Legal principle
Article L330-3 of the Commercial Code requires a party which makes available to another party a trade name, trademark or sign in consideration of an exclusivity or quasi-exclusivity commitment to give the other party at least 20 days before executing a contract a document containing accurate information which allows the other party to make an informed commitment. As in most cases, a franchisor will require the franchisee to trade under its distinctive signs on an exclusive basis, and sometimes by procuring most of its products or services from the franchisor or its designated parties; this provision applies almost systematically to franchising transactions.
Article R330-1 of the Commercial Code lists the information and documents to be provided to the potential franchisee in order to allow it to build its business plan. While most of the information listed is factual and straightforward (eg, the franchisor's registration details, the registration details of the licensed trademarks and financial statements for the last five years), some of the listed information may give rise to a more subjective interpretation and lead to disputes between franchisors and franchisees. Notably, this occurs in circumstances where the franchisee's business is unsuccessful and the franchisee alleges that it was misled by the franchisor as to the financial prospects of the franchised business.
The vast majority of cases relate to the requirement contained in Article R330-1 that the franchisor give a presentation on the situation and development perspectives of the relevant market from both a general and local point of view.
In cases where the franchisee has complained about the lack of forecast figures, the courts have tended to find that the law does not require the franchisor to provide a local market survey and a forecast income statement to the franchisee. However, if the franchisor provides a market survey and forecast figures to the franchisee to allow it to build its business plan, such information must be fair and accurate.
Where a court considers that the lack of (or the inaccuracy of) information has deceived the franchisee (which is often the case where the actual turnover is significantly below the forecast figures – for example, by more than 30%), it may hold the franchise agreement to be null and void, and in some cases find the franchisor liable for damages if the latter committed misrepresentation. If the franchisor's misrepresentation or the franchisee's error cannot be demonstrated, a judge may nonetheless grant damages to the franchisee for the loss suffered (covering the costs and investments incurred by the franchisee, but not the profit it expected to make based on the figures provided by the franchisor). This will be the case particularly where the franchisee has become bankrupt because of a structurally loss-making business.
Impact of franchisee's personal knowledge
An issue recently addressed in six Supreme Court decisions(1) is the extent to which such information on the local market should be given to the franchisee when it already operates in a similar business.
The cases related to the franchising of an innovative concept combining insurance and consumer credit. The franchisor allegedly provided little information on the local market conditions (eg, the number of inhabitants in a particular region and old data relating only to the insurance business). Although the appeal courts held that the information was too succinct in the light of the statutory requirements, they refused to grant damages to the franchisees on the ground that they had all previously acted as insurance agents in their respective regions and therefore had some knowledge of the franchised business.
The Supreme Court overruled the decisions and held that the appeal courts had failed to demonstrate how the franchisees' experience derived from the insurance business could be deemed sufficient in relation to an innovative business combining both insurance and consumer credit.
The courts assess the consequences of a violation of the statutory provisions regarding pre-contractual information on a case-by-case basis, taking into account, for example, the expertise of the franchisee, its obligation to carry out its own due diligence and the time it had to investigate the franchised business.
In the context of a new business, it is challenging to provide the same amount of information on the general and local markets as could be expected from a mature market. To mitigate the risk of penalties, the franchisor should substantiate as much as possible in the franchising documentation (in particular, in the preamble to the franchising agreement) the experience gained by a franchisee in a similar business and how such expertise has allowed the franchisee to investigate and understand the features and challenges of the new business in the light of the local market conditions. The franchisor should refrain from providing to the franchisee any forecast profit and loss statement or, if it does so, should be clear as to the assumptions on which the statement is based.
For further information on this topic please contact Raphael Mellerio at Aramis Law Firm by telephone (+33 1 53 30 7700) or email ([email protected]). The Aramis Law Firm website can be accessed at www.aramis-law.com.
Endnotes
(1) Cour de Cassation, Commercial Section, January 5 2016, nos 14-15.700, 14-15.703, 14-15.704, 14-15.706, 14-15.707 and 14-15.708.
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