This country-specific Q&A provides an overview to franchise and licensing laws and regulations that may occur in Chile.
It will cover pre-offer, registration and other requirements; ongoing relationships; renewals and terminations; and general considerations.
This Q&A is part of the global guide to Franchise & Licensing. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/franchise-and-licensing/
Is there a legal definition of a franchise and, if so, what is it?
Local laws and regulations do not provide a legal definition of franchise.
Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.
There are no special requirements to be met prior the offer and/or sale of a franchise, as there is no specific law or regulation that subjects a franchisor to general or formal pre-contract disclosure requirements. However, please note that the general rules and principles of good faith governed by the Chilean Civil Code apply, which require the parties to disclose to each other all matters relating to the future agreement that will be material to the other party's final decision to execute the agreement.
Are there any registration requirements for franchisors and/or franchisees? If so, please describe them and include any potential consequences for failing to comply. Is there an obligation to update existing registrations? If so, please describe.
Local laws and regulations provides no registration or notarisation requirements for franchisors or franchisees.
Are there any disclosure requirements (franchise specific or in general)? If so, please describe them (i.e. when and how must disclosure be made, is there a prescribed format, must it be in the local language, do they apply to sales to sub-franchisees) and include any potential consequences for failing to comply. Is there an obligation to update and/or repeat disclosure (for example in the event that the parties enter into an amendment to the franchise agreement or on renewal)?
There is no specific law or regulation that subjects a franchisor to general or formal disclosure requirements. However, the general provisions on good faith in the Chilean Civil Code require the parties to disclose to each other all matters related to the future agreement that will be material to the other party's final decision to execute the agreement. Moreover, despite the lack of any legal provision setting forth the specific time when and procedure under which disclosure is to be carried out, general provisions of the Chilean Civil Code rules that any disclosure of material information must be given to the other party in timely fashion and before a decision is made as to entering into the agreement.
If the franchisee intends to use a special purpose vehicle (SPV) to operate each franchised outlet, is it sufficient to make disclosure to the SPVs’ parent company or must disclosure be made to each individual SPV franchisee?
Considering no specific local law or regulation addresses franchise disclosure, a conservative approach would suggest that disclosure be made both to SPV’s parent company as well as to each SPV.
What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?
Franchisee may opt for instituting agreement-termination and damage proceedings against franchisor; however, the chances of success would reduce in case there was a disclaimer in the franchise agreement, disclosure document or sales material. Note, however, that gross negligence is not waivable in Chile, thus, such disclaimer would not suffice in case the event of mis-selling is regarded by a local court as a gross negligent act or action of the franchisor.
Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?
In that the true nature of a franchisor-franchisee relationship is not that of a provider-consumer one, it would be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis. Local consumer protection laws set forth certain rules applicable to non-negotiable agreements which, in general, provides that certain matters in these “take it or leave it” agreements shall not be left to the unilateral decision and discretion of provider. The foregoing would not be the case in a franchisor-franchisee relationship were a local court would likely regard both parties as being in equal or similar commercial conditions and, as a consequence thereof, franchisee would not require the legal protection consumer laws provides to the weaker party, namely, the consumer. Note, however, that franchisee would still be able to claim that franchisor behaved negligently in imposing a non-negotiable agreement on the former, but the burden of proof on franchisee would likely turn proving his case a cumbersome task.
How are trademarks, know-how, trade secrets and copyright protected in your country?
Trademarks are protected in Chile upon registration. In addition to the registration in Chile of the trademarks that are part of a franchise agreement, the parties can register a short form trade mark licence with the Chilean Trade Mark Office to gain further protection against third-party trade mark infringement (section 18 bis D, Chilean Law 19,039 on Industrial Property, of 1991, as amended by Chilean Laws 19,996, of 11 March 2005 and 20,160, of 26 January 2007). Registration is not mandatory and most franchisors do not register trademarks licences unless they are aware of, or are particularly concerned about, possible infringers.
