A franchisee in France may obtain the cancellation of a franchise contract mainly on grounds that the franchisor has provided incomplete or incorrect pre-contractual information, thus having induced the franchisee in an error as regards the prospects of the franchise and the opportunity to contract.
1. Failure by a franchisor to disclose to its franchisee in France all or part of the required pre-contractual information may result in the cancellation of the franchise contract
Article L. 330-3 of the Commercial Code imposes on the franchisor to provide the franchisee with a document giving sincere information, which enables the franchisee to engage in the contract in full knowledge.
According to French case law, the pre-contractual disclosure information which a franchisor is required to provide to a franchisee pursuant to the provisions of articles L. 330-3 and R. 330-3 of the French Commercial Code must be serious, complete and sincere, enabling the prospective franchisee to assess the opportunity to contract, mainly as regards the prospect of realizing a financial gain.
In the event that the information provided in the pre-contractual disclosure document is not correct or is incomplete, the franchisee may argue that its consent has been vitiated and claim the nullity, that is, the retroactive cancellation of the Franchise agreement.
In addition, in the event that the franchisee undergoes insolvency as a result of or in connection with the franchisor’s failure to comply with its obligations regarding pre-contractual disclosures, and/or the director(s) of the Developer’s company suffer damage, the franchisor may be held liable to indemnify for such damage.
French case law is very strict on the appreciation of the seriousness and sincerity with which a franchisor has prepared the pre-contractual disclosure document to enable the franchisee to assess the opportunity to contract.
Thus, French courts have decided that:
Having noted that the franchisee, whose contract involved the operation of several points of sale in the province, had committed itself on the basis of false and misleading information communicated by the franchisor and having found that the franchisor, who is obliged to provide a history of the franchise, had deliberately distorted the reality of the network by consciously concealing the difficulties of its development in the province, thus retaining essential information which had an impact on the viability of the franchise, the court of appeal rightfully cancelled the franchise contract (Court of Cassation 3 April 2012).
After having found that the activity of a franchisee was far below the forecast and has promptly resulted in its insolvency, the judge must examine whether the consent of the franchisee to enter into the franchise agreement had not been vitiated by wrong or incomplete pre-contractual information. If this is the case, the judge must cancel the franchise contract (French Supreme Court 4 October 2011; constant case law);
the lack of knowledge by the franchisee of the fact that the franchisor's manager had been subject to personal bankruptcy or that he had managed another company which had been put into judicial receivership is not, by itself, of a nature to show that the franchisee would not have contracted if he had known that fact (French Supreme Court, 19 January 2016; 5 January 2016). According to a decision of the Court of Appeal of Paris however dated 14 January 2015, the cancellation of a franchise contract must be pronounced on the grounds that the franchisor had concealed that the regional Director of the network had experienced insolvency, even though this fact had occurred in the framework of another franchise;
An important difference between the forecast turnover indicated by the franchisor and the figure actually achieved by the franchisee reveals a discrepancy unrelated to the normal margin of uncertainty inherent to market studies and provides grounds for the cancellation of the contract. The franchisor was not allowed to argue in defense that the disputed documents, referred to as "template" documents, had not been prepared to take into account the specifics of the franchisee's business project, nor could he argue that he had not been informed in a timely manner of the delay made by the franchisee in achieving the projections which would have allowed him to recommend appropriate remedial measures to be implemented by the franchisee, as there is no evidence that such measures could have cured such delay (Court of Appeal of Paris, 9 April 2009);
Forecast figures greater by 86%, 145% and 148% as compared to the accounting result obtained on the same products by the franchisee justify the cancellation of the contract on grounds of deceit by the franchisor (Court of Appeal of Rennes, 17 July 2008);
Similarly, in a case where the franchisee had committed no mismanagement, the cancellation of the franchise contract was justified by the turnover achieved by the franchisee which was by 36% lower than the forecast turnover, the magnitude of the difference between the two resulting, according to the court, from the levity with which the [market] study had been undertaken by the franchisor (French Supreme Court, 19 January 2010);
Having retained that the forecast figures contained in the disclosure document provided by the franchisor were grossly optimistic in light of the very large discrepancy that they presented with the turnovers actually achieved by the franchisee, who committed no mismanagement, and after having recalled that this data related to the very substance of the franchise agreement, for which the expectation of a gain was of primary importance, the court of appeal has rightfully determined that the franchisee’s consent had been deceived and it has rightfully pronounced the cancellation of the franchise contract (French Supreme Court, 12 June, 2012);
