Q&A: the franchisor-franchisee relationship in France

Franchise contracts and the franchisor/franchisee relationship

Franchise relationship legal guidelines

What legal guidelines regulate the continued relationship between franchisor and franchisee after the franchise contract comes into impact?

No, there are not any particular legal guidelines regulating the continued relationship between franchisor and franchisee through the course of the time period of the franchise settlement. The character of the connection concerned determines what legal guidelines apply: contract regulation, shopper regulation, competitors regulation, product legal responsibility, mental property regulation, employment regulation, private information safety legal guidelines, and so on.

Operational compliance

What mechanisms are generally included in agreements to make sure operational consistency and adherence to model requirements?

Franchise programs should be capable of monitor their franchisees for system compliance to make sure model safety, together with operation of the franchisee enterprise throughout the idea and satisfying their different obligations to the franchisor. This monitoring additionally allows the franchisee to show that the franchisor complies with its obligation of technical and industrial help. Consequently, most franchise agreements give the franchisor the proper to audit franchisee compliance, reporting necessities, an obligation of communication of accountant paperwork by the franchisee and incidence of ‘thriller shopper’ visits held by the franchisor. Nonetheless, the franchisor should be vigilant when utilizing thriller consumers. Certainly, so as to be admissible, proof will need to have been obtained in a good method. Nevertheless, when the fault has been provoked by a thriller shopper, the ensuing proof is unfair and the franchisor can’t use it (Supreme Courtroom, industrial part, 21 November 2021, No. 20-14.670). Nevertheless, this monitoring doesn’t necessitate interference of the franchisor within the administration of the franchisee.

Such a clause should be rigorously drafted and operated in follow. Certainly, for instance, the French courts typically authorise a franchisor to concern directions with a direct impression on the working circumstances of franchisees’ staff, offered that that is mandatory to keep up the repute and the uniformity of the franchise community. If the franchisor points direct and nominative directions to franchisees’ staff or will get concerned in hiring or firing, and extra typically interferes within the administration of the franchisee past its technical and industrial help obligations arising from the franchise settlement, the franchisor may be held to be the de facto supervisor of the franchisee and be chargeable for severe wrongdoing ought to it trigger, for instance, the franchisee’s insolvency. Subsequently, the franchisor could also be ordered to cowl the liabilities of the bankrupt franchisee or the dismissal of the franchisee’s staff.

Modification of operational phrases

Might the franchisor unilaterally change operational phrases and requirements through the franchise relationship?

Normally, the franchise settlement (or any contract) can’t be modified unilaterally by the franchisor or the franchisee. Subsequently, the events should conclude an addendum. Moreover, prior info should be organised between the franchisor and the franchisee relating to the completely different modifications to be made.

Nevertheless, it’s true that the franchisor additionally has an obligation to evolve the system. For franchisees, franchisors needs to be duty-bound to develop and innovate the system, and preserve it aggressive towards different comparable programs. Such modifications may occur through the operation of the franchise settlement. Subsequently, so as to keep away from in search of the franchisee’s consent on this evolution, the authors would suggest inserting an evolution clause that strictly defines the scope the place the settlement of the franchisee wouldn’t be required and the proper to change, for instance, the operational guide every now and then. This clause should be clearly drafted particularly if, in follow, it may result in monetary or necessary operational constraints for the franchisee.

Coverage affecting franchise relations

Do different authorities or commerce affiliation insurance policies have an effect on the franchise relationship?

There isn’t a authorities coverage that considerably impacts the franchise relationship. Relating to commerce affiliation insurance policies, the European Code of Ethics for Franchising and the French Standardisation Organisation customary (NF Z-20 000), that are non-binding guidelines, present pointers to their members on good practices to be carried out of their franchise relationships. The European Code, for instance, incorporates guiding ideas and units forth the respective rights and obligations of the franchisor and of the franchisee, particularly by way of:

• recruitment;
• membership;
• the operation of the community; and
• the contractual relationship earlier than, throughout and after the termination of the franchise settlement.