The franchisor must register its trade mark and logo with the Chilean Trade Mark Office in order to prove their validity against third parties, as the concept of "common law" trade mark is not recognised in Chile. It is sufficient to have filed for trade mark protection in order to enter into a franchise agreement or other trade mark licence agreement. It normally takes about six months to a year to gain full registration of trade marks, assuming that the applications are not contested. There is no procedure available through the Trade Mark Office to enforce trade mark rights against third-party infringements or post-expiration/termination use of the trade marks by a former franchisee. The sole remedy is to bring a criminal and/or civil complaint and request a seizure order to cease the offending use. The previous use of the trademark is not a requirement under Chilean trademark law for a party to register a trademark in the Chilean Trademark Office.
Generally, the following remedies are available in the case of infringement (Law 19,039 on Industrial Property): (i) cease of the infringing actions; (ii) damage award to the registered trademark holder; (iii) necessary measures to avoid further infringement; and (iv) publication of the court decision against infringers in a newspaper of the choice of the trademark holder.
Local laws provides a 10-year protection to registered trademarks, a term counted from registration date that could be extended for same term upon petition submitted before expiration of the term in currency or within 30 days following the expiration date.
Know How & Trade Secrets
No registration in any public office or registry is required to gain protection to trade secrets by local law. Moreover, trade secrets are protected by copyright on their mere creation as long as they remain confidential. Legal protection of trade secrets requires meeting the following requirements: (i) the information must be secret and non-accessible by third parties; (ii) the information must have commercial value; and, (iii) information must be reasonably protected by trade secret owner.
The misuse of trade secrets and other proprietary information by individuals or legal entities is punished with up to three years in prison and to a per-violation fine (section 284, Chilean Penal Code). While this provision remains relatively untested, a franchisor should be able to bring a civil injunctive relief action and/or an action for damages in a Chilean court in connection with any criminal proceedings against the infringer. However, enforcement of trade secret restrictions may be very difficult in a Chilean court that is inexperienced in these matters.
The latest amendment of Chilean law 19,039 on Industrial Property includes provisions on trade secrets (articles 86, 87 and 88) that regards as a violation of trade secrets the illegitimate acquisition, disclosure or exploitation thereof, provided that the illegitimate act entailed (i) an intent to make a profit (even if such profit benefits a third party; and, (ii) a damage to the trade secret owner.
Legal protection of trade secrets is indefinite provided they remain secret and confidential.
Chile is a member of the WIPO Berne Convention for the Protection of Literary and Artistic Works 1971, which require signatory countries to give national treatment to copyrightable works created in other signatory countries (including the USA). As any other works, computer software and manuals are protected by copyright on their mere creation, and in tune with copyright international regulation, no registration is needed to gain protection by local law.
However, a franchisor can facilitate enforcement against a copyright infringer by submitting its copyright works to the Chilean Copyright Office (“CCO”). The CCO would issue copyright certificate, which is regarded as prima facie evidence of holding rights on a given work in the event of an infringement. The lack of such certificate would force franchisor to prove its rights on the copyrighted material prior to obtain any relief. However, all copyrighted works submitted to the CCO are available to the public, so that the time and cost saved as a result of gaining prima facie evidence of rights could be outweighed by the public disclosure of the works.
Chilean law permits franchisors to contractually provide for the right to withhold a franchisee's use of materials (including copyrighted material) when the franchisee has failed to comply with the terms of a franchise agreement, including failure to pay all fees due to the franchisor.
Copyright licences can be registered with the Chilean Copyright Office, although registration is not mandatory.
Copyright protection remains in force throughout the life of the work’s author plus seventy years, counted from author’s death date.
Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.
There are no franchise specific laws governing the ongoing relation between franchisor and franchisee.
Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.
The only restriction under Chilean competition law that is generally applicable to franchising relates to exclusive or designated supplier provisions, which are permitted provided that they are linked to the need of preserving product’s quality level. Likewise, franchisor's imposition of resale prices on the franchisee under a penalty is also contrary to Chilean Competition Law. On the contrary, a mere resale price suggestion resulting in no punishment to franchisee if not taken, would generally not violate local Competition law. Additionally, Chilean Competition Law do not set a maximum permitted term for franchise agreements and/or for related product supply agreements.
