Franchises in Mexico constitute one of the most dynamic sectors of the economy, since it is considered to be a very successful business model with minimum risks. Up until 2016, around 11,800 new stores belonging to franchise systems had been opened in Mexico, with approximately 1,500 franchise brands, creating around 75,000 points of sale and over 890,000 direct employment positions.2
The Mexican Franchise Association (AMF) is a private entity, dedicated to the development of franchising in Mexico, providing support to commercial organisations working with the private and public sectors. There is no legal obligation for a franchise system to be affiliated with the AMF. However, according to the AMF, the associated franchises nationwide have generated more than 700,000 jobs and until this year 6.5 per cent of GDP in Mexico.
The franchise sector was expected to grow 7 to 10 per cent in 2017, generating 230 to 250 points of sale,3 and to continue to have a huge potential to generate jobs and wealth in Mexico.
II MARKET ENTRY
Mexico's Foreign Investment Law and its regulations impose some restrictions on foreign investment in Mexico, and while these have been relaxed considerably in recent years, they still have an impact upon foreign investors in Mexico. For example, an initial registration with the National Foreign Investment Registry is required for foreign investments to be made in Mexico and thereafter periodic filings must be submitted.
The Foreign Investment Law may, in some cases, prohibit or restrict certain types of investments, partially or completely, although these are not usually of concern to most franchisors since they only apply to a narrow range of business operations.
Subject to any limitations imposed by the Foreign Investment Law, there is no restriction in Mexico on the nationality of shareholders or members. Nevertheless, Mexican law requires that all companies have in their articles of incorporation either a provision prohibiting foreign shareholders or members, or a clause by which they agree to consider themselves as Mexican nationals with respect to their interest in the company, and not to invoke the protection of their own government in the event of a dispute, under penalty of forfeiting their interest to the state for violation of the clause.
ii Foreign exchange and tax
Mexico does not have foreign currency exchange restrictions. The considerations agreed under a franchise agreement could be either in Mexican pesos or a foreign currency. There are certain rules applicable to the actual payment of the consideration. If it is agreed to carry out payment within Mexican territory, the payer could elect to pay with the elected foreign currency or with Mexican pesos using the exchange rate published by the Central Bank of Mexico on the day of payment.
Mexico follows the Organisation for Economic Co-operation and Development (OECD) international tax standards. Thus, all transactions carried out with foreign residents (related parties or not), should fulfil the requirements of the arm's-length principle.
Income earned by foreign residents from a Mexican source is, in general, subject to withholding tax at various rates, which will depend on various factors, such as type of income (royalties, technical assistance), the tax residence of the receiving party, among other circumstances, but, in general, the withholding rate is 25 per cent over gross income. In the case of royalties, the withholding tax rates are between 25 per cent and 35 per cent, depending on the type of royalty paid to the foreign resident.
Foreign residents are subject to tax in Mexico for income earned from a source of wealth located in Mexico.
Mexico currently has over 75 tax treaties in force with other countries, including the United States, the United Kingdom, Canada, Japan, Germany, Spain, France and Switzerland. Mexico is constantly negotiating tax treaties with other countries. In addition, on 7 June 2017, Mexico signed the Multilateral Instrument,4 which allows it to swiftly amend existing bilateral tax treaties to implement tax avoidance measures developed by the OECD. Tax treaties can reduce taxation or even completely remove the withholdings described above.
III INTELLECTUAL PROPERTY
i Brand search
Clearance word searches may be conducted online through the Mexican Institute of Industrial Property (IMPI) database. The word search will provide trademarks that are identical, similar or have a word in common. The results are mostly reliable, but, given that the IMPI takes approximately two days to update the database, the provided information may not include a trademark that could constitute a legal impediment or data corresponding to possible designations to which Mexico could be subject, pursuant to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks.
The information contained in the search result does not constitute an official communication in terms of the Industrial Property Law (IPL).
ii Brand protection
In Mexico, it is not possible to file multi-class applications; rather individual applications, per mark per class, should be filed. If a trademark application has been previously submitted in another jurisdiction, priority may be claimed within six months of the filing date of the foreign application.
