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France | Pre-contractual disclosure in distribution and franchise agreements
31 марта 2021
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Under French Law, franchisors and distributors are subject to two kinds of pre-contractual information obligations: each party has to spontaneously inform his future partner of any information which he knows is decisive for his consent. In addition, for certain contracts – i.e franchise agreement – there is a duty to disclose a limited amount of information in a document. These pre-contractual obligations are mandatory. Thus these two obligations apply simultaneously to the franchisor, distributor or dealer when negotiating a contract with a partner.
General duty of disclosure for all contractors
What is the scope of this pre-contractual information?
This obligation is imposed on all co-contractors, to any kind of contract. Indeed, article 1112-1 of the Civil Code states that:
(§. 1) The party who knows information of decisive importance for the consent of the other party must inform the other party if the latter legitimately ignores this information or trusts its co-contractor.
(§. 3) Of decisive importance is the information that is directly and necessarily related to the content of the contract or the quality of the parties. »
This obligation applies to all contracting parties for any type of contract.
Who must prove the compliance with such provision ?
The burden of proof rests on the person who claims that the information was due to him. He must then prove (i) that the other party owed him the information but (ii) did not provide it (Article 1112-1 (§. 4) of the Civil Code)
Special duty of disclosure for franchise and distribution agreements
Which contracts are subject to this special rule?
French law requires (art. L.330-3 French Commercial Code) communication of a pre-contractual information document (in French “DIP”) and the draft contract, by any person:
- which grants another person the right to use a trade mark, trade name or sign,
- while requiring an exclusive or quasi-exclusive commitment for the exercise of its activity (e.g. exclusive purchase obligation).
Concretely, DIP must be provided, for example, to the franchisee, distributor, dealer or licensee of a brand, by its franchisor, supplier or licensor as soon as the two above conditions are met.
When the DIP must be provided?
DIP and draft contract must be provided at least 20 days before signing the contract, and, where applicable, before the payment of the sum required to be paid prior to the signature of the contract (for a reservation).
What information must be disclosed in the DIP?
Article R. 330-1 of the French Commercial Code requires that DIP mentions the following information (non-detailed list) concerning:
- Franchisor (identity and experience of the managers, career path, etc.);
- Franchisor’s business (in particular creation date, head office, bank accounts, historical of the development of the business, annual accounts, etc.);
- Operating network (members list with indication of signing date of contracts, establishments list offering the same products/services in the area of the planned activity, number of members having ceased to be part of the network during the year preceding the issue of the DIP with indication of the reasons for leaving, etc.);
- Trademark licensed (date of registration, ownership and use);
- General state of the market (about products or services covered by the contract)and local state of the market (about the planned area) and information relating to factors of competition and development perspective;
- Essential element of the draft contract and at least: its duration, contract renewal conditions, termination and assignment conditions and scope of exclusivities;
- Financial obligations weighing in on contracting party: nature and amount of the expenses and investments that will have to be incurred before starting operations (up-front entry fee, installation costs, etc.).
How to prove the disclosure of information?
The burden of proof for the delivery of the DIP rests on the debtor of this obligation: the franchisor (Cass. Com., 7 July 2004, n°02-15.950). The ideal for the franchisor is to have the franchisee sign and date his DIP on the day it is delivered and to keep the proof thereof.
The clause of contract indicating that the franchisee acknowledges having received a complete DIP does not provide proof of the delivery of a complete DIP (Cass. com, 10 January 2018, n° 15-25.287).
Sanction for breach of pre-contractual information duties
Criminal sanction
Failing to comply with the obligations relating to the DIP, franchisor or supplier can be sentenced to a criminal fine of up to 1,500 euros and up to 3,000 euros in the event of a repeat offence, the fine being multiplied by five for legal entities (article R.330-2 French commercial Code).
Cancellation of the contract for deceit
The contract may be declared null and void in case of breach of either article 1112-1 or article L. 330-3. In both cases, failure to comply with the obligation to provide information is sanctioned if the applicant demonstrates that his or her consent has been vitiated by error, deceit or violence. Where applicable, the parties must return to the state they were in before the contract.
Regarding deceit, Courts strictly assess its two conditions which are:
- (a material element) the existence of a lie or deceptive reticence (article 1137 French Civil Code);
- And (an intentional element) the intention to deceive his co-contractor (article 1130 French Civil Code).
Damages
Although the claims for contract cancellation are subject to very strict conditions, it remains that franchisees/distributors may alternatively obtain damages on the basis of tort liability for non-compliance with the pre-contractual information obligation, subject to proof of fault (incomplete or incorrect information), damage (loss of chance of not contracting or contracting on more advantageous terms) and the causal link between the two.
French case law
Franchisee/distributor must demonstrate that he would not have actually entered into the contract if he had had the missing or correct information
Courts reject motion for cancellation of a franchise contract when the franchisee cannot prove that this deceit would have misled its consent or that it would not have entered into the contract if it had had such information (for instance: Versailles Court of Appeal, December 3, 2020, no. 19/01184).
The significant experience of the franchisee/distributor greatly mitigates the possible existence of a defect in consent.
In a ruling of January 20, 2021 (no. 19/03382) the Paris Court of Appeal rejected an application for cancellation of a franchise contract where the franchisor had submitted a DIP manifestly and deliberately deficient and an overly optimistic turnover forecast.
Thus, while the presentation of the national market was not updated and too vague and that of the local market was just missing, the Court rejected the legal qualification of the franchisee’s error or the franchisor’s willful misrepresentation, because the franchisee «had significant experience» for several years in the same sector (See another example for a Master franchisee)
Similarly, the Court reminds that “An error concerning the profitability of the concept of a franchise cannot lead to the nullity of the contract for lack of consent of the franchisee if it does not result from data established and communicated by the franchisor«, it does not accept the error resulting from the communication by the franchisor of a very optimistic turnover forecast tripling in three years. Indeed, according to the Court, «the franchisee’s knowledge of the local market was likely to enable it to put the franchisor’s exaggerations into perspective, at least in part. The franchisee was well aware that the forecast document provided by the franchisor had no contractual value and did not commit the franchisor to the announced results. It was in fact the franchisee’s responsibility to conduct its own market research, so that if the franchisee misunderstood the profitability of the operation at the business level, this error was not caused by information prepared and communicated by the franchisor«.
The path is therefore narrow for the franchisee: he cannot invoke error concerning profitability when it is him who draws up his plan, and even when this plan is drawn up by the franchisor or based on information drawn up and transmitted by the franchisor, the experience of the franchisee who knew the local market may exonerate the franchisor.
Takeaways
- The information required by the DIP must be fully completed and updated ;
- The information not required by the DIP but communicated by the franchisor must be carefully selected and sincere;
- Franchisee must be given the opportunity to request additional information from the franchisor;
- Franchisee’s experience in the economic sector enables the franchisor to considerably limit its exposure to the risk of contract cancellation due to a defect in the franchisee’s consent;
- Franchisor must keep the proof of the actual disclosure of pre-contractual information (whether mandatory or not).