Geographic exclusivity is also a relevant matter to franchisors on which it shall turn to what the franchise agreement provides on territorial exclusivity. However, if a franchise agreement does not expressly grant territorial exclusivity to a franchisee, the franchisee can claim that franchisor's actions reasonably led it to believe in good faith such exclusivity was granted to franchisee if (i) franchisor informally conveyed franchisee that some sort of territorial exclusivity was granted on franchisee; (ii) franchisor and franchisee discussed about granting territorial exclusivity to franchisee; and, (iii) franchisor and franchisee exchanged correspondence, the contents of which implies a grant of territorial exclusivity to franchisee. Proof of the foregoing facts can be produced by exchange of e-mails and/or other relevant documentation between franchisor and franchisee, which would support franchisee’s allegation that such actions on the part of franchisor resulted in an implied amendment of the franchise agreement and, as a consequence thereof, franchisee could issue proceedings against franchisor in case third party franchisee’s outlets are opened within franchisee’s exclusive territory.
Post-termination non-compete covenants have been held to violate the constitutional right to work and are unenforceable, unless the franchisee is compensated for relinquishing its right to work (see answer to Question 11).
Franchisor can prevent franchisee from having its own website, from promoting its business on the internet or from engaging in e-commerce. Additionally, foreign franchisors usually register the “.cl” brand-related domain name before signing and executing franchise agreements.
Are in-term and post-term non-compete and non-solicitation clauses enforceable?
In-term non-compete and non-solicitation clauses are enforceable in Chile. As to post-termination non-compete and non-solicitation provisions, they are enforceable only if the following requirements are met: (i) the party bound by the clause is reasonably compensated; and, (ii) the clause is limited to an specific, reasonable and short time period.
Local laws and provisions do not determine what is to be regarded as a reasonable compensation or reasonable term for these clauses to last, making this a matter to be determined on a case-by-case basis. Moreover, in cases when these provisions restrict individuals ability to become employees or officers at another employer, the enforceability would be even more difficult, as these kind of covenants limiting the hiring of workforce have been held to violate the constitutional right to work and, in consequence, ruled to be unenforceable, if no compensation is given for a reasonable non-compete clauses.
Few franchisors actually compensate franchisees in relation to post-termination covenants. Instead, they include non-compete post-termination covenants merely for deterrence purposes, as their inclusion does not void or otherwise affect the remaining provisions of the franchise agreement.
Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
Is there an obligation (express or implied) to deal in good faith in franchise relationships?
As already mentioned, the general provisions on good faith of the Chilean Civil Code apply to the franchise relation. These general provisions require the parties to disclose to each other all matters pertaining to the future agreement that will be material to the other party's final decision to execute the agreement. Moreover, the good faith principles contained in the Chillan Civil Code govern all aspects of the franchisor-franchise relationship, from pre contractual disclosure matters to the post termination provisions included in the agreement.
Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?
Usually, Chilean courts will not regard a franchisee as an employee of the franchisor. However, local courts have been called to decide on whether the franchisor can be regarded as a co-employer (along with the franchisee) of the franchisee's employees, or be at least secondarily liable to the franchisee's employees for the franchisee's failure to meet its labour and social security obligations, all of which constitutes a risk to the franchisor. Court decisions on this issue have been confusing, as the Supreme Court has issued contradictory decisions. Please note that court precedents decisions are not binding in Chile.
To reduce the risk of being held as a co-employee or as secondarily liable, the franchisor should abstain from entering into a continuous, day-to-day direct relationship with the franchisee's employees involving a permanent and direct oversight and control of the means and ways in which these employees perform. In other words, if the franchisee's employees cannot evidence that the franchisor exerted permanent and continuous authority and control on them, the risk of the franchisor being held by a court as co-employer of, or secondarily liable to, the franchisee's employees will be reduced. Additionally, the franchise agreement can require the franchisee to submit to the franchisor, on a monthly basis, a certificate of the employer's labour and social security good standing issued by the Chilean Labour Directorate to have an assurance that the franchisee is complying with its labour and social security obligations.
Is there a risk that a franchisee could be deemed to be the commercial agent of the franchisor? What steps can be taken to mitigate this risk?
Chile does not currently have a restrictive agency law that would subject a franchisor, principal, manufacturer or licensor to a statutory cause of action for compensation by a franchisee or agent either upon the earlier termination for cause or natural expiration of a franchise or other agreement. However, there are court cases involving termination of distributorships where the courts have granted monetary damages for wrongful termination.