The approximate time frame for obtaining the registration of a trademark is three to six months. However, if an opposition is filed by a third party or if the trademark examiner issues an office action to clarify the listed goods or services, or citing an identical or confusingly similar trademark or otherwise objecting to the registrability of the proposed mark, the registration process will be extended up to a year or in some cases even more than a year.
Once the application is filed, it is published for opposition and will be examined by the examiner. In the event that a similar prior application or registration is found or the mark is considered not to be distinctive, the examiner issues an office action communicating the objection. At that point, the applicant is given an opportunity to file arguments to try to overcome the citation or objection.
The trademark should be used by the owner or by the recorded licensee to distinguish the products or services for which it was registered. If the trademark registration is used only by a licensee or franchisee, the licensee or franchisee should be recorded with the IMPI. If the owner, licensee or franchisee does not use the trademark during three consecutive years, a third party could request a non-use cancellation action based on lack of use.
Amendments to the IPL entered into force on 10 August 2018. Some of the changes introduced are relevant to franchises: (1) non-traditional trademarks – sound, olfactory and holographic trademarks – can be registered; and (2) the amendment introduces the possibility of registering as a trademark a plurality of operative and image elements that combine to distinguish products or services in the market, which in the international market is known as trade dress.
Article 213 of the IPL establishes several types of conduct that constitute administrative infringements, such as the unauthorised use of a registered trademark or not providing the franchise disclosure document (FDD) when requested. Administrative infringements can be sanctioned with: (1) a fine up to 20,000 times the current minimum wage approved in Mexico City; (2) an additional fine of up to 500 days' worth of the current minimum wage approved in Mexico City for each day that the infringement persists; (3) temporary closure of up to 90 days; (4) permanent closure; and (5) administrative detention of up to 36 hours. The infringement action is filed with the IMPI, which conducts an investigation and imposes any fines.
Additionally, breach of obligations stipulated in the agreement, such as payment of royalties, will incur civil liabilities.
iv Data protection, cybercrime, social media and e-commerce
Following constitutional amendments that included the right to data protection as a basic right of individuals, in 2010 the Federal Law on Protection of Personal Data held by Private Parties was enacted, followed, in 2011, by its Regulations (together the Data Protection Law). These pieces of legislation – which are complemented by guides issued by Mexico's data protection authority, the National Institute for Transparency, Information Access and Personal Data Protection – apply at a federal level and make up the Mexican data protection legal framework.
The Data Protection Law applies to all processing of personal data by private entities or individuals, except when it is processed for personal or domestic use or by credit bureaus.
Franchisors and franchisees will be data controllers with respect to certain personal data they process; for example, franchisees will be controllers of their employees' personal data and, in some cases, a franchisor is a data controller of customer data.
In this regard, when processing personal data or any information concerning identified or identifiable individuals, both franchisors and franchisees need to be aware of their obligations and responsibilities, which are more onerous for data controllers. Some of the obligations of data controllers are: (1) to maintain appropriate physical, technical and organisational security measures, (2) to provide a privacy notice to all data subjects, (3) to collect consent from data subjects, where necessary, and (4) to allow data subjects the exercise of their rights (access, rectification, cancellation, objection, etc.).
Personal data can be transferred to third countries regardless of the level of protection a country provides if transfers are covered by an agreement that is in compliance with the Data Protection Law and with the privacy notice that was made available to data subjects. Consent from data subjects for the transfer of their personal data is sometimes required.
Failure to comply with the provisions of the Data Protection Law may result in hefty fines and, if personal data is processed deceitfully or for profit, penalties of imprisonment may be imposed.
Although Mexico intends to ratify the Budapest Convention on Cybercrime, it has not done so and it is not clear when it will be ratified.
Notwithstanding this, under the Federal Criminal Code, illicit accessing of systems and destruction or causing the loss of information are crimes, along with the disclosure of trade secrets and confidential information. Because of the lack of specific provisions, the police treat certain other cybercrimes as fraud.