Franchise contracts almost always incorporate post-contractual non-competition clauses.
- The Franchisor intends to prevent that, once the contract is over, the Franchisee takes advantage of the “goodwill” generated by the franchised activity becoming an obvious competitor.
- The Franchisee, on the other hand, intends to have his hands as free as possible in order to devote to any activity, whether or not it competes with the business of its former Franchisor.
The natural vocation of the Franchisor is to build these covenants in the widest possible way, both territorially and temporarily, but that attitude easily collides with the non- competition EU regulations.
In 2013, the EU Court of Justice issued (case La Retoucherie / Manuel C) an order answering a question submitted by a Spanish Court that ruled that such restrictions on post-contractual free competition would only be valid if they were preached only with respect to the “premises” in which the terminated franchise contract had been developed, while the prohibition could not extend its effects to the locality (town or city) or to a larger geographical territory (region or country).
On the other hand, the Franchisor usually requires that the franchise agreement is subject to the legislation and the jurisdiction of the country where its headquarters are located, avoiding the legislation and jurisdiction of the courts of the franchisee’s country.
A few months ago the Superior Court of Justice of Madrid issued an interesting ruling on this issue declaring void an arbitration award by the International Court of Arbitration of the ICC.
- The arbitration award ruled about the contractual relation between a Spanish franchisor and an Argentine franchisee and a post-contractual non-competition clause that prevented the franchisee from performing competitive activities at the end of the contract throughout the territory of Argentina and Uruguay; the contract was subject to Spanish legislation and jurisdiction and, as mentioned above, it was obviously contrary to EU law.
- The arbitration award considered that the aforementioned post-franchise non-competition clause was valid and accordingly ordered the former franchisee to pay the contractually provided penalty.
- The arbitrator’s argument was that the rules of the European treaty on competition are limited to competition in the EU internal market and to trade among the Member States while the conflict judged in the arbitration was a franchise agreement that prohibited post-contract competition on the Argentinian and Uruguayan markets, which are not part of the EU internal market.
- The Superior Court of Justice of Madrid did not share this argument and declared the arbitration decision void; the Judgment argued that Spanish law “ineluctably” incorporates the EU regulations beyond its territorial scope; therefore, if a restrictive agreement is authorized by European law, it must be considered lawful in Spanish domestic law; and vice versa, if the agreement is considered illegal or not authorized by community law, it will not be lawful in our domestic law.
- Consequently, since Spanish law was applicable to the franchise contract in question, the arbitrator should have applied European law, and should have analyzed the non-competition agreement in the light of the European rules no matter if its effects were deployed in non-EU territories.
The relevant conclusion is clear: if the franchise contract is subject to the legislation of an EU country, even if the territory where the franchise deploys its effects is outside the EU, it will be unavoidably subject to the regulations of the EU on competition restrictive agreements.
The European franchisor must then decide if he prefers to submit to the legislation of his country or to the regulations of the country where the franchise is located, perhaps more permissive and less restrictive with respect to these types of agreements.
To create a homogeneous franchise system where all franchisees have to comply with the same requirements, franchisors typically use standard form franchise contracts – i.e. contracts pre-formulated drafted and provided by the franchisor for a multiple number of franchisees.
Within Germany, such franchise contracts have to comply with the quite strict German laws on standard form contracts (even in B2B). As a rule of thumb, such standard form contracts must be reasonable in order to be valid. Vice versa, they are void if they unreasonably disadvantage the franchisee, especially if
- they are not compatible with essential principles of law, or
- restrict essential rights or duties arising from the nature of the franchise contract to such an extent that the contractual purpose is endangered.
The same goes for handbooks, guidelines or other manuals: they all qualify as standard form contracts under German law (sec. 305 (1) German Civil Code [“BGB”]).
Moreover, franchise contracts must not excessively restrict the franchisee’s economic freedom. Worst case risk – as recently reconfirmed by the Federal Court –: the entire franchise contract is void!
“A franchise agreement is null and void in its entirety because of infringing sec. 138 BGB if the franchisee’s economic freedom is excessively impaired due to a large number of provisions which advantage the franchisor unilaterally and disadvantage the franchisee, for which no even approximately appropriate compensation is granted to the franchisee (…). This requires an overall assessment of the contractual agreement and the circumstances leading to the conclusion of the contract. Indications of an immoral gagging of the franchisee may be a provision with stipulates the franchisor’s authority to collect debts, thus enabling the franchisor to redirect payments to the franchisor, as well as contractual provisions restricting the franchisee’s economic freedom beyond what is typical for such a distribution system.”
(Decision of 11.10.2018, Case No. VII ZR 298/17, para. 17 [own translation] – regarding a “licensing contract” for realtors).
Practical advice
- This new decision by the Federal Court confirms the rather restrictive, rather franchisee-friendly decisions handed down by German courts in the past (e.g. the Federal Court’s Decision on fast food chains of 12.11.1986, Case No. VIII ZR 280/85, para. 10).
- To minimize the risk of invalidity, franchisors ideally observe the relevant statutory requirements on standard form contracts and the relevant case law on franchise contracts. According to the latest decision above, special care should be taken when the franchise contract provides for the franchisor’s power to collect debts. A way out could be the choice of another law – if the franchisor is based outside Germany (cf. Art. 3 Rome-I-Regulation).
- For guidance on franchisors’ advertising and pricing campaigns and compliance with antitrust law, check out the article “Franchise systems: ad campaigns with low prices can come costly!”.
Franchisors may run ad campaigns with low prices. Such campaigns, however, can come costly if they have an anticompetitive effect, especially if they factually force the franchisees to offer the products for the low prices.
Best example: pricing campaigns for the “burger of the week”, as decided by the Munich Regional Court in its decision of 26 October 2018 (Case No. 37 O 10335/15).
The situation
The plaintiffs are franchisees of the defendant’s franchise network, a restaurant chain. In addition to the obligation to pay «royalties» in return for the use of the franchise systems and its trade marks (5%), the franchise agreements also obliged the franchisees to pay a sales-related advertising fee. The defendant and franchisor used the advertising fees of the franchisees, among others, to advertise products from the plaintiffs’ menu at low prices, e.g. under the slogan «King of the Month«. By participating in the advertising campaigns and its low prices, the sales of the franchisees increased and thus the franchise fee they had to pay. After some time, the franchisees decided that this advertising campaign caused them financial damage – because the products offered for a low price affected the sale of products offered at a normal price (“cannibalism effect”). They no longer participated in the campaign and demanded an appropriate reduction of their advertising fee. Among other things, they brought an action for an injunction against the use of the advertising fee for the campaign complained of and for a declaratory judgment of the liability to pay damages. The Regional Court granted both motions.
The main reason. The advertising campaigns had the effect of restricting competition, namely the franchisees’ ability to determine their sale prices (contrary to sec. 1 and 2 (2) German Act against Restraints of Competition and Art. 2 (1), Art. 4 a) Vertical Block Exemption Regulation). After all, the franchisor set – so the court – the resale price through the de facto binding effect of the ad campaign.