The disclosure document stated an average turnover of €500 000 and a margin of 55%, while the two companies incorporated by the franchisee had only achieved a margin of 28% and a turnover of, respectively, €109 250 and €271 059. Moreover, while establishing the forecast figures, the franchisor had not taken into account the remuneration of the managers nor the accounting breakeven allowing to determine the minimum turnover necessary to generate a profit; in addition, the franchisor had complete control of the commercial margin in determining the sale price to be applied to the public and the purchase price for the products. In these circumstances, the Court of Appeal was right to pronounce the cancellation of the franchise contract (Supreme Court, 25 January, 2017);
In a case relating to a trademark license for the operation of a fitness center, the judges found that the disclosure document remitted to the franchisee did not contain any presentation of the national market of sports clubs; that, regarding the local market, no figure was given enabling the franchisee to assess the real importance of this market; that, in addition to that, the document contained erroneous information as to the lack of equivalent concept in France and general and unsubstantiated statements regarding development prospects; that, the franchisor had also provided the licensee with documents containing inaccurate and contradictory information on the identity of one of the operators; that, in these circumstances, the court of appeal has rightfully decided that the franchise agreement must be cancelled (French Supreme Court, 4 May 2010);
After an initial failure, a franchisor had re-established a franchise network. In this context, the magistrates found that the franchisor had failed to fulfil its obligation of sincerity under article L. 330-3 of the Commercial Code, as he had not communicated to the two franchisees the date of conclusion of all the franchise contracts of the members of the network, nor provided credible information on the prospects of profitability and development of the franchised activity. This failure had necessarily prevented the franchisees from making any relevant assessment of the degree of stability and profitability of the network, as well as of the reality of the franchisor's knowhow, to the point of altering their consent to contract, thus justifying the cancellation of the contract (Court of Appeal of Paris, 17 March 2010);
In accordance with article L. 330-3 of the Commercial Code, the franchisor is required to provide the franchisee with a history of the franchise, as well as an analysis of the potential of the network. Must therefore be cancelled the franchise agreement relating to the operation of a system for the manufacture and distribution of sandwiches for which the franchisor has communicated only a partial history of the franchise and an unrealistic forecast budget in order to conceal the difficulties of developing the network in the province. This omission and retention of essential information involving the viability and operation of the concept must be regarded as constituting a fraud committed at the expense of the franchisee, who has contracted on the basis of false and deceptive information. The franchisor is therefore obliged to refund the sums paid by the franchisee under the franchise agreement, that is, 389 428 euros (Court of Appeal of Paris, 19 January 2011);
In order to justify the cancellation of the contract, a court of appeal recalls that "if the law does not impose on the franchisor to provide a study of the local market, on the other hand, in the case where such information is given, the law imposes on the franchisee to provide a sincere presentation of the local market. In this case, the court considered that the 3-page market study was not serious; that the years selected for the analysis of the evolution of the population preceded by 5 years the date on which the document was delivered to the franchisee; that the data regarding the activity of the population, the unemployment rate and the average income per capita was obsolete; that no recent data on the population of Annecy was provided to the franchisee, together with no information on the distribution of the population by socio-professional categories or the exact number of competing public educational centers; that the comparison made by the franchisor between the area of attraction of the [educational] center of Paris and that of Annecy is irrelevant; that the franchisor should have made a comparison with another provincial city similar to Annecy; that the document did not contain a study of the prospect of market development; that all these elements would have enabled the franchisee to make an informed decision about the risk which he was taking and to determine whether or not the project was viable; that the forecasts attached to the market study showed that the center of Annecy should achieve a turnover of €25 174 per month, that is, €302 094 per year and a result of €41 481; That these figures were grossly erroneous since three and a half times higher than those that were indeed achieved (Court of Appeal of Paris, 30 June 2011);
Article L. 330-3 of the Commercial Code imposes on the franchisor to provide the franchisee with a document giving sincere information, which enables the franchisee to engage in full knowledge of the case. Having noted that the franchisee, whose contract involved the operation of several points of sale in the province, had committed itself on the basis of false and misleading information communicated by the franchisor and having found that the franchisor, who is obliged to provide a history of the franchise, had deliberately distorted the reality of the network by consciously concealing the difficulties of its development in the province, thus retaining essential information which had an impact on the viability of the franchise, the court of appeal rightfully cancelled the franchise contract (French Supreme Court 3 April 2012);