Social media and e-commerce
There are no specific regulations or provisions applying to franchises and social media, nor codes of conducts in this regard; however, social media activity is mainly governed by the Data Protection Law and consumer protection legislation.
E-commerce is regulated in Mexico by several laws, including the Code of Commerce and the Federal Law on Consumer Protection, which protects consumers in Mexico, regardless of location of providers.
IV FRANCHISE LAW
In Mexico, the franchise agreement will be governed, and subject to the terms agreed, by the parties, as well as by the provisions set out in the IPL and its implementing Regulation and, for aspects not regulated in the IPL, the general rules of the Federal Civil Code and the Commercial Code. The government agency in charge of applying the IPL is the IMPI. Additionally, depending on the franchise, other laws may apply, such as the Data Protection Law.
A franchise is defined in Article 142 of the IPL, which establishes that a franchise exists when, with a licence to use a trademark granted in writing, technical knowledge is transmitted or technical assistance is provided, for the licensee to produce or sell goods or render services in a uniform manner and with the operating, commercial and administrative methods established by the owner of the trademark, to maintain the quality, reputation and image of the products or services distinguished by the trademark.
ii Pre-contractual disclosure
Prior to granting a franchise, and at least 30 business days before executing the franchise agreement, the franchisor must provide the prospective franchisee with the relevant company information in the FDD.
Article 65 of the Regulations of the IPL establishes that the FDD must contain at least the following technical, economic and financial information:
- name, corporate name or business name, domicile and nationality of the franchisor;
- description of the franchise;
- seniority of the original franchisor and, where applicable, of the master franchisee of the business object of the franchise;
- intellectual property rights involved in the franchise;
- amounts and types of payment that the franchisee must make to the franchisor;
- types of technical assistance and services that the franchisor must provide to the franchisee;
- definition of the geographical area in which the business exploiting the franchise operates;
- franchisee's right to grant sub-franchises to third parties and, if applicable, the requirements the franchisee must satisfy to do so;
- obligations of the franchisee with respect to the confidential information provided by the franchisor; and
- obligations and rights of the franchisee arising from the execution of the franchise agreement.
After timely delivery of the FDD, no additional requirements must be met before executing the agreement. There is no obligation to register the FDD with the IMPI.
A lack of veracity in the information disclosed in the FDD will entitle the franchisee, in addition to demanding the nullity of the agreement, to claim for losses and payment of damages. This right to claim payment of damages may be exercised by the franchisee within the first year of the execution of the agreement, and the franchisee must be able to prove that the damages arose as a consequence of the lack of veracity in the information contained in the FDD.
Failure to provide the FDD upon request by the prospective franchisee is considered an administrative infraction of the IPL. The IMPI may sanction this conduct with an economic fine, temporary or permanent closure of the premises or administrative arrest.
The franchise agreement should be registered with the IMPI to be binding to third parties. In Mexico, trademark owners must prove use to prevent a cancellation action by any third party, and recordal of the franchise agreement with the IMPI would serve as proof of use, granting the owner protection of the trademark. However, although recommended, there is no legal obligation to record the franchise agreement. To maintain certain aspects confidential, a short version of the franchise agreement may be recorded with the IMPI.
iv Mandatory clauses
According to Article 142 bis of the IPL, franchise agreements must be in writing and contain at least the following minimum provisions:
a the geographical zone;
- the location, minimum size and investment characteristics of the infrastructure, relating to the premises in which the franchisee shall carry out the activities deriving from the agreement;
- if applicable, the inventory, marketing and advertising polices, and the provisions relating to the merchandise supply and to contracting with suppliers;
- the policies, procedures and terms for any reimbursement, financing and other considerations that fall within the parties' charge in the terms agreed in the agreement;
- the criteria and methods applicable to determining the franchisee's commission and profit margins;
- the characteristics of the technical and operational training of the franchisee's personnel and the manner in which the franchisor shall provide technical assistance;
- the criteria, methods and procedures of supervision, information, evaluation and valuation of the performance and quality of the services under the responsibility of the franchisor and the franchisee;
- the terms and conditions governing sub-franchising, in the event that it is agreed by the parties;
- the reasons for termination of the franchise agreement;
- the assumptions under which the terms or conditions relating to the franchise agreement may be reviewed and, if applicable, modified by mutual agreement;
- unless otherwise agreed, the absence of an obligation for the franchisee to sell its assets to the franchisor or whoever the franchisor designates at the end of the agreement; and
- any provisions regarding the franchisee's obligation to sell or transfer the shares of its company to the franchisor or to make the franchisor a partner in the company.