The decision stands in line with the previous case law, especially of the German Federal Court’s decisions on low-price campaigns by franchisors of
- self-drive rental vehicles (“Sixt ./. Budget”, 02.02.1999, Case No. KZR 11/97, para.30),
- pet food (“Fressnapf”, 04.02.2016, Case No. I ZR 194/14, para. 14), and
- glasses within a dual distribution system where the franchisor sold the products through its own branches and through franchisees without differentiating between branch and franchise operations (“Apollo Optik”, 20.05.2003, Case No. KZR 27/02, para. 37).
Practical tips
- Obligations that are essential for running the franchise system do not restrict competition for the purposes of the EU antitrust rules (similar to the US law’s “ancillary restraints doctrine”). In particular, the following restrictions are typically indispensable components of a functioning franchise agreement:
- Restrictions of the transfer of know-how;
- Non-compete obligations (during and after the term of the agreement), prohibiting the franchisee from opening a shop of the same or similar nature in an area where he may compete with other members of the franchise network;
- Obligations of the franchisee not to transfer his shop without the franchisor’s prior approval.
(cf. EU Court of Justice, 28.01.1986, Case “Pronuptia”, Case No. 161/84 para. 16. 17).
- However, franchise systems are not per se exempted from the prohibition of restricting competition. Therefore, watch out to comply with the EU antitrust rules to avoid painful fines and ensure that the franchise agreement can be enforced.
- The prohibition of price-fixing (or Resale Price Maintenance) applies to the relationship between franchisor and franchisee if the franchisee bears the economic risk of its enterprise. To avoid that an ad campaign with recommended resale prices constitutes an anticompetitive price-fixing, the concrete situation needs to be assessed thoroughly. What helps to avoid also any factual binding effect:
- Add a clarifying note: “Only at participating restaurants in … . As long as stocks last.”
- Ensure that such note is clearly visible, e.g. by adding an asterisk “*” to the price.
- Avoid any measures that could be interpreted as pressure or incentive for the franchisees and which would turn the recommended price into a fixed price (e.g. because other pricing would otherwise lead to negative evaluations).
- Such ad campaigns may work, as a UK court’s decision shows: According to the BBC, Burger King franchisees sued the franchisor in 2009 “because a corporate promotion required franchisees to sell a double cheeseburger for $1 that cost a $1.10 to make. The court ruled for Burger King.” Under the above circumstances and also for short-term promotions, franchisors may even impose the resale price – such campaigns just need to be well prepared.
- For an overview on resale price maintenance, see the Legalmondo article Resale Price Maintenance and Exceptions for short-term promotions.
- Resale Price Maintenance can come costly – in 2018, the European Commission imposed fines of EUR 111 million in total on four consumer electronics manufacturers – Asus, Denon & Marantz, Philips and Pioneer – for fixing online resale prices (cf. the Press release of 24 July2018).
Once convinced of the utility of mediation as a method of resolving conflicts between franchisor and franchisee and taken the decision to include a clause in the contracts that provides for it, the last step would be what elements should be taken into account when drafting it.
- The previous negotiation. It seems advisable that both parties grant themselves the possibility of trying to solve the problem with a previous formal negotiation. Mediation does not exclude the previous attempt made by the interested parties or their lawyers; however, it seems advisable to contractually provide a suitable end according to the circumstances. Experience shows that lengthening this phase too long may result in the conflict becoming more complicated and even more difficult to approach mediation.
- The clause may also provide for the place where the mediation will take place. Again at this point the parties are free. It is convenient that this is accurate indicating the concrete city.
- The language in which the mediation will be developed is the a faculty of the parties. There will be no difficulty in mediations in which both parties use the same language, but it is very convenient in contracts with parties that have different languages, or that belong to regions or countries with different co-official languages. The drafting or signing of the contract in a specific language does not presuppose that this must be the language of the mediation. It is an element to be taken into account also when requesting a mediator who can use that language in the chosen mediation institution.
- The procedure can also be decided by the parties. In particular, the number of sessions, the maximum expected duration, the participation of advisors, etc. Keep in mind that the greater or lesser regulation will allow to avoid future conflicts in this respect, although it will also imply a greater limit to the freedom of the parties that, nevertheless, will remain free to modify the agreement by mutual consent.
- The term of the mediation can also be contemplated. This would allow, for example, to prevent mediation from being extended only for purely procedural strategic purposes or to gather information from the other party before starting a procedure, etc. The professional mediators, however, are able to identify these manoeuvres, also having the power to put an end to mediation in those cases.
- Choosing the mediator or the mediation institution is an important choice. The parties can agree on who will be their mediator, indicate in the contract the elements to choose it, or submit directly to a Mediation Institution so that it is the one who designates it according to its own rules. These decisions can be alternatives (that is, that the parties agree on the mediator and, in case of lack of agreement, submit to an institution that names it), or they can be unique. The designation of an Institution requires that it has a sufficient guarantee of stability (avoid designating short-term institutions or without much future guarantee), with a sufficient panel of mediators depending on the characteristics of the mediation (language, competence, experience) and that allows the necessary flexibility for its operation.
- Finally, it is convenient that the clause includes an alternative way in case the mediation does not succeed either because the parties do not reach an agreement, or because they withdraw from the mediation. It is important to recall that mediation does not close the doors to the conflict be resolved by recourse to ordinary jurisdiction or arbitration. And in terms of specialized arbitration in distribution contracts, the IDArb (https://www.idiproject.com/content/idarb-idi-arbitration-project) is an excellent option.
On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”
We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:
- Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
- If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
- The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
- By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
- In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
- It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
- Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
- Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.
On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”
It is recommended that franchise agreements clearly foresee how to solve and deal with potential conflicts. The relationship between franchisor and franchisee may have some difficulty due, for example, to the absence of specific regulation of its content (at least in Spain) and to the fact that its elements are contained in different pieces of legislation. What I will say in these posts could also be useful for other distribution contracts, or in general collaboration agreements, although I will focus on franchising due to its special characteristics.
Conflicts between franchisees and franchisors can cover multiple legal and commercial aspects: product supplies, brands, know-how, exclusivity and territory, non-competition, promotion and advertising, sales through the Internet … And all this, in a context in which, frequently, both parties want to maintain their collaboration and good relations.
How to face, then, these potential conflicts? A first step is usually the direct negotiation between the parties and their advisers who have the task of being useful to them in this purpose. But this does not always end with a positive result. And the almost natural step if this happens is usually the beginning of a judicial procedure often preceded by a series of previous formal requirements.
However, there is a way that, taking into account the characteristic elements of the franchise contract and the nature of possible conflicts, can be an excellent and privileged alternative method to solve them: mediation. Let’s see why:
- In mediation there is no third party that imposes its decision on the conflict. The franchisor and the franchisee solve it by themselves with the help of a professional (the mediator) who, in a neutral and independent way, uses their skills and specifically acquired knowledge (help in identifying the interests of the parties, active listening, legitimacy …) so that both can reach a consensus. The mediator does not advise (the parties can go with their respective advisors), it does not decide or sentence, but it helps that the parties find the solution that most satisfies both: they better than anyone else know the business, its evolution, the aspects perhaps not foreseen in the contract and the future that they want for themselves.
