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24 May 2016
The government recently published an order relating to the reform of contract law, which is considered to be the most significant since the Civil Code was enacted in 1804. Generally, the order enshrines some of the principles and solutions that have been developed by established case law. However, it also introduces notable changes in regards to specific issues, some of which may affect the formation and performance of franchising agreements.
Under the new Article 1112-1 of the Civil Code:
"the party who knows an information which is decisive to the consent of the other must inform the second party, provided that the latter legitimately ignores such information or relies on its co-contracting party. Nevertheless, such duty of information does not relate to the assessment of the value of the service. The information having a decisive nature is that which has a direct and necessary link with the content of the contract or the status of the parties... The parties may neither limit nor exclude such duty. Without prejudice to the liability of the party bound by such duty, failure to respect such duty may cause the agreement to be held null and void [on the ground of error or misrepresentation]."
Under Article L330-3 of the Commercial Code, franchisors are already bound by a specific pre-contractual disclosure obligation. Article R330-1 of the code lists the information and documents to be provided to the potential franchisee in order to allow it to build its business plan (for further details please see "Pre-contractual disclosure: impact of franchisee's knowledge of business").
Under the new Article 1112-1 of the Civil Code – which sets out a general mandatory information obligation – franchisees may be entitled to rely not only on the specific contractual disclosure obligation, but also on the general provision. Consequently, franchisees may argue that information that was crucial to the franchisor's consent (albeit not information listed in Article R330-1 of the Commercial Code) was not or was improperly disclosed to them. However, this ability should be limited due to the insertion of the term 'legitimately', which suggests that the franchisee has a parallel enquiry obligation.
Under the new Article 1195 of the Civil Code:
"if a change of circumstances which was unforeseen at the time of the formation of the agreement renders performance excessively onerous for a party who did not accept to bear the related risk, the latter may request from the other party a renegotiation of the agreement. Pending such renegotiation, the requesting party continues to perform its obligations. In case the renegotiation is refused or falls through, the parties may agree to terminate the agreement upon the date and at conditions they determine or jointly ask the judge to adapt the agreement. If no agreement is reached within a reasonable deadline, the judge may upon the request of either party, revise the agreement or terminate it, upon the date and at conditions he determines."
Contrary to the position currently adopted by civil courts, a party will be entitled to request the revision of an agreement in the event of an unforeseen change of circumstances. In such a case, the judge may not only terminate the agreement, but also revise it – which provides for a potentially high level of judicial interference. However, as the new Article 1195 is not a public order provision, the parties may expressly derogate therefrom. Due to the duration of franchising agreements, and the potential for the economic parameters to evolve significantly throughout their performance, franchisors may wish to insert a specific derogation from the clause or alternatively to use narrowly defined hardship clauses.
The new Article 1171 of the Civil Code provides that:
"in a pre-formulated standard agreement, any clause which creates a significant imbalance between the rights and obligations of the parties to an agreement is deemed null and void. The determination of the significant imbalance does not relate to the main object of the agreement or the adequacy of the price to the performance."
In order to understand the potential impact of such a provision on franchising agreements, it is necessary to refer to the definition of a 'pre-formulated standard agreement' in the order – namely, an agreement whose general terms, "excluded from the negotiation, are determined in advance by one of the parties". A franchising agreement will likely fall within the definition of a 'pre-formulated standard agreement' under the new provisions of the Civil Code, even if specific clauses (eg, the royalty amount) may sometimes be discussed with the franchisee or master franchisee.
The concept of significant imbalance derives from consumer law (Article L132-1 of the Consumer Code) and the law governing trade relationships between retailers and their suppliers (Articles L442-6(1) and (2) of the Commercial Code). Although neither the price nor the object of the agreement can be challenged under the new Article 1171 of the Civil Code, it remains to be seen whether judges will use such text to set aside or restrict the application of, for example, exclusion of liability, exclusivity and non-compete clauses.
The order will enter into force on October 1 2016. Franchising agreements should be drafted in consideration of the new provisions in order to minimise the risk of judicial intervention.
For further information on this topic please contact Raphael Mellerio at Aramis Law Firm by telephone (+33 1 53 30 7700) or email (email@example.com). The Aramis Law Firm website can be accessed at www.aramis-law.com.
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