Termination by franchisor

In what circumstances could a franchisor terminate a franchise relationship? What are the precise authorized restrictions on a franchisor’s potential to terminate a franchise relationship?

A franchise settlement is often entered into for a set time period and might be successively renewed per the phrases of the settlement. If the settlement just isn’t renewed, the contractual discover interval should be complied with. Such discover is required to be ‘cheap’ in order to not run afoul of the provisions of part L 442-1 (II) of the Business Code on sudden termination of a longtime enterprise relationship.

Except the settlement incorporates a selected clause allowing termination by the franchisor in sure circumstances pertaining, for instance, to the income made with the franchisee, and except the franchisee has dedicated contractual breaches, early termination by the franchisor just isn’t attainable. In follow, termination of the franchise relationship on the initiative of the licensor happens if the franchisee fails to pay the franchise royalties or for the products delivered by the franchisor, or commits materials breaches of the franchise settlement, reminiscent of failure to respect the idea, disclosure of know-how, infringement of the franchisor’s mental property or failure to adjust to unique sourcing necessities. Certainly not is the opening of insolvency or comparable proceedings towards a franchisee grounds for termination of the franchise settlement underneath the relevant obligatory public coverage guidelines. The termination clause contained within the franchise settlement authorises the franchisor to straight terminate the settlement with out having to undergo the courts.

The formalities indicated within the settlement needs to be complied with. Sometimes, a termination clause requires a discover of breach, a timeframe (or not) by which to remedy the notified breach and the efficient date of termination. If the franchise settlement doesn’t comprise a termination clause however is terminated by the franchisor, the matter would in the end be determined by the courts within the occasion that the franchisee challenges the termination. The provisions launched by the contract regulation reform in 2016 on the rescission of contracts may have an effect on the franchise relationship (sections 1224 via 1230 of the Civil Code), on condition that they’ve included main modifications. In abstract, within the Civil Code:

• The time period résolution (rendered right here as rescission, and beforehand used as a generic time period for ending an settlement) has changed the time period résiliation (rendered right here as termination for the long run), the usage of which is now reserved to circumstances the place a courtroom cancels an settlement with out ordering restitution of any companies which have already been carried out (part 1229(3)).
• The franchisor could, at its personal threat, after having given discover of breach to the franchisee, rescind the settlement by discover despatched to the latter in case of constant breach (part 1226).
• In any occasion, rescission will also be requested from the courts (part 1227).
• The place the acts of efficiency exchanged have been helpful solely on the complete efficiency of the settlement that has been rescinded, the events shall restore the entire of what they’ve obtained from one another (part 1229(3)).
• Dispute decision clauses (arbitration clause specifically), in addition to confidentiality and non-disclosure clauses, survive the tip of the settlement (part 1230).

 

Case regulation has additionally prolonged the survival of the limitation of legal responsibility clause (Supreme Courtroom, industrial division, 7 February 2018). A rescission risk is now additionally open to each events within the case of unexpected financial circumstances not contemplated by the settlement that come up through the time period of the franchise settlement and that place an extreme burden on a celebration (ie, hardship). Part 1195 of the Civil Code permits the rescission of the franchise settlement by mutual settlement between the events if the franchisee refuses to renegotiate the phrases of the settlement.

Termination by franchisee

In what circumstances could a franchisee terminate a franchise relationship?

The principles relevant to termination are the identical for franchisors and franchisees. In a 28 February 2018 ruling, the Paris Courtroom of Appeals ordered a franchisee to pay damages to the franchisor because of wrongful termination, on the grounds that ‘the voluntary cessation’ of the franchisee’s exercise was not grounds for early termination underneath the phrases of the settlement.

Renewal

How are renewals of franchise agreements normally effected? Do formal or substantive necessities apply?

Franchise agreements are topic to the widespread guidelines of contract regulation and will not be essentially concluded for a fixed-term length. Usually, events conclude a franchise settlement for a interval of 5 to 10 years, and supply a selected clause specifying the phrases and circumstances of the renewal of the franchise settlement. Thus, whether or not the necessities are formal or substantive depends upon what’s indicated within the particular provisions.