The cancellation of the franchise contract must be pronounced when the franchisor provides obsolete, excessively general, or incomplete information. In the present case, the franchisor had consciously delivered a misleading and truncated presentation of the entire network, since he had concealed the judicial winding-up of a network member after several years of non-existent turnover. The network had been misrepresented in the absence of an indication of a ratio between the franchisees who were joining and those who were leaving the network, which would have shown that between 2006 and 2010 the organization had gained only seven partners while the franchisor had provided a much more flattering presentation; furthermore, over a period of five years, the network had almost renewed itself twice, as most of the original members had preferred not to subscribe to a new contract and the figures stated by the franchisor had almost never been approached (Court of Appeal of Colmar, 30 September 2015);
In a case where the franchisor had committed to provide the franchisee with certain commercial statistics and information on the performance by the other members of the network with the assertion that this information was indispensable to the evolution of the brand and the performance of the network, the judges decided that by obscuring the reasons for the failure of a previous franchisee and the consequences which resulted from this on the commercial reputation of the brand, by making an erroneous representation of the network and by operating an erroneous transmission of the forecast figures, the franchisor had breached its obligation of sincerity as regards data which was necessarily decisive with regard to the franchisee's consent and that the information communicated by the franchisor to the franchisee, in that it was erroneous and devoid of seriousness, revealed that the franchisor had deliberately deceived the consent of the franchisee (French Supreme Court, 3 November, 2016);
In a case concerning corporate concierge services, the judges found that at the time of conclusion of the contract no network had been established; that there had been no feedback regarding the franchised activities; that the franchisor had provided only meagre data on forecast turnover and profitability; that the franchisor did not prove that it provided credible information on the prospects for profitability and development of the franchised activity; that these omissions are in breach of the obligation of sincerity which is imposed on the franchisor by article L. 330-3 of the Commercial Code; that such breach has necessarily prevented the franchisee from making any relevant assessment of the degree of stability and profitability of the network and of the reality of the know-how of the franchisor, and must be regarded as constituting a fraudulent misinformation (Court of Appeal of Paris, 3 October 2012);
Even if the manager of the franchised company was not a novice for having successfully operated another business under the same franchised brand in another region several years earlier, the franchisor had to disclose to him genuine market figures regarding the local market; The judges noted that the forecast turnover announced by the franchisor was twice as high as that achieved by the franchisee after several years of operation; that this discrepancy exceeded the usual margin of error in the matter; that no failure in the management of the business by the franchisee had occurred which could explain such discrepancy; that the franchisor did not provide any examples of businesses with an activity similar to the franchised activity and located in agglomerations of similar size having achieved turnovers comparable to the forecasts stated by the franchisor; consequently, the Court of Appeal rightfully deduced that the franchisor, who provided the franchisee with an unrealistic and fanciful estimate, failed to comply with its obligation to inform the franchisee, and that the franchisee was deceived by the franchisor on decisive elements in the calculation of the risks it took (French Supreme Court, 25 June, 2013);
It has also been decided that the franchisor’s breach of its pre-contractual disclosure obligations of study and provision of information towards the future franchisee, had deprived such franchisee from information which was necessary to enable the franchisee to make an informed decision as to the opportunity of its investment, and was the direct cause for the judicial liquidation of the franchised company and therefore for the losses suffered by its managers as a result of the implementation of a surety they had granted to the benefit of a bank to guarantee the obligations of the franchised company (French Supreme Court, 19 January 2010);
If the forecast accounts are not included in the items to be found in the pre-contractual disclosure document, they must, when communicated, present a serious character. After finding that provisional accounts had been given to the franchisee and noted that there were significant discrepancies between the expected turnover and the turnover which was achieved, and that the expected margin had not been reached, the judges also found that the franchisor was unable to explain how he had prepared the forecast figures stated in the forecast accounts. The judges further found that the franchisor may not state that the franchisee had applied an insufficient margin as, in light of the competition which existed in the region, an increase in the margin, while leading to higher prices may not have resulted in an increased turnover. Consequently, the discrepancy between the projected figures and the figures actually achieved by the franchisee was not attributable to the franchisee but to the breach, by the franchisor, of its obligation to inform the franchisee as it had provided to him forecast accounts which were devoid of seriousness, thus justifying that the franchisor should be held liable for the damage suffered by the franchisee (French Supreme Court, 31 January 2012).
2. A Franchisee can obtain the cancellation of the franchise contract if the latter is requalified into an employment contract or a contract for the management of a subsidiairy
A franchisee in France can also obtain the cancellation of the franchise contract if the latter is requalified into an employment contract or a contract for the management of a subsidiairy.