v Guarantees and protection
Mexican law contemplates real and personal guarantees. Real guarantees allow creditors to enforce a payment obligation by recourse to the debtor's real estate or personal property, as the case may be. Personal guarantees bind the guarantor to fulfil an obligation (normally payment of money owed) in the event of the debtor's breach. In both cases, the guarantees are aimed at enforcing the creditor's interest by way of a right exercisable over the debtor's property or that of the guarantor.
Each guarantee is specifically regulated. For instance, joint obligors and sureties, as well as mortgages, are regulated by the Federal Civil Code and local civil codes; pledges are regulated by the General Credit Instrument and Transactions Law; and bonds are dealt with under the Insurance and Bonding Institutions Law.
Each guarantee has a specific implementation and, in some cases, a specific enforcement procedure. The convenience of adopting a determined guarantee in a contract should be assessed on a case-by-case basis, in light of the specific covenants to be secured and any other particularities, especially those that might impact the guarantee's enforcement. In Mexican franchise legal practice, the most used guarantee is the personal guarantee.
i Franchisor tax liabilities
A franchisor resident for tax purposes in Mexico is required to pay income tax on its worldwide income. A legal entity is deemed to be a Mexican resident for tax purposes if its main administration or seat of effective management is located in Mexico. Mexican residents are subject to income tax on their profits at a general rate of 30 per cent.
Regarding income from foreign sources, Mexico allows legal entities to credit direct and indirect foreign income taxes capped at the Mexican corporate tax rate, provided the income is subject to tax in Mexico.
Franchisors may deduct only expenses that are strictly necessary to fulfil their corporate purpose, and these include business expenses, certain local taxes and social security contributions, among others.
Mexico has controlled foreign corporation rules, whereby income derived from foreign investments must be taxed in Mexico when accrued in the foreign jurisdiction, even if it has not been distributed to the investor. The foregoing applies where income subject to foreign taxation is taxable a rate of less than 75 per cent of the applicable income tax rate in Mexico or not taxed at all.
Mexican transfer pricing rules apply to business transactions entered into by and between related parties. These provisions are based on the arm's-length standard, as Mexico has adopted most of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Franchisor foreign resident for tax purposes
Domestic law provides that foreign residents obtaining income arising from a source of wealth located in Mexico are required to pay income tax in Mexico. In the case of income arising from royalties or technical assistance (if the technical assistance qualifies as a royalty (know-how)), the source of wealth shall be considered to be in Mexican territory when the goods or rights for which the royalties or the technical assistance are paid are used in Mexico, or when the royalties or the technical assistance are paid by a Mexican resident or by a foreign resident with a permanent establishment in Mexico. The income tax must be withheld by the person making the payments if this is a Mexican resident (Mexican franchisees).
The income tax withheld or paid by the foreign franchisor may be creditable in its country of tax residency.
If the income for royalties is earned by a foreign franchisor whose income is subject to a preferential tax regime, the income for royalties shall be subject to a 40 per cent withholding tax rate, without any deductions, rather than at the tax rates indicated above.
ii Franchisee tax liabilities
Pursuant to domestic law, the income tax associated with royalties paid to foreign residents must be withheld by the person making the payments if this is a Mexican resident (Mexican franchisees) or even a foreign resident.
If the payment is made by a franchisee Mexican resident, the franchisee should withhold the income tax and pay it directly to the Mexican tax authority.
In practice, it could be complicated for the foreign withholding party to pay the relevant tax in Mexico, since there is no an easy mechanism for foreign residents to pay the relevant tax directly.
