Overview

The concept of franchising was introduced to Spain in the 1970s but remained relatively undeveloped until Spain joined the EU in 1986. Since then, the sector has expanded considerably and the country now boasts one of the largest and fastest growing franchise markets in the EU. Last year alone, the value of this sector increased by over 17% and provided Spain with a turnover in excess of 1,000 billion pesetas (approx £4 billion).

In Spain, around 70% of franchises are home grown, the rest of the market being shared largely by American (13%), French (10%), Italian (4%) and British (2%) franchisors.

Franchising is particularly strong in the distribution and retail sectors which together account for about 26% of all franchises. Other prominent players include textiles and fashion, fast food and hotels.

While there is a wide cross-section of franchisors in Spain today, it is an industry which at present remains regionalised. In fact, those based in and around Madrid and Barcelona account for almost 70% of the national total. Other regional strongholds include Valencia, Andalucia, Aragon and the Basque country.

Franchising has become well-respected in Spain and many well known Spanish companies are turning to franchising as either a way of growing their business or in order to develop a foreign concept.

In Spain, the most common way for a foreign franchisor to enter the market is by way of a master franchise although it is not uncommon for larger Spanish corporations to take on the development rights for a foreign franchise.

Few foreign franchisors open their own pilot operation in Spain before franchising the concept to third parties. Direct franchising proves difficult for foreign franchisors in Spain and is therefore rarely used by them as a way into the Spanish market.

Spanish Law

There is specific Disclosure and Registration legislation which applies to all franchises being sold into Spain (including master franchises).

Under Spanish Law, all franchising companies (whether Spanish, foreign, or a master franchisee) must be registered in the Franchisors' Registry. Non-compliance with this registry obligation constitutes a serious infringement and can carry fines of anything from 500,000 pesetas (approx £2,000) to 2,500,000 pesetas (approx £10,000).

The Franchisors’ Registry was established in 1988 with the aim of creating a transparent system, particularly in relation to franchise agreements. The idea was that potential franchisees could identify reputable franchise systems by reference to the Register. However, the original idea was to set up a Registry in each region of Spain under the central jurisdiction of the Central Registry based in Madrid. This has not, as yet, been achieved nationwide.

A lack of uniformity in criteria has also meant that the Registry has been operating without proper admission rules. As a result, the Registry has admitted (and therefore given credibility to) systems which are not business format franchises. In turn, this has led to the Registry failing to achieve its aims of establishing a list of quality franchise systems.

Spanish legislation also requires the franchisor to disclose in writing to the franchisee - within 21 days before closing a deal with a franchisee (ie within 21 days prior to the signing of a franchising contract, or pre-contract, or prior to any payment to the franchisor) - all information necessary to enable the franchisee to freely and knowingly decide on whether to join the franchise network. There is the risk of a civil claim from the franchisee if these disclosure requirements are not satisfied. The Registry may also impose a fine.

Since the mid-Eighties, there has been a marked increase in judicial decisions relating to franchising. Courts are now frequently faced with franchise disputes in respect of the terms of a franchise agreement or non-disclosure. There has been some inconsistency in the way the Courts have assessed franchise agreements. While some judgments have treated the contract as a general commercial contract, other decisions have considered the franchise agreement as little more than a trademark licence. In some cases, the agreement has been treated as the licensing of a marketable technique or know-how or even as a licence of intangible goods.

Whichever approach they choose, the Spanish Courts take the view that the franchisor and franchisee are independent entities, each one of them assuming the individual responsibility for the success or failure of their business. A franchisor does not guarantee the franchisee’s success.

However, this does not mean that franchisors can always avoid liability for a franchisee’s poor performance. When it is obvious that the poor turnover of the franchisee is due to the lack of assistance, support or management from the franchisor, liability may exist. Liability will also exist if the problems have been caused by a lack of disclosure by the franchisor.

Spanish Courts will allow the premature termination of a franchise contract if it is frustrated and due to unforeseen circumstances the economic means of the contract cannot be achieved.
Conclusion

The Spanish franchise market offers UK franchisors a good opportunity to expand into Europe. Spanish law requires a degree of disclosure and registration is required. However, while the courts take different views on the values and purposes of franchising agreements and the registration system in place is not without its own problems, the latter is at least designed to promote transparency and provides a way of officially recognising quality franchisors operating in Spain. Franchisors considering entering Spain will enjoy commercial enthusiasm and few legal barriers.