A franchisee has normally no computerized proper to resume its franchise settlement. Thus, courts typically rule that the franchisor wouldn’t be liable if it decides to not renew the franchise settlement (Courtroom of Appeals, Paris, 12 January 2005, No. 03/02283; Courtroom of Appeals Versailles, 24 January 2017, No. 15/00955). The franchisor doesn’t should justify its determination to not renew the franchise settlement and the franchisee normally can’t declare any compensation (Courtroom of Appeals Versailles, 14 March 2017, No. 15/00146). Within the case of the renewal of a franchise settlement with a set time period, in any occasion, the renewal entails a brand new franchise settlement and subsequently, the franchisor should present the franchisee with a brand new pre-contractual info doc.

Refusal to resume

Might a franchisor refuse to resume the franchise settlement with a franchisee? If sure, in what circumstances could a franchisor refuse to resume?

Except in any other case contractually agreed, the franchisee has no proper to acquire the renewal of the franchise settlement when the latter has been entered into for a set time period and been carried out via to its time period, and any discover that’s owed contractually or legally has been revered. This precept is now enshrined in part 1212(2) of the French Civil Code (‘No-one could require the renewal of the contract’). Accordingly, except the refusal to resume is unfair or sudden, the franchisor just isn’t chargeable for any indemnity fee on the mere foundation of non-renewal, even within the absence of trigger for non-renewal. The franchisor is underneath no obligation to present causes for the choice to not renew. The franchisor’s legal responsibility can solely be incurred if the choice to not renew the settlement constitutes an abuse of proper, which should be demonstrated by the franchisee. Proof of the abuse of the proper can’t be introduced merely on the idea of the expression of a refusal, the unjustified nature of such refusal, proposing the signature of a special settlement, the mere reality that there’s an financial imbalance between the events or the franchisor’s determination to prioritise the opening of branches in growing the franchise. Lastly, abuse of the proper to not renew the franchise settlement could represent an ‘intentional wrongdoing’ by the licensor (Supreme Courtroom, industrial division, 4 September 2018). Case regulation in legal responsibility circumstances claiming abusive non-renewal by the franchisor primarily contain the reorganisation of distribution networks.

Switch restrictions

Might a franchisor limit a franchisee’s potential to switch its franchise or limit transfers of possession pursuits in a franchisee entity?

A franchise settlement is often deemed to be concluded intuitu personae, at the least the place the franchisee is anxious. This being the case, within the absence of a clause allowing transfers of the franchise settlement, the franchisee can’t switch the settlement with out the consent of the franchisor. It’s, after all, attainable to contractually limit the franchisee’s potential to switch its franchise by requiring, for instance, the franchisor’s approval in case of the sale of the franchisee’s enterprise. Opposite to the switch of the franchise settlement, transfers of possession in a franchisee entity (change of management), inasmuch as that authorized entity stays the identical, don’t infringe the intuitu personae nature of the franchise settlement. Except in any other case offered within the franchise settlement, such a change of management on no account requires the prior approval of the franchisee (Lyon Business Courtroom, 12 June 2015). If an intuitu personae clause permits for early termination of the franchise settlement, it should be for the good thing about each the franchisor and the franchisee. If it is just for the good thing about one in every of them, it’s thought of a clause inflicting a big imbalance and shall be cancelled (Courtroom of Enchantment, Paris, 5 January 2022, No. 20/00737).

Charges

Are there legal guidelines or laws affecting the character, quantity or fee of charges?

There isn’t a regulation or regulation affecting the character, quantity or fee of charges.

Nevertheless, the pre-contractual info doc is required to comprise the monetary particulars of the settlement proposed by the franchisor, and subsequently to specify any upfront entry price, the quantity of the royalties and the way they’re calculated, in addition to the phrases of fee. The doc also needs to comprise an estimate of the general funding required to open the franchise.

Case regulation additionally posits that the franchisor is required to allocate promoting and promotional charges to promoting and promotion, and to offer proof thereof to the community (Versailles Courtroom of Appeals, 29 September 2015).