Mexican franchisees should determine whether the payments for royalties fulfil the Mexican requirements to be deducted as expenses for tax purposes, including in relation to transfer pricing rules.
iii Tax-efficient structures
Mexico has adopted the OECD international tax standards, including recommendations made in relation to base erosion and profit shifting actions. Thus, the tax efficiency of franchising structures should be analysed carefully before any implementation.
Mexico currently has over 75 tax treaties in force with other countries. While these vary considerably in scope and conditions, several grant relief on royalty payments.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
The Mexican Federal Civil Code provides that contracts are perfected by, and binding on, the parties by their mere consent (except for those contracts that require the fulfilment of certain formalities). Once perfected, the parties are bound not only by the covenants expressly agreed, but also by the consequences that, according to the nature of the contract, are consistent with good faith, usage and the law. Similarly, Article 6 bis of the Mexican Commercial Code, obligates individuals and entities engaged in commercial activities to act in accordance with honest practices.
These articles, applicable to the IPL, incorporate the principle of good faith in contracts, which entitles the affected party to claim for damages and lost profits under general liability provisions set forth in Mexican Federal Civil Code.
ii Agency distributor model
Mexican law is very specific as to what constitutes a franchise, therefore, agency or distribution agreements that contain the elements of a franchise will be subject to the IPL, and to the civil or commercial laws applicable to contracts. The government agency in charge of enforcing the IPL is the IMPI.
iii Employment law
In Mexico, the Federal Labor Law (FLL) defines an employment relationship as the rendering of a subordinated personal service by one person to another in exchange for the payment of a wage. The main element of an employment relationship is subordination, which the Fourth Chamber of the Supreme Court of Justice of Mexico has defined as the employer's legal right to control and direct the employee and the employee's corresponding duty to obey the employer. Once an employment relationship exists, all the rights and obligations under the FLL apply automatically, regardless of how the agreement is characterised by the parties, and regardless of the nationality of the employee.
From an employment standpoint, a franchisee in Mexico should not be considered or treated as an employee. Even if the franchise agreement includes certain instructions or obligations charged to the franchisee, they should not be considered work-related instructions but merely the obligations deriving from a commercial agreement.
The franchise agreement should state that both parties are independent contractors and that franchisees are responsible for complying with local employment law by paying employees at the least the minimum statutory benefits afforded by law.
iv Consumer protection
In Mexico, consumer protection is regulated by the Federal Consumer Protection Law (FCPL) and its Regulations. The FCPL applies to both domestic and foreign companies rendering services or providing goods in Mexico.
According to the FCPL, in general terms, a consumer is considered the final beneficiary of the products or services rendered by a supplier; thus, a supplier is someone who offers, distributes, or sells a product or renders a service to a consumer.
In principle, franchisees cannot be treated as consumers, since their activities correspond to the provisions and regulations established for suppliers; however, the FCPL does contemplate an exception and authorises claims by individuals or entities that acquire, warehouse, use or consume goods or services to incorporate them in a productive process, as long as the claims do not exceed 488,736.58 Mexican pesos.
v Competition law
The economic competition framework in force in Mexico is grounded in Article 28 of the Federal Constitution, and further regulated by the Federal Economic Competition Law (FECL). The agency in charge of enforcing the FECL is the Federal Economic Competition Commission (FECC), although it is enforced by the Federal Telecommunications Institute in the broadcasting and telecommunications sectors.
The FECL applies to economic agents, construed as individuals, legal entities, economic groups and in general any private or public agent involved in economic activity.
The FECL regulates four main types of anticompetitive behaviour, namely: (1) absolute monopolistic practices, including hardcore cartel behaviour; (2) relative monopolistic practices, which refer to abuses of a dominant position in the market; (3) anticompetitive concentrations or mergers; and (4) barriers to competition.
There are no specific provisions or exceptions applying specifically to franchises (or e-commerce) in terms of competition enforcement and as such, these will be governed by general provisions. Because of their nature, however, it is common for franchise agreements to include provisions that will be relevant in terms of antitrust assessment and enforcement, as outlined below.
