The Paris Court of Appeal recently held that a franchisor had not breached its duty of loyalty towards its franchisee in reorganising its business following its change of control. In the context of an internal business reorganisation, franchisors should therefore be careful in statements that they may make to franchisees, including in the pre-contractual disclosure documentation.
The concept of loyalty is frequently used as a general (and often fallback) principle by franchisees and franchisors in the litigation context. As a franchise agreement cannot identify every illegal behaviour of the parties, loyalty and good faith are often used as key principles to determine what is allowed. The Court of Cassation recently considered the loyalty principle in a case opposing a franchisor and a franchisee in the computing school sector.
As part of the promotion of their networks, franchisors often edit websites displaying contact details and other relevant information regarding the franchise network's outlets, whether they are owned by them or operated by franchisees. In a recent decision, the Versailles Court of Appeal held that a franchisor had treated a franchisee's stores on its website unfairly compared with its own stores.
Where a court considers that a lack of information (or inaccuracy in this regard) has deceived a franchisee, it may hold the franchise agreement null and void and, in some cases, find the franchisor liable for damages. The challenge for franchise agreements is that restitutions made to franchisees often include entry fees and royalties paid by the franchisee during the agreement, while the services provided by the franchisor may not be restituted as such.
The French courts often address the issue of whether a franchisor has properly fulfilled its assistance obligation. In a recent case, the Paris Court of Appeal held that this obligation is exclusively technical and commercial and constitutes purely a 'best efforts' obligation. This decision has confirmed that franchisors need not provide financial assistance to their franchisees. Instead, the assistance obligation consists only of helping the franchisee to operate the business from a commercial and technical standpoint.
The extent of the group in the context of a franchising network has given rise to a number of court decisions, leading to some uncertainty for employers as to the scope of their reassignment obligations. A set of bills was recently enacted as part of the priority measures intended to bring greater flexibility to labour legislation. One such measure provides a narrow definition of a 'group' in relation to the obligations to reassign employees who are dismissed either for economic reasons or for personal inability.
One of the key components of any franchise agreement is the transmission of know-how by the franchisor to the franchisee. Absent this, the agreement may be held null and void or requalified as a mere distribution agreement. In a recent decision, the Supreme Court held that the absence of any pilot outlet run by the franchisor does not amount to a lack of know-know transmission.
Under French civil law, a party to a contract has a duty of loyalty to its contracting party in the performance of the contract. The Supreme Court recently applied this duty of loyalty to a franchisor which had concluded a framework contract with a master franchisee. The court held that the franchisor did not cooperate with, assist or advise the master franchisee loyally. The court also held that it had terminated the framework contract in an unfair manner.