Franchising in Brazil

On December 3, 2014, the São Paulo Court of Appeal handed down a decision confirming the obligation to respect the 10-day period between the provision of pre-contractual information and the signing of the franchise agreement. However, while acknowledging compliance with the legally stipulated timeframe, the Court ruled that the information provided was insufficient in relation to the requirements of the law, and thus annulled the contract entered into.

In a decision dated December 11, 2014, the same Court of Appeal ruled that the collection of service tax ("ISS"), paid by franchisors on royalties, was unconstitutional. The Court ruled that franchising constitutes a complex contract and cannot be considered as a simple provision of services, the chargeable event for ISS. This is an opportunity for us to look at the legal (I) and economic (II) framework of franchising in Brazil.

I. The legal framework for franchising

Franchising in Brazil is regulated by Law 8.955 of December 15, 1994 (the "Law"). This law requires franchisors to provide franchisees with information at least 10 days before signing the contract.

Failure to meet this deadline may result in the contract being cancelled, and any sums paid by the franchisee to the franchisor will have to be reimbursed by the latter. The same sanctions may be applied to franchisors who communicate incorrect information.

The law lists the information that must be provided prior to the conclusion of the franchise agreement, in the document Circular de Oferta de Franquia (Franchise Offer), such as :

- company history, corporate form and other data of companies associated with the franchisor;

- Balance sheets and financial data for the last 2 years;

- description of the franchise and the activities to be developed by the franchisee ;

- information on the investment amount, entry fee, advertising, insurance, rent and royalties, and payment terms;

- agreed territory ;

- description of the assistance provided by the franchisor ;

- the franchisee's situation after the contract expires, especially with regard to know-how and the possibility of carrying on a competing business.

Pre-contractual information helps to identify the rights and obligations of both franchisor and franchisee. It is customary for the Circular de Oferta de Franquia to be accompanied by a copy of the franchise agreement and its appendices. The franchise agreement must be in writing and signed by 2 witnesses, failing which it is null and void.

With the exception of the succinct rules laid down by law, franchise contracts in Brazil are subject to contractual freedom, in compliance with the principle of good faith on the part of the parties and the general principles of contracts.

II. Business environment

Despite an economic slowdown, and growth forecasts for Brazil revised downwards by the World Bank to 1% in 2015, Brazil remains a growth market with a middle class representing over 50% of the population, or 100 million inhabitants, the result of a policy of redistribution(Bolsa Familia) carried out under President Lula between 2002 and 2010.

During this period, 31 million Brazilians were lifted out of poverty and into consumption. However, consumption-led growth cannot be the sole engine of the economy.

According to the World Bank's 2015 Doing Business ranking, while Brazil moved up 3 places in terms of business climate in 2014, it remains ^120th (out of 189), ahead of Argentina (^124th) but still behind Ecuador (^115th), Chile (^41st) and Mexico (^39th).

A member country of the BRICS (Brazil, Russia, India, China and South Africa), representing the most important emerging countries, Brazil constitutes, according to the World Bank (April 29, 2014), the ^7th largest economy in the world. In addition, France is a long-standing economic partner of Brazil, and the European Union today accounts for a large share of Brazil's international trade. According to the Brazilian Ministério das Relações Exteriores , between the years 2009/2013, Brazil's exports to Europe increased by 39.7%, reaching a figure of 47.8 billion USD. Similarly, imports of European products into Brazil rose by 73.6% over the same period. Trade exchange between Europe and Brazil accounted for 61.1 billion USD for the period from January to August 2014. (September 2014, Uniao Europeia Intercâmbio comercial com o Brasil).

In addition to its growing domestic market, Brazil is also a gateway to various Latin American countries. The country is a member of Mercosur, a customs union that also includes Argentina, Uruguay, Paraguay and Venezuela, and of Unasur. Unasur is an intergovernmental organization comprising 12 countries on the continent, including all Mercosur members and Andean countries such as Chile and Bolivia. The total population of Unasur member countries is around 390 million.

Although the Brazilian market has become the^4th largest recipient of foreign direct investment (65 billion USD in 2013), access to it remains complex due to the presence of protectionist barriers to entry. A local presence is therefore often necessary to penetrate this market, which may be of interest to French franchisors.

According to the Brazilian Franchising Association ("ABF"), Brazil is the^4th largest franchising market in the world, the first in Latin America and the second in terms of the number of brands present. This position reflects the country's recent economic growth and especially the population's increasing purchasing power. During 2014, franchises recorded growth of around 7% on sales and 10% on the number of franchised stores (ABF - December 16, 2014). According to ABF, the Brazilian market already boasts more than 2,200 franchises, including foreign companies such as DIA, McDonald's, C&A, Zara, Applebee's etc.

Over the course of 2014, several foreign chains expanded their franchises in Brazil, such as the American Forever 21, which inaugurated its first 11 franchises in the territory and 16 new stores are scheduled to open in 2015 (Interview by Eduardo Barbieri with O Dia newspaper, January 05, 2015).

French company L'Oréal is also aware of the importance of the Brazilian market and has decided to introduce Essie and The Body Shop brands, Brazil being the^3rd largest consumer market for cosmetics (Tobias Chanan interview with O Dia newspaper, January 05, 2015).

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