Single-firm conduct and vertical restraints
Pursuant to Articles 54 to 56 of the FECL, exclusive distribution, exclusive supply and, in general, exclusivity clauses, along with product ties, full-line forcing or vertical price-fixing (a common practice in franchise agreements) and other vertical restraints or single-firm conduct5 can qualify as illegal relative monopolistic practices if: (1) the parties have substantial market power in the relevant market;6 (2) the agreement has the object or effect of unduly displacing or restricting third-party market access; and (3) the parties are not able to prove efficiencies outweighing any negative effects of the practice.
These provisions are assessed for their overall impact on competition and thus, while they are not illegal per se, if the effects assessment is negative, the FECC will order the alleged wrongdoers to cease the conduct and is empowered to impose fines of up to 8 per cent of the wrongdoer's annual accruable income.
Although less common in the context of franchises, competition provisions in Mexico will allow active investigation and penalising of agreements between competitors that have the object or effect of fixing prices, restricting output, allocating markets or bids, or the exchanging of information with any of these effects. Such agreements or exchanges of information are per se illegal and will incur not only large administrative fines, but also criminal liability for employees.
In the context of franchises, it is important to bear in mind that franchisees within the franchise might be competitors in the same market; as such, parties within the franchise that are acting as competitors in any market should be careful to avoid such agreements or exchanges of information.
vi Restrictive covenants
As general rule, the will of the parties is the governing law of the agreement. That is to say, the parties are free to agree on the terms and conditions to be included in an agreement, provided they are not contrary to law.
Accordingly, any contractual covenants will be governed and subject to the terms agreed by the parties, as well as, in specific cases, provisions set out in the IPL and civil and commercial principles.
Notably, Article 5 of the Mexican Constitution grants all persons the right to develop the activity, industry, commerce or job they choose as long as it is legal. However, according to the criteria sustained by the Supreme Court of Justice, restrictive agreements or clauses (e.g., non-compete clauses) may be enforceable as long as they are subject to a determined term and territory, and a consideration is paid in exchange. Nevertheless, enforceability may be subject to a court proceeding, which may be time sensitive and, as in any proceeding of this nature, results cannot be anticipated.
Mexican law differentiates termination and rescission of an agreement. Termination is the consequence of the expiration of the term, or achievement of its subject matter, while rescission is the consequence of a breach, which might be declared by the non-breaching party without judicial intervention if this possibility is expressly agreed in the contract. In the case of both termination and rescission, under Mexican law and based on the freedom to contract, the parties can validly agree on restrictive covenants that would survive the termination or rescission of the contract and can be enforced at the request of the interested party.
The Mexican legal system forbids the parties to take matters into their own hands. Following this principle, agreements allowing the franchisor to unilaterally 'de-identify' the franchise facilities, or to take over a franchisee's leases, premises or business are unenforceable and carrying out these actions might trigger criminal and civil actions against the franchisor.
Pursuant to the provision of the IPL, the franchisor and the franchisee cannot terminate the agreement unilaterally, unless it has been executed for an indefinite time, or there is a just cause for it. Should the franchisee (or franchisor) wish to terminate the agreement in advance, whether this happens by mutual agreement or rescission, the franchisee (or franchisor) must comply with the requirements and procedures established in the agreement. In the case of a violation of the provisions, the early termination of the agreement made by the franchisor or franchisee will result in payment of the conventional penalties established in the agreement or in lieu of compensation for the damage caused.
Post-termination of the agreement, certain specific provisions will continue in full force and effect. According to the IPL, both during the term of the agreement and after its conclusion, the franchisee must maintain the confidentiality of any information of that character, and of the operations and activities of the franchise.
viii Anti-corruption and anti-terrorism regulation
Mexico has several regulations on fraud, anti-corruption and anti-money laundering. Fraud is included in the Federal Criminal Code (FCC); anti-corruption is regulated by the Federal Constitution, as well as in secondary laws relating to the recently created National Anti-Corruption System, which is the law applicable to corrupt practices by private parties; anti-money laundering is regulated by the Federal Act to Prevent and Identify Illegally Funded Transactions (the Anti-Money Laundering Law).