- Mediation is a harmonized mode of dispute resolution in the European Union through the Directive on certain aspects of mediation in civil and commercial matters. This allows the parties in different Member States to be familiar with it, therefore it is possible to foresee a unified system in contracts with international parties, and it will be easier to enforce the agreements reached.
- Mediation allows, therefore, to satisfy both parties better than the judicial alternative and with more creative solutions that a judge will never be able to apply. Unlike a legal proceeding where one usually wins and another loses, mediation can bring together the interests of franchisees and franchisors and, in this way, both obtain a better response. It allows a less belligerent and more friendly format that can be very useful since in many cases the disputes do not have too much entity to go to court, or refer to non-essential aspects of the relationship, or can be addressed from more global perspectives or with references to objective parameters. In addition, frequently, franchisees and franchisors want to continue maintaining their commercial relationship and, through mediation, resolved the conflict, this will be possible (unthinkable, however, if they had initiated a judicial confrontation).
- Mediation is, in principle, voluntary. At any time, the parties can abandon it even in those Member States or conflicts for which it may be mandatory to attend at least to the information session.
- It is a method that easily adapts to the characteristics of both parties: it is very flexible with the formalities, and the franchisor and the franchisee are who, with the help of the mediator, design a large part of the procedure to arrive at a solution being able to control its evolution. It also allows a solution that is much more adapted to their specific situation, provides more imaginative solution ideas, allows better dialogue, maintains the relationship, distinguishes facts from opinions or judgments, and allows the parties to return to their business saving energies that would otherwise be devoted to conflict management.
- It is a faster procedure than a trial, with a cost that can be assumed and controlled in advance.
- Mediation is confidential, so the publicity of the conflict is reduced, avoiding reputation costs or by extending to the rest of the network. What is treated in a mediation procedure cannot be disclosed even in a subsequent judicial proceeding.
- Both parties can arrive at a solution that will be binding for them. In addition, even if no agreement is reached, with the mediation the parties are in a better position to continue the relationship and resolve their problems: they have been able to present their points of view, they have been heard and have listened, they have opened dialogue channels, they have been able to show greater flexibility and, in short, they have improved their relations as a requirement to end the conflict and reach agreements.
- The degree of compliance with conflicts resolved through mediation is much higher than those imposed by a judge since the agreements are more satisfactory for them and it has been the parties themselves who have decided what to do.
- And finally, if the mediation has not worked, the possibility of claiming in the courts remains open.
France is a great market for franchise networks where almost 2,000 networks are operated. It is one of the most successful scheme of developing business.
Franchisor must mainly respect French regulations on pre-disclosure information and French and EU competition regulations, among others rules. Although the control of the quality of its network and of its brand image is a very important and legitimate issue for franchisor, the latter cannot interfere too much in the day-to-day activity of the franchisees, since franchisees are independent businesses. Therefore relations between franchisors and franchisees are only based on commercial law and not on employment law. However, recent French rules will lead franchisors to implement some employment law rules with their franchisees and franchisees’ employees.
Foreign franchisors operating franchise networks in France must indeed know how to deal with the constraints incurred by the Employment Act (dated 08 August 2016) and its Decree (dated 04 May 2017), and effective as from May 07 2017, relating to the creation of an employee forum for the whole franchise network. Indeed this Social Dialogue Committee can impact deeply the organization of franchise networks.
First of all, only networks in which operators are bound by franchise agreements are concerned by the new social dialogue committee. Accordingly, trademark licensing and distribution contracts appear not to be included. Franchise agreements should be understood as sui generis contracts that are the sum of three separate agreements: a trademark licensing agreement, a know-how licensing agreement, and a commercial or technical assistance agreement. However, the Act of 08 august 2016 creates some confusion by stating that the franchise agreements concerned by this Social Dialogue Committee are the agreements “referred to in article L330-3 of the French Commercial Code”, although not only does that article not define what a franchise contract is, it may also apply to other contracts (exclusive distribution agreements) to determine whether the network fall into the scope of this Act.
Furthermore, according to the Act, only specific franchise agreements including “clauses that have an impact on work organisation and conditions in franchisee businesses” are concerned. The Act does not define such clauses although, on the one hand, whether a social dialogue committee is called for depends on identifying such clauses, and on the other hand, franchisees are in essence independent of the franchisor when organising and managing their business, including in employment matters. It will therefore be necessary to conduct an employment audit of all franchise agreements (for instance, what happens if a clause sets opening hours or defines a dress code?) to determine whether the network fall into the scope of this Act.
Finally, a Social Dialogue Committee is only called for in franchise networks employing at least 300 staff working (full-time) in France. It would seem that this does not include the franchisor’s employees or the employees of operators that are not bound to the network’s head by a franchise agreement (e.g., operators bound by a trademark licensing contract).
An implementation implying a long negotiation
Even where the legal requirements are met, franchisors are under no obligation to set up a Social Dialogue Committee spontaneously. However, once a trade union has called for an Social Dialogue Committee to be set up, the franchisor does have an obligation to take part actively in the negotiations initiated by that trade, to check with all the franchisees whether the number of employees in its network reaches the 300 threshold, and then to set up a “negotiation forum” made of representatives of employees (trade unions) and of employers (franchisor and franchisees) to negotiate an agreement creating and organizing the future Social Dialogue Committee.
The negotiations with trade unions and franchisees will end, within six months, in an agreement subject to the consent of franchisor, trade union(s) and at least of 30% of the franchisees (representing 30 % of the employees of the network). This agreement shall define the Social Dialogue Committee’s composition, how its members are designated, their term of office, the frequency of meetings, if and how many hours employees may dedicate to the committee, the material or financial means required for the committee to fulfill its purpose, and how running and meeting costs and representatives’ travel and subsistence expenses are handled, among other things. This last issue could be a major concern not only for franchisor but also for franchisees-employers. Failing to reach such agreement, the Decree imposes the creation of the Social Dialogue Committee with several strict and minimum provisions which could create unreasonable burden for the franchisor.
Once set up, internal rules define precisely how the Social Dialogue Committee is to function (required majorities, notices of meeting and referral, publication of debates, etc.).
Much ado about nothing?
The Social Dialogue Committee does not have the authority to investigate cases or to issue binding rulings, but the Social Dialogue Committee must be kept informed of franchisees joining or leaving the network and “of the franchisor’s decisions liable to impact the volume and structure of staff, working time, or the employment, work, and vocational training conditions of the franchisees’ employees”.
The Social Dialogue Committee may also make suggestions for improving such conditions throughout the network.
The impact of the Social Dialogue Committee is eventually rather limited, but franchisors have to master and control seriously the implementation of the rules in order to avoid loss of times and energy by their own franchisees and a disorganisation of its network.
