- 法国
France | Pre-contractual disclosure in distribution and franchise agreements
31 3 月 2021
- 分销协议
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
Spain – Franchising – Non Competition clauses
23 10 月 2019
- 西班牙
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
Germany – Franchising standard form contracts
10 9 月 2019
- 德国
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
Franchise systems: ad campaigns with low prices can come costly!
26 2 月 2019
- 欧洲
- 德国
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
法国–特许经营关系网和劳动法
4 9 月 2018
- 法国
- 分销协议
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
Drafting the mediation clause in franchise agreements
31 5 月 2018
- 西班牙
- 分销协议
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
Mediation and franchise agreements – best practices
3 5 月 2018
- 西班牙
- 分销协议
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
Mediation and franchise agreements
10 4 月 2018
- 西班牙
- 分销协议
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.
写信给 France | Pre-contractual disclosure in distribution and franchise agreements
USA – Franchise Agreements
5 10 月 2017
- 美国
- 特许经营
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).
法国是特许经营关系网的大市场,近2000家特许经营关系网处于运营状态。这是最成功的商业发展计划之一。
特许人必须主要遵守法国关于预先披露信息的规定以及法国和欧盟的竞争条例等规定。虽然对授予特许者来说,对关系网质量和品牌形象的控制是一个非常重要且合法的问题,但授予特许者不能过多地干预特许经营人的日常活动,因为特许经营人是独立商家。因此,授予特许人与特许经营人之间的关系只能建立在商法的基础上,而不能建立在劳动法的基础上。然而,法国最近的规定将导致授予特许者与特许经营者和他们的雇员一起实施某些劳动法。
在法国经营特许经营关系网的外国特许经营者确实必须知道如何应对《劳动法》(2016年8月8日)及其法令(2017年5月4日)所带来的限制,并自2017年5月7日起生效,该法令涉及为整个特许经营关系网设立一个雇员论坛。事实上,这个社会对话委员会可以对特许经营关系网的组织工作产生深刻的影响。
首先,新的社会对话委员会只关心经营者受特许权协议约束的关系网。因此,商标许可和分销合同似乎没有包括在内。特许权协议应被理解为由三项单独协议构成的特殊合同:商标许可协议、专有技术许可协议和商业或技术援助协议。然而,2016年8月8日的法律却造成了一些混乱,规定社会对话委员会所涉及的特许协议是“引用《法国商法典》第L330-3条”协议,尽管该条不仅没有界定特许合同的定义,而且可以适用于其他合同(独家分销协议),以确定该关系网是否属于该法的范围。
此外,根据该法案,只有包括“对特许经营企业的工作组织和条件有影响的条款”的具体特许协议才会受到关注。尽管该法没有界定这些条款,一方面,是否需要社会对话委员会取决于确定这些条款;另一方面,特许经营者在组织和管理其业务,包括在雇佣劳工事务方面,本质上独立于授予特许人。因此,有必要对所有特许经营协议进行就业审计(例如,如果条款规定营业时间或规定着装怎么办?),以确定该关系网是否属于该法的范围。
最后,只有在法国雇用至少300名(全职)工作人员的特许经营关系网才要求设立社会对话委员会。这似乎不包括特许经营人的雇员或不受特许经营协议约束的经营者的雇员(例如受商标许可合同约束的经营者)。
意味着长期谈判的实现
即使满足了法律要求,授予特许人也没有义务自发成立社会对话委员会。然而,一旦工会要求成立社会对话委员会,授予特许人就有义务积极参加该行业发起的谈判,与所有特许经营者核实其关系网上的雇员人数是否达到300人的门槛,然后建立一个由雇员(工会)代表和雇主(授予特许人和特许经营人)代表组成的“谈判论坛”,用来达成创建和组织未来社会对话委员会的协议。
与工会和特许经营者的谈判将在6达成协议但须经授予特许人、工会和至少30%的特许经营者(占关系网雇员的30%)的同意。该协议应确定社会对话委员会的组成、其成员的任职方式、任期、会议的频率、如果需要,雇员可以为委员会贡献多长时间、委员会实现其宗旨所需的物质或财政手段、以及如何处理费用和代表的旅费和生活津贴等问题。最后一个问题可能不仅是授予特许人关注的一个主要问题,而且也是特许经营人-雇主关注的一个主要方面。由于没有达成这样的协议,该法令规定设立社会对话委员会,其中有几项严格和最低限度的规定,可能会给授予特许人造成不合理的负担。
一旦成立,内部规则将确切界定社会对话委员会的运作方式(所需的多数人、会议通知和引荐来源、讨论内容的公布等)。
无事生非?
社会对话委员会无权调查案件或作出具有约束力的裁决,但社会对话委员会必须让大家知道特许经营者加盟或离开销售关系网的情况,以及“授予特许者的决定,易于影响到特许经营者雇员的数量和结构、工作时间或就业、工作和职业培训条件”。
社会对话委员会还可就如何改善贯穿整个关系网的条件提出建议。
社会对话委员会的影响终究相当有限,但授予特许人必须认真掌握和控制规则的实施,以避免损失自己的特许经营商的时间和精力以及关系网的混乱。
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.