Franchise and significant imbalance: a gale-force warning
French law and courts jeopardizing franchising : a short reminder on these issues seems necessary. Redlink franchising team can be of some help with these new concerns.
The Paris Court of Appeal has followed the lead of the Paris Commercial Court. A judgment of October 13, 2020, following a referral from the Minister of Economy (which was appealed), has shaken up the peaceful climate of franchising, as it had been spared until then from sanctions for significant imbalance in contracts (Article L442-1 of the Commercial Code). The Paris Court of Appeal took a similar position in a decision dated January 5, 2022.
After being examined by the French Competition Control Authority, the franchise agreements in question were unraveled. Just forgetting that the franchise is an atypical contract where one of the parties transmits its know-how, concedes its brands and assists its franchisee, to give him the means of a commercial success.
The Minister boldly or imperiously challenged certain clauses, which were validated as not creating a significant imbalance:
1. The clause relating to the payment of the entry fee and training:
- Payment of an entry fee of €10,000,
- In case of failure to complete the training or if the restaurant does not open within two years of the signature, the 10,000€ is not refunded.
- the clause is valid.
2. The clause relating to the payment of royalties, the management of the point of sale and penalties / interest for late payment:
- While the Minister ardently defends -and logically so- the respect of payment deadlines, he contested a clause involving weekly deductions of royalties with late payment penalties.
- With respect to advertising fees, the Minister of the Economy was unable to demonstrate a significant imbalance.
- Regaing the consultation of the franchisees' accounting documents by the franchisor or a mandated third party, the court ruled out the significant imbalance: the clause supervises the franchisors' daily activity and management and falls within the franchisor's duty to assist.
3. Clause relating to the franchisor's exemption from liability in the event of the franchisee's economic failure.
- The Court dismisses the legal scope of the clause, as it is provided in the preamble...
4. Language of drafting
- An agreement drafted in English and in French, with the English version being the prevailing version, does not entail a significant imbalance.
5. Initial layout of the points of sale
- No imbalance if the franchisee chooses the architect for FF&Es.
6. Control of the points of sale by the franchisor
- No imbalance, as this is part of the franchisor's obligations.
7. Setting of sales prices and control of promotional activities
- No imbalance found in the absence of evidence.
8. Training provided within the network and its billing to the franchisee
- No imbalance, in the absence of sufficient evidence.
Other clauses are sanctioned for significant imbalance and cancelled:
1. Clause relating to the opening hours of sales outlets
- An obligation to open restaurants every day of the week, with a minimum of 98 hours, unless authorized by the franchisor, constitutes a significant imbalance, as this obligation is non-negotiable and does not take into account the location of the outlet.
- Obligation of the franchisee to take out a civil liability insurance policy with a minimum guarantee of €1,700,000 and a cover of €850,000 for company vehicles. In the event of non-compliance, the franchisee must reimburse, without limit, all reasonable costs incurred by the franchisor in enforcing this obligation.
- The absence of a limit on reimbursement by the franchisee creates a significant imbalance.
3. Non-Exclusive Territory Clauses and the Franchisor's Right to Compete
- Possibility for the franchisor to grant licenses to any person, even if they compete with an established franchisee,
- Contractual non-competition clause by the franchisee.
- The conjunction of these two clauses creates a significant imbalance in favour of the franchisor. The TC advocates a right of first refusal by the franchisee on the site of a former franchisee and the possibility for the franchisee to terminate the franchise agreement in the event of the installation of a new franchisee in the vicinity.
4. Clauses relating to the duration and termination of the agreement
- The exclusivity has the same duration as the franchise agreement, which is 20 years. According to the court, the exclusivity cannot be longer than 10 years and the franchise agreement must be for 10 years. It creates a significant imbalance
- Termination of the contract: In case of insolvency of the franchisee, the contract is terminated, the clause is deemed unbalanced because there is no definition of "insolvency",
- In the event of a third breach within 12 months of the previous breaches, the contract is terminated by operation of law, the clause is unbalanced because the franchisor can terminate the contract for any breach, including for exceptional circumstances.
- At the end of the contract, the franchisee must, within a reasonable period of time, de-identify the restaurant, under penalty of a fine of €175 per day, the clause is deemed to be unbalanced because no definition of a reasonable period of time is given.
5. Clauses on applicable law and jurisdiction
- The contract is governed by Dutch law and an arbitration court located in New York ;
- The court considers the clause to be legally and culturally too restrictive.
9. Intuitu personae clause
- Impossibility of assignment or transfer of the contract without the agreement of the franchisor,
- The franchisee must be informed of any project that affects the distribution of capital / the identity of the managers, with the possibility of early termination at no cost to the franchisor.
- The court decides that the term "incident" is too vague and that the economy of the contract would require a choice of franchisor by the franchisee.
10. Termination and termination clauses in the franchise agreement
- Termination for the sole benefit of the franchisor for breaches not necessarily covered by the franchise agreement: breach of the spirit of the agreement/non-payment of an invoice from a referenced supplier/non-compliance by the franchisee with laws relating to the business, management and operation of the business,
- Penalty clause applicable for each breach,
- No indemnity in case of termination at the franchisor's expense.
- The judges consider that all these stipulations create a significant imbalance.
The unbalanced clauses are cancelled...