Are there any laws and regulations that affect the nature and payment of royalties to a foreign franchisor and/or how much interest can be charged?
The interest rate applied could always be challenged and held invalid in Chile if such interest rate would exceed the then maximum conventional interest rate determined periodically by the Central (Reserve) Bank of Chile.
Is it possible to impose contractual penalties on franchisees for breaches of restrictive covenants etc.? If so, what requirements must be met in order for such penalties to be enforceable?
Contractual penalties are enforceable in Chile either as an exclusive remedy or in addition to damages for breach of contract, depending on the terms of the franchise agreement. However, local law provides certain limits to liquidated damages as its figure cannot exceed twice the amount of the principal obligation (e.g. contract price). Should the foregoing be the case, the affected party may file a motion with local courts petitioning a reduction on the liquidated damages.
What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?
A 30% withholding income tax applies to amounts paid or credited to persons without domicile or residence in Chile for the use of trade marks, patents, formulas, technical assistance and other similar services, whether characterised as royalties or as any other form of remuneration (section 59, Chilean Income Tax Law).
Section 59 also establishes a special reduced withholding tax rate of 20% on remittances made to remunerate services rendered exclusively abroad for engineering works and technical assistance generally. The Chilean Inland Revenue held that services rendered abroad under a franchise agreement can fall under this reduced withholding tax rate if the amounts remitted abroad consist of funds destined to remunerate engineering works or technical assistance in general, that is, professional or technical services which a person or entity knowledgeable of a science or technique supplies through advice, report or plans (sent to Chile by a supplier of services located abroad) (Chile’s Inland Revenue Circular/Ruling No. 2.313 of 14 January 1990). A subsequent ruling clarified that the same 20% tax rate applies if the amounts remitted abroad constitute income destined to remunerate individuals for scientific or technical activities developed in Chile (Chilean Inland Revenue Official Communication No. 1845 of 14 July 1998).
For example, Chile’s Inland Revenue found that the following activities were classified as technical assistance and therefore subject to the 20% tax rate (Official Communication No. 423 of 30 January 1991):
· Manufacturing, programming, quality control and production processes and equipment maintenance.
· Market research, introduction and distribution of products, organisation of a commercial network and preparation of statistics.
· Organisation of administrative work, cost/pricing calculation, planning, personnel training, personnel selection.
· Inventory control outside Chile of products produced in Chile.
Chile is a party to treaties to avoid double taxation with Argentina, Australia, Austria, Belgium, Brazil, Canada, Colombia, China, Croatia, Denmark, Ecuador, France, Ireland, Italy, Japan, Malaysia, Mexico, Norway, New Zealand, Paraguay, Peru, Poland, Portugal, Russia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand and the UK. Tax treaties with the Czech Republic have been signed but have not been ratified yet.
Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?
Local law does not vest franchisee with a right to request a renewal on expiration of the initial term. Also, there is no mandatory compensation payable to a terminated party (including a franchisee) if termination is effected on expiry of the agreement, whether or not there has been a breach on the part of the franchisee. It should be noted, however, that the franchisee can claim that it was reasonably led to believe that the agreement would be extended, resulting in expenses and business expectations for which compensation is due if, for example, any of the following occurred during the term of the agreement: (i) the parties entered into early and informal negotiations aimed at extending the term of the agreement or at introducing changes that would apply beyond the contractually stipulated termination date; (ii) the parties discussed the possibility of a market research to determine sales forecast covering a period beyond the termination date; (iii) the parties exchanged correspondence regarding actions or events to take place beyond the termination date. Proof of the foregoing is provided by exchange of e-mails and/or other relevant documentation.
Are there any mandatory termination rights which may override any contractual termination rights? Is there a minimum notice period that the parties must adhere to?
There are no mandatory termination rights which may override any contractual termination rights. Likewise, there is no minimum notice period that the parties must adhere to, although termination or non-renewal notice would typically be served with no less than 6 month in advance to effective termination date.
Are there any intangible assets in the franchisee’s business which the franchisee can claim ownership of on expiry or termination, e.g. customer data, local goodwill, etc.