The Milestone EU-Mercosur Trade Deal
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France: Ambush marketing and the Paris 2024 Olympic Games
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Scrivi a Christophe
Spain — Franchising — Non Competition clauses
23 октября 2019
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Under French Law, franchisors and distributors are subject to two kinds of pre-contractual information obligations: each party has to spontaneously inform his future partner of any information which he knows is decisive for his consent. In addition, for certain contracts – i.e franchise agreement – there is a duty to disclose a limited amount of information in a document. These pre-contractual obligations are mandatory. Thus these two obligations apply simultaneously to the franchisor, distributor or dealer when negotiating a contract with a partner.
General duty of disclosure for all contractors
What is the scope of this pre-contractual information?
This obligation is imposed on all co-contractors, to any kind of contract. Indeed, article 1112-1 of the Civil Code states that:
(§. 1) The party who knows information of decisive importance for the consent of the other party must inform the other party if the latter legitimately ignores this information or trusts its co-contractor.
(§. 3) Of decisive importance is the information that is directly and necessarily related to the content of the contract or the quality of the parties. »
This obligation applies to all contracting parties for any type of contract.
Who must prove the compliance with such provision ?
The burden of proof rests on the person who claims that the information was due to him. He must then prove (i) that the other party owed him the information but (ii) did not provide it (Article 1112-1 (§. 4) of the Civil Code)
Special duty of disclosure for franchise and distribution agreements
Which contracts are subject to this special rule?
French law requires (art. L.330-3 French Commercial Code) communication of a pre-contractual information document (in French “DIP”) and the draft contract, by any person:
- which grants another person the right to use a trade mark, trade name or sign,
- while requiring an exclusive or quasi-exclusive commitment for the exercise of its activity (e.g. exclusive purchase obligation).
Concretely, DIP must be provided, for example, to the franchisee, distributor, dealer or licensee of a brand, by its franchisor, supplier or licensor as soon as the two above conditions are met.
When the DIP must be provided?
DIP and draft contract must be provided at least 20 days before signing the contract, and, where applicable, before the payment of the sum required to be paid prior to the signature of the contract (for a reservation).
What information must be disclosed in the DIP?
Article R. 330-1 of the French Commercial Code requires that DIP mentions the following information (non-detailed list) concerning:
- Franchisor (identity and experience of the managers, career path, etc.);
- Franchisor’s business (in particular creation date, head office, bank accounts, historical of the development of the business, annual accounts, etc.);
- Operating network (members list with indication of signing date of contracts, establishments list offering the same products/services in the area of the planned activity, number of members having ceased to be part of the network during the year preceding the issue of the DIP with indication of the reasons for leaving, etc.);
- Trademark licensed (date of registration, ownership and use);
- General state of the market (about products or services covered by the contract)and local state of the market (about the planned area) and information relating to factors of competition and development perspective;
- Essential element of the draft contract and at least: its duration, contract renewal conditions, termination and assignment conditions and scope of exclusivities;
- Financial obligations weighing in on contracting party: nature and amount of the expenses and investments that will have to be incurred before starting operations (up-front entry fee, installation costs, etc.).
How to prove the disclosure of information?
The burden of proof for the delivery of the DIP rests on the debtor of this obligation: the franchisor (Cass. Com., 7 July 2004, n°02-15.950). The ideal for the franchisor is to have the franchisee sign and date his DIP on the day it is delivered and to keep the proof thereof.
The clause of contract indicating that the franchisee acknowledges having received a complete DIP does not provide proof of the delivery of a complete DIP (Cass. com, 10 January 2018, n° 15-25.287).
Sanction for breach of pre-contractual information duties
Criminal sanction
Failing to comply with the obligations relating to the DIP, franchisor or supplier can be sentenced to a criminal fine of up to 1,500 euros and up to 3,000 euros in the event of a repeat offence, the fine being multiplied by five for legal entities (article R.330-2 French commercial Code).
Cancellation of the contract for deceit
The contract may be declared null and void in case of breach of either article 1112-1 or article L. 330-3. In both cases, failure to comply with the obligation to provide information is sanctioned if the applicant demonstrates that his or her consent has been vitiated by error, deceit or violence. Where applicable, the parties must return to the state they were in before the contract.
Regarding deceit, Courts strictly assess its two conditions which are:
- (a material element) the existence of a lie or deceptive reticence (article 1137 French Civil Code);
- And (an intentional element) the intention to deceive his co-contractor (article 1130 French Civil Code).
Damages
Although the claims for contract cancellation are subject to very strict conditions, it remains that franchisees/distributors may alternatively obtain damages on the basis of tort liability for non-compliance with the pre-contractual information obligation, subject to proof of fault (incomplete or incorrect information), damage (loss of chance of not contracting or contracting on more advantageous terms) and the causal link between the two.
French case law
Franchisee/distributor must demonstrate that he would not have actually entered into the contract if he had had the missing or correct information
Courts reject motion for cancellation of a franchise contract when the franchisee cannot prove that this deceit would have misled its consent or that it would not have entered into the contract if it had had such information (for instance: Versailles Court of Appeal, December 3, 2020, no. 19/01184).
The significant experience of the franchisee/distributor greatly mitigates the possible existence of a defect in consent.
In a ruling of January 20, 2021 (no. 19/03382) the Paris Court of Appeal rejected an application for cancellation of a franchise contract where the franchisor had submitted a DIP manifestly and deliberately deficient and an overly optimistic turnover forecast.
Thus, while the presentation of the national market was not updated and too vague and that of the local market was just missing, the Court rejected the legal qualification of the franchisee’s error or the franchisor’s willful misrepresentation, because the franchisee «had significant experience» for several years in the same sector (See another example for a Master franchisee)
Similarly, the Court reminds that “An error concerning the profitability of the concept of a franchise cannot lead to the nullity of the contract for lack of consent of the franchisee if it does not result from data established and communicated by the franchisor«, it does not accept the error resulting from the communication by the franchisor of a very optimistic turnover forecast tripling in three years. Indeed, according to the Court, «the franchisee’s knowledge of the local market was likely to enable it to put the franchisor’s exaggerations into perspective, at least in part. The franchisee was well aware that the forecast document provided by the franchisor had no contractual value and did not commit the franchisor to the announced results. It was in fact the franchisee’s responsibility to conduct its own market research, so that if the franchisee misunderstood the profitability of the operation at the business level, this error was not caused by information prepared and communicated by the franchisor«.
The path is therefore narrow for the franchisee: he cannot invoke error concerning profitability when it is him who draws up his plan, and even when this plan is drawn up by the franchisor or based on information drawn up and transmitted by the franchisor, the experience of the franchisee who knew the local market may exonerate the franchisor.
Takeaways
- The information required by the DIP must be fully completed and updated ;
- The information not required by the DIP but communicated by the franchisor must be carefully selected and sincere;
- Franchisee must be given the opportunity to request additional information from the franchisor;
- Franchisee’s experience in the economic sector enables the franchisor to considerably limit its exposure to the risk of contract cancellation due to a defect in the franchisee’s consent;
- Franchisor must keep the proof of the actual disclosure of pre-contractual information (whether mandatory or not).
