to determine the legal nature of this figure:
  • Some authors link franchising to distribution contracts and in particular to the concession contract, a thesis followed in French doctrine, although it is criticised for the existing differences, such as the fact that the concessionaire can use, together with those of the grantor, their own distinctive signs; the lack of transfer of commercial know-how in the concession; the absence of payment of entry fees and royalties by the concessionaire.
  • Other authors include franchising in the category of distribution contracts in general, although the usefulness of this thesis is scarce, given that it refers to figures that also lack a clear legal discipline and it has been pointed out that the franchise contract is not a distribution contract, in the sense that, although it can be applied to distribution, it can be used for purposes other than merely distributive ones (Ruiz Peris).
  • Another group tries to redirect the franchise contract to the licensing of intangible goods and, fundamentally, to that of trademark licensing; a position that has been criticised as being too restrictive, since the franchisor does not limit themself to granting a licence on their distinctive signs to the franchisee, but offers them a complete method of exploiting a company, that know-how that goes beyond the licensing of distinctive signs; this is why some authors see it as a licensing contract whose object would be the business model that the franchisor assigns to the franchisee, considered as a unitary intangible asset.
  

Types of franchising

There are multiple types of franchises which may depend on the type of activity and the level of integration.
  
According to their purpose, a distinction is made between:
  • Service franchising, whereby the franchisee offers their services using the franchisor's sign, trade name and even the franchisor's brand name, while following the franchisor's guidelines.
  • industrial or production franchising, where the franchisee manufactures the franchised products according to the franchisor's specifications
  • Distribution franchise, whereby the franchisee sells certain products, manufactured or selected by the franchisor, in an outlet bearing the franchisor's distinctive signs.
  
The type of contract is referred to as:
  • direct franchising, in which the franchisor itself contracts directly and individually with franchisees in another State and in another Member State, and
  • master franchising, where the franchisor grants to a person, called a master franchisee, principal franchisee or sub-franchisor, the right, and often also the obligation, to spread the franchise in a given territory, either through franchised outlets opened by the principal franchisee himself or through the granting of franchises to other persons (sub-franchisees).
  
Geographically, they can be regional or zonal, national or international.
  
Corner franchises, in which the franchisor gives part of his establishment to the franchisee, while the latter can take advantage of the franchisor's clientele.
  

What should the franchise contract contain?

The absence of regulations means that it is necessary to resort to agreements resulting from the autonomy of will with the general limitations upon such and the rules regulating the relationship of these agreements with competition law.
  

Obligations of the franchisor

Following the franchise concept and the guiding principles set out in the European Franchise Code of Ethics, the franchisor has the following obligations:
  • Have successfully developed and exploited a concept for a reasonable time and at least in a pilot unit before the launch of the chain.
  • Being the owner of the rights over the signs of distinction among the clientele (brand and distinctive sign) and the transfer of the use of the brand and distinctive signs to the franchisee, as well as the know-how of the business in a certain territory and for a certain period of time.
  • The franchisor will provide the franchisee with technical and commercial assistance, which includes aspects such as sales techniques, administration, merchandising, location of the most suitable site, decoration of the premises, advertising and promotional activities common to the network and individual to the franchisee, market studies, etc.
  • The franchisor must respect the exclusive area granted to the franchisee where the franchisee will operate the business.
  • Initial and ongoing training of the franchisee and their staff in each and every aspect of the operation of the business.
  • Identify authorised sources of supply.
  • Coordinate national advertising campaigns.
  • Provide the franchisee with the legally required pre-contractual information.
  

OBLIGATIONS OF THE FRANCHISee


The franchisee's obligations are:
  • Development of the activity respecting and applying the management methods proposed by the franchisor, establishment standards and facilities.
  • To take into account the economic considerations of the concession and services provided, normally consisting of the payment of an entry fee, a periodic advertising fee which may be calculated as a percentage of the franchisee's annual turnover or of the products purchased, and royalties for the use of the brands.
  • Obligation of confidentiality and secrecy vis-à-vis third parties of the know-how and other business secrets transferred by the franchisor, even after the termination of the contract.
  • Non-infringement of the assigned industrial and intellectual property rights, i.e., using them within the contractual framework.
  • Non-competition obligation. The franchisee may not carry out any activity that directly or indirectly represents competition with the activity that constitutes the object of the franchise contract and may be maintained in this obligation for one year after the termination of the contract.
  • Periodic information to the franchisor on sales management and performance.
  • Enable monitoring and control by the franchisor, making access to accounting and inventory possible.
  • In order to maintain the identity and reputation of the network, the franchisee undertakes to source its supplies exclusively from the franchisor or suppliers authorised by the franchisor.
  • Obligation to sell or use in the framework of the provision of services, products of the franchisor's brand as well as products which are not of the franchisor's brand, but which are marketed or used throughout the network to maintain a uniform image.
  • Achieve an annual sales figure.
  • No assignment of the contract or premises without the prior approval of the franchisor.
  

How long does the franchise last?

The duration of the contract is at the discretion of the parties, so the termination of the contractual relationship may be:
  • on the expiry of the period for which the duration of the contract was agreed in the case of a fixed-term contract,
  • at the will of the parties,
  • by unilateral termination by one of the contracting parties - in which case we must distinguish between fixed-term contracts and open-ended contracts because the term of the contract or duration of the contract has not been stated,
  • as a result of a party's complaint that the other party has failed to fulfil its contractual obligations, or
  • by supervening circumstances affecting the capacity and/or personality of the parties affecting the subject matter of the legal transaction.
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