Usury

Are there restrictions on the quantity of curiosity that may be charged on overdue funds?

The quantity of curiosity that may be charged on overdue funds is set by the events. Nevertheless, part L 441-10 of the French Business Code gives a minimal charge of 3 times the statutory rate of interest. If no charge is offered by the settlement, the speed utilized can be 10 per cent over the official curiosity utilized by the European Central Financial institution to its most up-to-date financing operation. Whereas no particular authorized provision offers with most rates of interest, the imposition of unreasonably excessive charges, specifically relating to industrial practices, could possibly be thought of as manifestly abusive and thus prohibited underneath part L 441-16 and L 442-1 of the Business Code. Collectors may additionally declare damages for any hurt and prices they might have suffered because of late funds.

International alternate controls

Are there legal guidelines or laws limiting a franchisee’s potential to make funds to a international franchisor within the franchisor’s home forex?

No. The events could conform to make funds within the forex of their alternative.

Confidentiality covenant enforceability

Are confidentiality covenants in franchise agreements enforceable?

Confidentiality covenants in franchise agreements are enforceable. As one of many important traits of the franchise settlement is the transmission of know-how, this supposes the attainable conclusion, through the negotiation part, of a confidentiality or non-disclosure settlement. The primary goal of a franchise settlement consists of the reiteration of know-how, subsequently the negotiations themselves contain the sharing of confidential info, even when that info doesn’t essentially correspond to the know-how itself. For instance, this info could allow the franchisee candidate to evaluate the standard of the strategy to be transferred, in addition to details about the community that the candidate is considering becoming a member of. Equally, most franchise agreements comprise, in order to guard the franchisor’s know-how, a confidentiality clause whereby the franchisee undertakes to not disclose such know-how to 3rd events. Within the case of litigation in regards to the breach of the sort of clause (and thus the termination of the franchise settlement by the franchisor primarily based on such breach), the courts could limit its scope of software, for instance by excluding info that’s the truth is already publicly obtainable or a scope insufficiently restricted in house (Courtroom of Enchantment, Toulouse, 18 November 2020, No.19/00757; Courtroom of Enchantment, Angers, 10 November 2020 No.16/01971). For the reason that 2016 reform of contract regulation, part 1230 of the Civil Code additionally expressly gives that confidentiality clauses expressly survive the settlement.

Good-faith obligation

Is there a basic authorized obligation on events to cope with one another in good religion through the time period of the franchise settlement? If that’s the case, how does it have an effect on franchise relationships?

Pursuant to part 1104 of the French Civil Code, agreements should be negotiated, concluded and carried out in good religion. This basic contract rule totally applies to franchise agreements. It implies, specifically, an obligation of loyalty and cooperation in any respect phases of the efficiency of the franchise settlement.

 

Franchisees as customers

Does any regulation deal with franchisees as customers for the needs of shopper safety or different laws?

Solely customers and non-professionals profit from shopper regulation safety. The rationae personae scope of shopper regulation is, subsequently, typically tough to ascertain. The legislator outlined the notion of shopper for the primary time in Act No. 2014-344 of 17 March 2014 (popularly generally known as the Hamon Legislation). Beforehand, it was left to the courts to outline what shopper meant. The authorized definition established is broad, as is codified within the preliminary part of the French Client Code as referring to ‘any pure individual appearing for functions apart from his industrial, industrial, craft, career or agricultural exercise’. The definition of a shopper given in article 2-1 of Directive No. 2011/83/EU on shopper rights is ‘any pure one who, in contracts lined by this Directive, is appearing for functions which can be exterior his commerce, enterprise, craft or career’. Authorized individuals, subsequently, fall exterior the scope of the definition of ‘shopper’.