Franchise contracts almost always incorporate post-contractual non-competition clauses.
- The Franchisor intends to prevent that, once the contract is over, the Franchisee takes advantage of the “goodwill” generated by the franchised activity becoming an obvious competitor.
- The Franchisee, on the other hand, intends to have his hands as free as possible in order to devote to any activity, whether or not it competes with the business of its former Franchisor.
The natural vocation of the Franchisor is to build these covenants in the widest possible way, both territorially and temporarily, but that attitude easily collides with the non- competition EU regulations.
In 2013, the EU Court of Justice issued (case La Retoucherie / Manuel C) an order answering a question submitted by a Spanish Court that ruled that such restrictions on post-contractual free competition would only be valid if they were preached only with respect to the “premises” in which the terminated franchise contract had been developed, while the prohibition could not extend its effects to the locality (town or city) or to a larger geographical territory (region or country).
On the other hand, the Franchisor usually requires that the franchise agreement is subject to the legislation and the jurisdiction of the country where its headquarters are located, avoiding the legislation and jurisdiction of the courts of the franchisee’s country.
A few months ago the Superior Court of Justice of Madrid issued an interesting ruling on this issue declaring void an arbitration award by the International Court of Arbitration of the ICC.
- The arbitration award ruled about the contractual relation between a Spanish franchisor and an Argentine franchisee and a post-contractual non-competition clause that prevented the franchisee from performing competitive activities at the end of the contract throughout the territory of Argentina and Uruguay; the contract was subject to Spanish legislation and jurisdiction and, as mentioned above, it was obviously contrary to EU law.
- The arbitration award considered that the aforementioned post-franchise non-competition clause was valid and accordingly ordered the former franchisee to pay the contractually provided penalty.
- The arbitrator’s argument was that the rules of the European treaty on competition are limited to competition in the EU internal market and to trade among the Member States while the conflict judged in the arbitration was a franchise agreement that prohibited post-contract competition on the Argentinian and Uruguayan markets, which are not part of the EU internal market.
- The Superior Court of Justice of Madrid did not share this argument and declared the arbitration decision void; the Judgment argued that Spanish law “ineluctably” incorporates the EU regulations beyond its territorial scope; therefore, if a restrictive agreement is authorized by European law, it must be considered lawful in Spanish domestic law; and vice versa, if the agreement is considered illegal or not authorized by community law, it will not be lawful in our domestic law.
- Consequently, since Spanish law was applicable to the franchise contract in question, the arbitrator should have applied European law, and should have analyzed the non-competition agreement in the light of the European rules no matter if its effects were deployed in non-EU territories.
The relevant conclusion is clear: if the franchise contract is subject to the legislation of an EU country, even if the territory where the franchise deploys its effects is outside the EU, it will be unavoidably subject to the regulations of the EU on competition restrictive agreements.
The European franchisor must then decide if he prefers to submit to the legislation of his country or to the regulations of the country where the franchise is located, perhaps more permissive and less restrictive with respect to these types of agreements.
To create a homogeneous franchise system where all franchisees have to comply with the same requirements, franchisors typically use standard form franchise contracts – i.e. contracts pre-formulated drafted and provided by the franchisor for a multiple number of franchisees.
Within Germany, such franchise contracts have to comply with the quite strict German laws on standard form contracts (even in B2B). As a rule of thumb, such standard form contracts must be reasonable in order to be valid. Vice versa, they are void if they unreasonably disadvantage the franchisee, especially if
- they are not compatible with essential principles of law, or
- restrict essential rights or duties arising from the nature of the franchise contract to such an extent that the contractual purpose is endangered.
The same goes for handbooks, guidelines or other manuals: they all qualify as standard form contracts under German law (sec. 305 (1) German Civil Code [“BGB”]).
Moreover, franchise contracts must not excessively restrict the franchisee’s economic freedom. Worst case risk – as recently reconfirmed by the Federal Court –: the entire franchise contract is void!
“A franchise agreement is null and void in its entirety because of infringing sec. 138 BGB if the franchisee’s economic freedom is excessively impaired due to a large number of provisions which advantage the franchisor unilaterally and disadvantage the franchisee, for which no even approximately appropriate compensation is granted to the franchisee (…). This requires an overall assessment of the contractual agreement and the circumstances leading to the conclusion of the contract. Indications of an immoral gagging of the franchisee may be a provision with stipulates the franchisor’s authority to collect debts, thus enabling the franchisor to redirect payments to the franchisor, as well as contractual provisions restricting the franchisee’s economic freedom beyond what is typical for such a distribution system.”
(Decision of 11.10.2018, Case No. VII ZR 298/17, para. 17 [own translation] – regarding a “licensing contract” for realtors).
Practical advice
- This new decision by the Federal Court confirms the rather restrictive, rather franchisee-friendly decisions handed down by German courts in the past (e.g. the Federal Court’s Decision on fast food chains of 12.11.1986, Case No. VIII ZR 280/85, para. 10).
- To minimize the risk of invalidity, franchisors ideally observe the relevant statutory requirements on standard form contracts and the relevant case law on franchise contracts. According to the latest decision above, special care should be taken when the franchise contract provides for the franchisor’s power to collect debts. A way out could be the choice of another law – if the franchisor is based outside Germany (cf. Art. 3 Rome-I-Regulation).
- For guidance on franchisors’ advertising and pricing campaigns and compliance with antitrust law, check out the article “Franchise systems: ad campaigns with low prices can come costly!”.
Franchisors may run ad campaigns with low prices. Such campaigns, however, can come costly if they have an anticompetitive effect, especially if they factually force the franchisees to offer the products for the low prices.
Best example: pricing campaigns for the “burger of the week”, as decided by the Munich Regional Court in its decision of 26 October 2018 (Case No. 37 O 10335/15).
The situation
The plaintiffs are franchisees of the defendant’s franchise network, a restaurant chain. In addition to the obligation to pay «royalties» in return for the use of the franchise systems and its trade marks (5%), the franchise agreements also obliged the franchisees to pay a sales-related advertising fee. The defendant and franchisor used the advertising fees of the franchisees, among others, to advertise products from the plaintiffs’ menu at low prices, e.g. under the slogan «King of the Month«. By participating in the advertising campaigns and its low prices, the sales of the franchisees increased and thus the franchise fee they had to pay. After some time, the franchisees decided that this advertising campaign caused them financial damage – because the products offered for a low price affected the sale of products offered at a normal price (“cannibalism effect”). They no longer participated in the campaign and demanded an appropriate reduction of their advertising fee. Among other things, they brought an action for an injunction against the use of the advertising fee for the campaign complained of and for a declaratory judgment of the liability to pay damages. The Regional Court granted both motions.
The main reason. The advertising campaigns had the effect of restricting competition, namely the franchisees’ ability to determine their sale prices (contrary to sec. 1 and 2 (2) German Act against Restraints of Competition and Art. 2 (1), Art. 4 a) Vertical Block Exemption Regulation). After all, the franchisor set – so the court – the resale price through the de facto binding effect of the ad campaign.
