The French Supreme Court (“Cour de cassation”) has confirmed the nullity of a franchise agreement where the consent of the franchisee was found to be vitiated on account of the franchisor’s having presented a “non-serious” earnings forecast.
French Supreme Court (“Cour de cassation”), commercial chamber, 17 March 2015, n°13-24.853.
Pursuant to Article L330-3 of the Commercial Code, the franchise precontractual disclosure document, which must be provided by the franchisor to the prospective franchisee at least 20 days before the franchise contract is signed, must specify, inter alia, "the status and development opportunities of the market concerned". There is no obligation to provide a financial performance representation and doing so can be risky, as demonstrated by this holding of the French Supreme Court (“Cour de cassation”).
- The franchisee of an office equipment distribution chain was put into liquidation shortly after the opening of its store. The liquidator, acting on behalf of the franchisee, obtained the nullification of the franchise agreement and the payment of damages by the franchisor due to misleading pre-contractual information.
- The franchisor claimed before the Supreme Court that the appealed against decision of the Court of Appeal had not taken into account the following arguments:
- That the franchisor had expressed concerns regarding the already existing competition and the risks of setting up in a new commercial area; and
- That providing an earnings forecast is not mandatory, and therefore the franchisor allegedly had no obligation to discuss and incorporate in the precontractual information document the many variables that it was accused of having omitted.
Overly optimistic earnings forecast based on incomplete data
- In this recently published judgment, the French Supreme Court (“Cour de cassation”) confirmed the decision of the Court of Appeal, judging that the franchisee had been led to enter into a franchise agreement based on false and misleading information and a “non-serious” earnings forecast.
- The nullification of the agreement on account of vitiated consent was justified by the Court based on the following facts:
- That the discrepancy between the estimated and actual earnings was very significant;
- That the franchisor’s data was based on those of other established franchisees, while the franchisee was a novice and set up its franchise location in a newly opened shopping center; and
- That the earnings claims lacked precision regarding the expenses of the franchisee (employee wages, investments, fee to be paid to the lessor, etc.) and omitted the possibility of delays in opening the store.
Although there are risks involved in disclosing earnings forecasts, the assessment of the facts and circumstances nevertheless plays an important role. Judges may be inclined to rule in favor of the franchisor if the franchisee is highly experienced (Court of Appeal of Paris, 7 May 2014) or when the earnings forecast did not originate from the franchisor (Court of Appeal of Paris, 12 November 2014).