Order No. 2016-301 of 14 March 2016, which totally recast the legislative a part of the Client Code, added to the preliminary part of the Client Code the class of ‘non-professional’. The definition of a non-professional was simplified by Act No. 2017-203 of 21 February 2017, which ratified the order and outlined a non-professional as ‘any authorized one who just isn’t appearing for skilled functions’. Accordingly, in contrast to a shopper, a authorized individual can profit from standing as a non-professional. Nevertheless, a non-professional can solely profit from the provisions of the Client Code that particularly cowl non-professionals. The identical preliminary part of the Client Code defines knowledgeable as ‘any pure or authorized individual, public or non-public, appearing for functions associated to his industrial, industrial, craft, career or agricultural exercise, together with when he acts within the identify or on behalf of one other skilled’.

 

It isn’t all the time straightforward, within the follow of shopper regulation, to find out who qualifies as a shopper, a non-professional or knowledgeable. The Supreme Courtroom has adopted a stance on this respect in two rulings dated 29 March 2017, by which it held {that a} ‘authorized individual appearing for functions that are exterior its industrial, industrial, craft, career or agricultural exercise’ can qualify as a non-professional and thus profit from shopper regulation safety. Accordingly, if a franchisee is a authorized individual and acts within the scope of its franchising exercise, it won’t be protected underneath shopper regulation.

Language of the settlement

Should disclosure paperwork and franchise agreements be within the language of your nation?

There isn’t a particular authorized requirement that the disclosure doc or the franchise settlement be written in French. Nevertheless, to keep away from any future argument that the licensee didn’t consent to contract on a totally knowledgeable foundation, it could be safer for the paperwork and agreements to be drafted in French or else translated into French.

Restrictions on franchisees

What sorts of restrictions are generally positioned on the franchisees in franchise contracts?

There are typically no restrictions on provisions in franchise contracts. A notable exception issues competitors regulation. 

Courts and dispute decision

Describe the courtroom system. What sorts of dispute decision procedures can be found related to franchising?

The French courtroom system has two separate orders: administrative courts and judicial courts. The courtroom earlier than which a dispute is introduced depends upon the subject material and the quantity at stake.

The judicial or ‘unusual’ courtroom system is comprised of civil, industrial and legal courts. A dispute involving a typical franchise settlement falls throughout the jurisdiction of the unusual courts, of which there are three ranges: the industrial courtroom (courtroom of first occasion), the courtroom of appeals and the Supreme Courtroom. A franchise dispute may additionally be topic to arbitration if the franchise settlement incorporates an arbitration clause or if the events so resolve when the dispute arises.

Mediation in its place dispute decision technique can be obtainable.

Arbitration – benefits for franchisors

What are the principal benefits and downsides of arbitration for international franchisors contemplating doing enterprise in your jurisdiction? Are some other various dispute decision (ADR) procedures notably favoured or disfavoured in your jurisdiction?

The principal benefits are as follows.

• The events could select a number of arbitrators specialising within the regulation or in a given discipline, relying on the specifics of the dispute. For instance, an arbitral panel could also be composed of 1 lawyer and two technical specialists or by a lawyer, a businessperson and a technical specialist.
• Arbitration is confidential. Hearings will not be open to the general public. Events not wishing their case or sure associated elements to turn into public information have each curiosity in resorting to arbitration.
• Arbitration avoids jurisdictional conflicts between courts, specifically in worldwide disputes and extra typically in conflict-of-law points. It subsequently affords better safety than judicial decision.
• Enforcement is feasible in every single place.
• Arbitral awards have the pressure of judicial choices and might be simply enforced overseas via worldwide arbitral conventions to which many international locations are signatories.
• Arbitration is expeditious.
• The time interval by which the award should be entered is about by the events or, in any other case, by the Guidelines of Arbitration.
• Challenges of an arbitral award are restricted in scope.

 

The primary drawback might be the price of arbitration.

Nationwide therapy

In what respects, if in any respect, are international franchisors handled in a different way (legally, or as a sensible matter) from home franchisors?

International franchisors will not be handled in a different way from home franchisors.

Pursuant to the provisions of part L151-1 of the Financial and Monetary Code, monetary dealings between France and overseas are unrestricted. Nevertheless, in sure restricted sectors (reminiscent of these involving nationwide defence or affecting public order, or actions which can be important to safe the pursuits of the nation), part L151-3 of the Financial and Monetary Code submits international buyers to a previous authorisation course of.