The decision stands in line with the previous case law, especially of the German Federal Court’s decisions on low-price campaigns by franchisors of
- self-drive rental vehicles (“Sixt ./. Budget”, 02.02.1999, Case No. KZR 11/97, para.30),
- pet food (“Fressnapf”, 04.02.2016, Case No. I ZR 194/14, para. 14), and
- glasses within a dual distribution system where the franchisor sold the products through its own branches and through franchisees without differentiating between branch and franchise operations (“Apollo Optik”, 20.05.2003, Case No. KZR 27/02, para. 37).
Practical tips
- Obligations that are essential for running the franchise system do not restrict competition for the purposes of the EU antitrust rules (similar to the US law’s “ancillary restraints doctrine”). In particular, the following restrictions are typically indispensable components of a functioning franchise agreement:
- Restrictions of the transfer of know-how;
- Non-compete obligations (during and after the term of the agreement), prohibiting the franchisee from opening a shop of the same or similar nature in an area where he may compete with other members of the franchise network;
- Obligations of the franchisee not to transfer his shop without the franchisor’s prior approval.
(cf. EU Court of Justice, 28.01.1986, Case “Pronuptia”, Case No. 161/84 para. 16. 17).
- However, franchise systems are not per se exempted from the prohibition of restricting competition. Therefore, watch out to comply with the EU antitrust rules to avoid painful fines and ensure that the franchise agreement can be enforced.
- The prohibition of price-fixing (or Resale Price Maintenance) applies to the relationship between franchisor and franchisee if the franchisee bears the economic risk of its enterprise. To avoid that an ad campaign with recommended resale prices constitutes an anticompetitive price-fixing, the concrete situation needs to be assessed thoroughly. What helps to avoid also any factual binding effect:
- Add a clarifying note: “Only at participating restaurants in … . As long as stocks last.”
- Ensure that such note is clearly visible, e.g. by adding an asterisk “*” to the price.
- Avoid any measures that could be interpreted as pressure or incentive for the franchisees and which would turn the recommended price into a fixed price (e.g. because other pricing would otherwise lead to negative evaluations).
- Such ad campaigns may work, as a UK court’s decision shows: According to the BBC, Burger King franchisees sued the franchisor in 2009 “because a corporate promotion required franchisees to sell a double cheeseburger for $1 that cost a $1.10 to make. The court ruled for Burger King.” Under the above circumstances and also for short-term promotions, franchisors may even impose the resale price – such campaigns just need to be well prepared.
- For an overview on resale price maintenance, see the Legalmondo article Resale Price Maintenance and Exceptions for short-term promotions.
- Resale Price Maintenance can come costly – in 2018, the European Commission imposed fines of EUR 111 million in total on four consumer electronics manufacturers – Asus, Denon & Marantz, Philips and Pioneer – for fixing online resale prices (cf. the Press release of 24 July2018).
Once convinced of the utility of mediation as a method of resolving conflicts between franchisor and franchisee and taken the decision to include a clause in the contracts that provides for it, the last step would be what elements should be taken into account when drafting it.
- The previous negotiation. It seems advisable that both parties grant themselves the possibility of trying to solve the problem with a previous formal negotiation. Mediation does not exclude the previous attempt made by the interested parties or their lawyers; however, it seems advisable to contractually provide a suitable end according to the circumstances. Experience shows that lengthening this phase too long may result in the conflict becoming more complicated and even more difficult to approach mediation.
- The clause may also provide for the place where the mediation will take place. Again at this point the parties are free. It is convenient that this is accurate indicating the concrete city.
- The language in which the mediation will be developed is the a faculty of the parties. There will be no difficulty in mediations in which both parties use the same language, but it is very convenient in contracts with parties that have different languages, or that belong to regions or countries with different co-official languages. The drafting or signing of the contract in a specific language does not presuppose that this must be the language of the mediation. It is an element to be taken into account also when requesting a mediator who can use that language in the chosen mediation institution.
- The procedure can also be decided by the parties. In particular, the number of sessions, the maximum expected duration, the participation of advisors, etc. Keep in mind that the greater or lesser regulation will allow to avoid future conflicts in this respect, although it will also imply a greater limit to the freedom of the parties that, nevertheless, will remain free to modify the agreement by mutual consent.
- The term of the mediation can also be contemplated. This would allow, for example, to prevent mediation from being extended only for purely procedural strategic purposes or to gather information from the other party before starting a procedure, etc. The professional mediators, however, are able to identify these manoeuvres, also having the power to put an end to mediation in those cases.
- Choosing the mediator or the mediation institution is an important choice. The parties can agree on who will be their mediator, indicate in the contract the elements to choose it, or submit directly to a Mediation Institution so that it is the one who designates it according to its own rules. These decisions can be alternatives (that is, that the parties agree on the mediator and, in case of lack of agreement, submit to an institution that names it), or they can be unique. The designation of an Institution requires that it has a sufficient guarantee of stability (avoid designating short-term institutions or without much future guarantee), with a sufficient panel of mediators depending on the characteristics of the mediation (language, competence, experience) and that allows the necessary flexibility for its operation.
- Finally, it is convenient that the clause includes an alternative way in case the mediation does not succeed either because the parties do not reach an agreement, or because they withdraw from the mediation. It is important to recall that mediation does not close the doors to the conflict be resolved by recourse to ordinary jurisdiction or arbitration. And in terms of specialized arbitration in distribution contracts, the IDArb (https://www.idiproject.com/content/idarb-idi-arbitration-project) is an excellent option.
On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”
We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:
- Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
- If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
- The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
- By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
- In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
- It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
- Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
- Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.
On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”
It is recommended that franchise agreements clearly foresee how to solve and deal with potential conflicts. The relationship between franchisor and franchisee may have some difficulty due, for example, to the absence of specific regulation of its content (at least in Spain) and to the fact that its elements are contained in different pieces of legislation. What I will say in these posts could also be useful for other distribution contracts, or in general collaboration agreements, although I will focus on franchising due to its special characteristics.
Conflicts between franchisees and franchisors can cover multiple legal and commercial aspects: product supplies, brands, know-how, exclusivity and territory, non-competition, promotion and advertising, sales through the Internet … And all this, in a context in which, frequently, both parties want to maintain their collaboration and good relations.
How to face, then, these potential conflicts? A first step is usually the direct negotiation between the parties and their advisers who have the task of being useful to them in this purpose. But this does not always end with a positive result. And the almost natural step if this happens is usually the beginning of a judicial procedure often preceded by a series of previous formal requirements.
However, there is a way that, taking into account the characteristic elements of the franchise contract and the nature of possible conflicts, can be an excellent and privileged alternative method to solve them: mediation. Let’s see why:
- In mediation there is no third party that imposes its decision on the conflict. The franchisor and the franchisee solve it by themselves with the help of a professional (the mediator) who, in a neutral and independent way, uses their skills and specifically acquired knowledge (help in identifying the interests of the parties, active listening, legitimacy …) so that both can reach a consensus. The mediator does not advise (the parties can go with their respective advisors), it does not decide or sentence, but it helps that the parties find the solution that most satisfies both: they better than anyone else know the business, its evolution, the aspects perhaps not foreseen in the contract and the future that they want for themselves.
