The French administration has criticized many imbalanced provisions in fast food and theme catering franchise agreements
Within the scope of its mission to control significant imbalance between the rights and obligations of the parties in commercial agreements, the French administration body in charge of consumer and competition matters (the DGCCRF) carried out a sector inquiry in the franchised fast food and theme catering sector and controlled 12 franchise agreements. The DGCCRF reported it had found many imbalanced provisions in favor of franchisors. The DGCCRF issued five warnings and two summons, and two injunctions are under process.
In the scope of this inquiry, the DGCCRF analyzed contractual relations between 12 franchisors and franchisees. Many breaches of provisions of the French Commercial Code on restrictive practices (pratiques restrictives de concurrence) were uncovered. Certain billing rules were found to be breached. Furthermore, certain payment deadlines exceeded the maximum provided under French law.
However, the DGCCRF seems to have focused particularly on provisions that could create significant imbalance between the rights and obligations of the parties to the franchise agreement.
Under Article L.442-6 of the French Commercial Code, it is prohibited inter alia to impose a significant imbalance between the rights and obligations of the parties to a commercial agreement or commercial relationship in general. This prohibition is sanctioned by damages. The French Ministry of Economy can also sue the franchisor before French Commercial Courts and ask for the payment of a civil fine up to 2 million euros or 5% of the French annual turnover of the franchisor.
Article L.442-6 of the French Commercial Code is a mandatory provision that can be applied by French courts to franchises in France, even if the parties had decided that the contract is governed by the law of another country.
The following provisions seem to be the most problematic according to the DGCCRF.
Unjustified or disproportionate payment obligations
The DGCCRF observed in certain agreements that, while the franchisee has to pay an advertising fee to promote the network, the services rendered in this regard by the franchisor were not sufficient.
Besides, certain franchise agreements provide for a renewal fee that seems disproportionate, especially when it is identical to the entry fee.
Other clauses creating significant imbalance
The DGCCRF also raised the issue of several clauses that could create significant imbalance, such as:
- clauses providing that only the English version of the franchise agreement is binding;
- clauses allowing the franchisor to unilaterally modify the contract, or allowing the franchisor alone to terminate the contract early;
- clauses providing for the loss of the entry fee by the franchisee if it does not pass the test during the initial training;
- clauses allowing unlimited access by the franchisor to the franchisee’s electronic data;
- disproportionate penalty clauses;
- disproportionate non-compete clauses allowing the franchisor to conclude another franchise agreement within the same territory.
Result of the inquiry
Following this inquiry, the DGCCRF initiated against franchisors two contemplated legal actions, as well as two contemplated injunctions to change the franchise agreements. Furthermore, the DGCCRF warned five other franchisors not to include imbalanced clauses in their franchise agreements.
It will be important to follow the results of the judicial actions brought by the DGCCRF as they will give directions on which provisions can create significant imbalance in franchise agreements.
However, these actions will take time and will not address all problematic provisions. It is therefore strongly recommended to anticipate the potential visit of the DGCCRF and review the franchise agreements with French franchisees under this angle of significant imbalance which the DGCCRF seems keen to investigate.