Fraud is classified as a criminal offence under the FCC. Companies in Mexico have a legal duty to create internal mechanisms to avoid, prevent or detect this kind of illegal activity; thus, franchisees must be aware what such criminal activity entails and its implications for doing businesses in Mexico.
As part of the National Anti-Corruption System, Congress enacted the General Administrative Liabilities Law, which contemplates several sanctions for public officials, individuals and companies involved in acts of corruption such as bribery, unlawful participation in public bids, misuse of public resources and unlawful contracting with former public officials. Sanctions range from onerous fines to the dissolution of the infringing company for particularly serious offences.
The Anti-Money Laundering Law is a federal law and aims to protect the financial system and the economy of the country by providing means and procedures to detect and prevent activities or transactions involving illegally obtained funds. This Law establishes a catalogue of activities considered to be 'vulnerable activities' in that they may facilitate the dispersion of illegally obtained funds. If a company or a franchisee performs any of these activities habitually, it could be subject to the provisions and regulations of the Anti-Money Laundering Law, and thus would have certain additional obligations.
ix Dispute resolution
In Mexico, when a dispute in relation to a franchise agreement exists, the parties can choose to resolve their disputes through the courts (litigation) or by alternative dispute resolution mechanisms, such as arbitration.
If the parties to the franchise agreement have agreed to submit any resulting disputes to the jurisdiction of any of the local courts of the states of Mexico to be decided under Mexican law, the judicial proceeding will be heard by a local court, generally referred to as a first level or first instance court, which will be responsible for resolving the dispute through a final judgment. This judgment may be challenged through an appeal, which will be decided by a higher-level court, generally referred to as a second instance court. The parties can file a writ of amparo against a final judgment from a second instance court whenever they consider fundamental or constitutional rights to have been violated by an unlawful act or omission by the local courts. The writ of amparo will be heard and resolved by a federal court, which will issue a final judgment.
In the event that the parties agree to arbitrate, either through an arbitration clause in the agreement or after the controversy has arisen, the parties will be forced to honour the terms of the arbitration agreement and have their dispute decided by an arbitral tribunal. There are two types of arbitration: ad hoc arbitration and institutional arbitration. It is fairly common for parties to agree to institutional arbitration for commercial and business matters. By submitting to arbitration, the parties agree that their dispute will be decided by an impartial adjudicator, identified as the arbitrator, whose decision will be final and binding to the parties (the award).
Foreign judgments and arbitral awards that do not contravene Mexican law (public order) are enforceable through a procedure of recognition and enforcement that is carried out before a first instance court. As one of the 159 states contracting to the New York Convention, Mexico is obliged to enforce arbitral awards.
Mediation, is a non-binding alternative dispute resolution mechanism available to any of the parties in a franchise dispute, either through any of the mediation centres of the Superior Court of Justice or through other institutions that have certified mediators. Mediation will not proceed if the counterparty does not agree to mediate and resolve the dispute through a settlement agreement between the parties.
In Mexico, as the administrative authority in matters of industrial property, the IMPI is in charge of resolving any claim of administrative infringement initiated by a franchisor against any person who violates the provisions of the IPL. In this regard, the IPL provides for an administrative conciliation process, in which a neutral intermediary (the IMPI), at the request of one or both parties and at any time during the dispute, will strive to provide an alternative solution. However, this conciliatory process is not common in practice.
VII CURRENT DEVELOPMENTS
There are no developments of particular relevance for franchising in Mexico at present.
1 Eduardo Kleinberg is a partner at Basham, Ringe y Correa, SC. The author would like to thank the following colleagues for their valued contributions to this chapter: Zarina Beltran, Teresa Espinosa, Jesus Colunga, Jose Massas, Julio Copo, Sara Gutierrez, Francisco Matus, Mónica Roldan, Alvaro Gonzalez and Rodolfo Barreda.
4 The OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, also known as the Multilateral Instrument.
5 e.g., refusal to sell, price discrimination, raising rivals costs, margin squeeze and so on.
6 The capacity to fix prices or restrict the supply in the relevant market without competitors being actually or potentially capable of counteracting this capacity.