- Mediation is a harmonized mode of dispute resolution in the European Union through the Directive on certain aspects of mediation in civil and commercial matters. This allows the parties in different Member States to be familiar with it, therefore it is possible to foresee a unified system in contracts with international parties, and it will be easier to enforce the agreements reached.
- Mediation allows, therefore, to satisfy both parties better than the judicial alternative and with more creative solutions that a judge will never be able to apply. Unlike a legal proceeding where one usually wins and another loses, mediation can bring together the interests of franchisees and franchisors and, in this way, both obtain a better response. It allows a less belligerent and more friendly format that can be very useful since in many cases the disputes do not have too much entity to go to court, or refer to non-essential aspects of the relationship, or can be addressed from more global perspectives or with references to objective parameters. In addition, frequently, franchisees and franchisors want to continue maintaining their commercial relationship and, through mediation, resolved the conflict, this will be possible (unthinkable, however, if they had initiated a judicial confrontation).
- Mediation is, in principle, voluntary. At any time, the parties can abandon it even in those Member States or conflicts for which it may be mandatory to attend at least to the information session.
- It is a method that easily adapts to the characteristics of both parties: it is very flexible with the formalities, and the franchisor and the franchisee are who, with the help of the mediator, design a large part of the procedure to arrive at a solution being able to control its evolution. It also allows a solution that is much more adapted to their specific situation, provides more imaginative solution ideas, allows better dialogue, maintains the relationship, distinguishes facts from opinions or judgments, and allows the parties to return to their business saving energies that would otherwise be devoted to conflict management.
- It is a faster procedure than a trial, with a cost that can be assumed and controlled in advance.
- Mediation is confidential, so the publicity of the conflict is reduced, avoiding reputation costs or by extending to the rest of the network. What is treated in a mediation procedure cannot be disclosed even in a subsequent judicial proceeding.
- Both parties can arrive at a solution that will be binding for them. In addition, even if no agreement is reached, with the mediation the parties are in a better position to continue the relationship and resolve their problems: they have been able to present their points of view, they have been heard and have listened, they have opened dialogue channels, they have been able to show greater flexibility and, in short, they have improved their relations as a requirement to end the conflict and reach agreements.
- The degree of compliance with conflicts resolved through mediation is much higher than those imposed by a judge since the agreements are more satisfactory for them and it has been the parties themselves who have decided what to do.
- And finally, if the mediation has not worked, the possibility of claiming in the courts remains open.
France is a great market for franchise networks where almost 2,000 networks are operated. It is one of the most successful scheme of developing business.
Franchisor must mainly respect French regulations on pre-disclosure information and French and EU competition regulations, among others rules. Although the control of the quality of its network and of its brand image is a very important and legitimate issue for franchisor, the latter cannot interfere too much in the day-to-day activity of the franchisees, since franchisees are independent businesses. Therefore relations between franchisors and franchisees are only based on commercial law and not on employment law. However, recent French rules will lead franchisors to implement some employment law rules with their franchisees and franchisees’ employees.
Foreign franchisors operating franchise networks in France must indeed know how to deal with the constraints incurred by the Employment Act (dated 08 August 2016) and its Decree (dated 04 May 2017), and effective as from May 07 2017, relating to the creation of an employee forum for the whole franchise network. Indeed this Social Dialogue Committee can impact deeply the organization of franchise networks.
First of all, only networks in which operators are bound by franchise agreements are concerned by the new social dialogue committee. Accordingly, trademark licensing and distribution contracts appear not to be included. Franchise agreements should be understood as sui generis contracts that are the sum of three separate agreements: a trademark licensing agreement, a know-how licensing agreement, and a commercial or technical assistance agreement. However, the Act of 08 august 2016 creates some confusion by stating that the franchise agreements concerned by this Social Dialogue Committee are the agreements “referred to in article L330-3 of the French Commercial Code”, although not only does that article not define what a franchise contract is, it may also apply to other contracts (exclusive distribution agreements) to determine whether the network fall into the scope of this Act.
Furthermore, according to the Act, only specific franchise agreements including “clauses that have an impact on work organisation and conditions in franchisee businesses” are concerned. The Act does not define such clauses although, on the one hand, whether a social dialogue committee is called for depends on identifying such clauses, and on the other hand, franchisees are in essence independent of the franchisor when organising and managing their business, including in employment matters. It will therefore be necessary to conduct an employment audit of all franchise agreements (for instance, what happens if a clause sets opening hours or defines a dress code?) to determine whether the network fall into the scope of this Act.
Finally, a Social Dialogue Committee is only called for in franchise networks employing at least 300 staff working (full-time) in France. It would seem that this does not include the franchisor’s employees or the employees of operators that are not bound to the network’s head by a franchise agreement (e.g., operators bound by a trademark licensing contract).
An implementation implying a long negotiation
Even where the legal requirements are met, franchisors are under no obligation to set up a Social Dialogue Committee spontaneously. However, once a trade union has called for an Social Dialogue Committee to be set up, the franchisor does have an obligation to take part actively in the negotiations initiated by that trade, to check with all the franchisees whether the number of employees in its network reaches the 300 threshold, and then to set up a “negotiation forum” made of representatives of employees (trade unions) and of employers (franchisor and franchisees) to negotiate an agreement creating and organizing the future Social Dialogue Committee.
The negotiations with trade unions and franchisees will end, within six months, in an agreement subject to the consent of franchisor, trade union(s) and at least of 30% of the franchisees (representing 30 % of the employees of the network). This agreement shall define the Social Dialogue Committee’s composition, how its members are designated, their term of office, the frequency of meetings, if and how many hours employees may dedicate to the committee, the material or financial means required for the committee to fulfill its purpose, and how running and meeting costs and representatives’ travel and subsistence expenses are handled, among other things. This last issue could be a major concern not only for franchisor but also for franchisees-employers. Failing to reach such agreement, the Decree imposes the creation of the Social Dialogue Committee with several strict and minimum provisions which could create unreasonable burden for the franchisor.
Once set up, internal rules define precisely how the Social Dialogue Committee is to function (required majorities, notices of meeting and referral, publication of debates, etc.).
Much ado about nothing?
The Social Dialogue Committee does not have the authority to investigate cases or to issue binding rulings, but the Social Dialogue Committee must be kept informed of franchisees joining or leaving the network and “of the franchisor’s decisions liable to impact the volume and structure of staff, working time, or the employment, work, and vocational training conditions of the franchisees’ employees”.
The Social Dialogue Committee may also make suggestions for improving such conditions throughout the network.
The impact of the Social Dialogue Committee is eventually rather limited, but franchisors have to master and control seriously the implementation of the rules in order to avoid loss of times and energy by their own franchisees and a disorganisation of its network.
