Costa Rica now has a specific regulatory framework governing franchise agreements following the approval of Law No. 23,448, the Law for the Regulation and Promotion of Franchises, enacted by the Legislative Assembly.
This marks the first comprehensive regulation of the franchise business model in Costa Rica, incorporating mandatory principles, pre-contractual disclosure obligations, and express rules governing the content and limits of franchise agreement provisions.
What changes going forward?
Until now, franchises operated under scattered legal provisions (intellectual property, competition, civil, and commercial law). Under the new law:
- The franchise agreement is now legally defined.
- Mandatory governing principles are established (good faith, collaboration, standardization, territorial delimitation, and bilateral exclusivity).
- The Franchise Disclosure Document (FDD) is formally regulated.
- Certain clauses deemed abusive are expressly prohibited.
- A Registry of Franchising Companies is created.
- Strict consequences are established for inaccurate or incomplete information.
While the law enhances legal certainty, it also significantly raises compliance standards.
Mandatory Franchise Disclosure Document (FDD)
Upon entry into force of the law, franchisors must provide detailed pre-contractual disclosure at least 30 calendar days prior to executing the franchise agreement. The FDD must include, among other items:
- The network’s experience and development history.
- The number of active and terminated franchisees in recent years.
- The structure and territorial scope of the network.
- Relevant litigation history.
- Estimated initial investment.
- Essential economic terms (initial fee, royalties, contributions).
- Properly substantiated financial projections.
- Information regarding technical assistance, training, and suppliers.
Financial projections must be based on sufficiently supported experience or studies. The provision of inaccurate information may result in contractual nullity, repayment of amounts paid, and liability for damages.
Mandatory review of existing agreements
The law establishes mandatory minimum content for franchise agreements, including:
- Territorial scope and exclusivity conditions.
- Confidentiality and know-how protection policies.
- Technical assistance and training obligations.
- Supply, supervision, and control policies.
- Grounds for termination.
- Dispute resolution mechanisms.
- Governing law.
It also introduces specific limitations:
- Non-compete clauses may not exceed five years.
- Post-term restrictions may not exceed one year, except for protection of non-public know-how.
- Clauses prohibiting passive sales within an exclusive territory are prohibited.
This requires franchisors to review and adjust their current contractual models.
A new standard of liability
The new law significantly raises the franchisor’s standard of responsibility. Granting trademark rights or executing a formally structured agreement will no longer be sufficient. Franchisors must:
- Demonstrate effective transfer of know-how.
- Provide ongoing technical assistance.
- Ensure adequate training of franchisees and their personnel.
- Maintain technological and operational updates to the system.
- Deliver clear, objective, and verifiable pre-contractual disclosure.
Failure to comply with these duties may result in direct civil liability.
Benefits for franchisees and SMEs
From the franchisee’s perspective, the law seeks to rebalance the contractual relationship and reduce the historical information asymmetry inherent in this model.
It strengthens transparency at the pre-investment stage, establishes protection mechanisms against inaccurate disclosure, and provides greater certainty regarding territorial rights and exclusivity.
Additionally, the law promotes the participation of small and medium-sized enterprises (SMEs) within the franchise system, facilitating their formalization and expansion under clear regulatory standards.
What should companies do now?
We recommend an immediate assessment in three key areas:
- Compliance audit review: existing agreements, operating manuals, training policies, territorial structure, and financial documentation.
- FDD restructuring: Ensure that all projections are properly substantiated and supported by documentary evidence.
- Preventive risk strategy: Evaluate exposure to current and prospective franchisees and adjust clauses that may be incompatible with the new regulatory framework.
In summary, Law No. 23,448 not only regulates the franchise model but redefines its legal standards in Costa Rica, moving the system toward a framework of greater transparency, formalization, and corporate accountability.
