All questions

Franchise law

i Legislation

Although franchising is a well-established distribution system in France, there is no specific legislation governing franchising. This is strange for a country that is used to producing numerous laws on many different business subjects. As stated by a minister some years ago, this is because legislating on franchising would risk 'weakening its dynamic and evolving features'.

Consequently, franchising is subject to general EU and French laws governing distribution, including competition laws (in particular EC Regulation No. 330/2010 of 20 April 2010 on vertical restraints).

An area in which French legislators have dealt with franchising is in relation to pre-contractual disclosure, which is described below (known as the Doubin Law of 1989, the provisions of which are set out in Article L330-3 of the French Commercial Code). Franchising is not mentioned as such in the Law (which may apply to other distribution methods as well) but it is at the centre of this Law. More recently, the French parliament adopted the law on growth and business (known as the Macron Law), which contains certain provisions regarding cross-termination in the context of franchising, as well as non-compete clauses.

ii Pre-contractual disclosure

Article L330-3 of the French Commercial Code requires any party who makes available to another person a trade name, trademark or trade sign in consideration of an exclusivity or quasi-exclusivity commitment by the other party, to provide to that other party at least 20 days before the execution of a contract a document giving accurate information allowing the other party to make an informed commitment. Because a franchisor will in most cases require the franchisee to trade under its distinctive signs on an exclusive basis and sometimes by procuring most of its products or services from the franchisor or parties designated by the franchisor, this provision applies almost systematically to franchising transactions.

The franchisor's pre-contractual information obligation is the subject of extensive case law in France, in circumstances where the franchisee's business is unsuccessful and the franchisee alleges that he or she has been misled by the franchisor on the financial prospects of the franchised business. According to the Doubin Law, the franchisor is required to give a presentation on the state and development perspectives of the relevant market. In cases where the franchisee complains about the lack of forecast figures, French courts tend to adopt the following approach: the law does not require the franchisor to provide a local market survey and a forecast income statement to the franchisee. However, if the franchisor does provide a market survey and forecast figures to the franchisee to allow it to build its business plan, the information must be fair and accurate.

Where a court considers that the lack of (or inaccuracy of) information has deceived the franchisee (which will often be the case where the actual turnover is significantly below the forecast figures, for example by more than 30 per cent), it may hold the franchise agreement as null and void and in some cases find the franchisor liable for damages, if the latter has committed misrepresentation. If the misrepresentation of the franchisor or the error of the franchisee cannot be demonstrated, a judge may nonetheless grant damages to the franchisee for the loss suffered (covering the costs and investments incurred by the franchisee but not the profit he or she was expecting to make on the basis of the figures provided by the franchisor). This will be the case particularly where the franchisee has become bankrupt because of a structurally loss-making business.

iii Registration

No specific registration requirement applies to companies solely on the basis that they are franchisees. However, depending on the business they are involved in, they may be subject to certain regulatory constraints (such as special permits to be obtained in certain professions, e.g., restaurants and travel agencies). It is for the franchisee to apply for such permits, with the assistance of the franchisor if necessary.

iv Mandatory clauses

To constitute a franchise agreement under French law, the agreement needs to provide for three essential obligations on the part of the franchisor, namely (1) the licensing of intellectual property rights to the franchisee, (2) the provision of substantial know-how, and (3) the supply of commercial and technical assistance by the franchisor. The franchisee's obligations may be more or less detailed (bearing in mind agreements subject to French law are traditionally shorter than English ones) but should include at a minimum the financial conditions, including the entry fee and the franchise royalty payable by the franchisee.

v Guarantees and protection

There are various ways in which a franchisor may secure the payments due by the franchisee. The French Civil Code provides for various kinds of personal guarantees, such as letter of comfort, surety and first demand guarantee. Such guarantees may be issued by the parent company of the franchisee or by a financial institution. From a protection point of view, the franchisor is much better off with a third-party demand guarantee, which can be enforced by the franchisor subject to the conditions set out in the guarantee itself, and the guarantor may not raise objections in relation to the underlying franchising agreement. It is obviously preferable that the guarantor be located in a country where the enforcement of a foreign judgment can realistically be obtained in a timely manner.