Local laws and regulations do not vest on franchisee ownership rights on intangible assets such as customer data or local goodwill, which makes this a matter to be decided by a local court on a case-by-case basis. Note, however, that a franchisee goodwill compensation claim would be a cumbersome proceeding to franchisee given the strict standard of proof applied by courts, which makes difficult for franchisee to obtain an award in his favour.
Is there a national franchising association? Is membership required? If not, is membership commercially advisable? What are the additional obligations of the national franchising association?
There is no national franchising association. However, the Santiago Chamber of Commerce runs the Comité de Franquicias (Franchise Committee), the purpose of which is contributing to the growth and widespread of the franchise industry based on investors’ trust as well as on good business practices. Also, the Comité de Franquicias aims at being the point of reference for the implementation of the franchising business model in Chile, contributing with value and growth opportunities to different interest groups.
Are foreign franchisors treated differently to domestic franchisors?
Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?
Must the franchise agreement be governed by local law?
No, the choice of foreign law as substantive law of the agreement is acceptable.
What dispute resolution procedures are available to franchisors and franchisees? Are there any advantages to out of court procedures such as arbitration, in particular if the franchise agreement is subject to a foreign governing law?
Franchisor and franchisee shall bring their dispute for resolution by local civil courts unless the franchise agreement provides for arbitration. Litigation at local civil courts is less expensive than arbitration but is time-consuming, as it often takes years to obtain a final, not subject to recourses decision. Additionally, civil court judges are less familiar with franchising agreements and with disputes that typically arise from a franchisor-franchisee relationship. The foregoing favours arbitration as a dispute resolution method.
The choice of foreign arbitration would be acceptable. Notwithstanding the foregoing, although Chile is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it could take up to two years or more to enforce a foreign arbitration award in Chile. Once a foreign award is obtained, all orders, correspondence, evidence and other materials in the arbitration case will have to be translated into Spanish and submitted to the Chilean Supreme Court, which will assign an officer of the court to review all the procedural formalities of the award and determine preliminarily if the award is suitable for enforcement in Chile (exequatur proceedings). If the award passes the Supreme Court officer’s review, the Supreme Court itself will review the award and, if satisfied that the award meets all the pertinent requirements under Chilean law and international conventions to which Chile is a signatory, issue an order for enforcement by the competent lower court. The non-enforcing party may raise defenses at any stage during the recognition process, which will of course delay or hinder enforcement.
Because of the difficulty with enforcing a foreign arbitration award, an alternative may be to hold the arbitration in Chile using one of three different Chilean mediation and arbitration centers (the Santiago Chamber of Commerce, the Chilean American Chamber of Commerce and the National Arbitration Centre), the Arbitration and Mediation Center of the Santiago Chamber of Commerce being the oldest and most experienced of the three centers. The use of a Chilean arbitration procedure, if a speed and quick enforcement is valued over what may be a more controllable and/or reliable result in a foreign jurisdiction proceeding, is recommended.
Does local law allow class actions by multiple franchisees?
Must the franchise agreement and disclosure documents be in the local language?
No, however, a Spanish-written franchise agreement and disclosure documents would avoid and prevent from a future defense by franchisee on lack of understanding based on the language of the franchise agreement and ancillary documents.
Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?
Yes, local law recognizes that contracts signed by means of electronic signatures are valid and enforceable in Chile.
Can franchise agreements be stored electronically and the paper version be destroyed?
Yes, this is feasible from a legal standpoint, although not recommended from a practical viewpoint, as the paper version would suffice as proof of the franchise agreement if the electronic version of lost. Moreover, if feasible, signing and executing the franchise agreement in the form of a private deed signed before a notary public is recommended, as it provides legal certainty as to execution date and the signatory parties.
Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
At tax reform bill is under discussion at Chile’s Congress that includes no franchise-specific provisions, but the following two aspects thereof may have an impact on international franchising in Chile: (i) the creation of a sole fully integrated tax regime setting forth total tax burden on all foreign investors, that would be capped at 35% regardless of the existence of a tax treaty in force; and, (ii) international tax rules would be updated and simplified in order to attract foreign investment into the country.