By Ordinance No. 2016-131 of 10 February 2016, the Government made an in depth modification to the French Civil Code in respect of contract law, regime and proof of obligations.
Subject to ratification by Parliament, the ordinance will enter into force on October 1st, 2016 and will therefore apply to agreements entered into after that date (with the exception of interrogatory actions that may apply to agreements concluded prior to this date - see below).
This reform, long overdue, has two main objectives:
- Increase legal certainty by establishing coherency between the French Civil Code and the judicial solutions identified by the Cour de Cassation. In compliance with civil law tradition, case law solutions which have emerged over the last two hundred years have been codified.
- Increase the attractiveness of French contract law by simplifying it, rendering it more readable and accessible, more effective and in tune with the times.
In fact, a large majority of the more than 300 new provisions will not surprise the legal community since they simply resume principles derived from case law over the years.
We can quote some examples here of codification of case law solutions of particular interest to distribution relationships: the enforceability of the terms and conditions of sale and purchase which are only enforceable on the other party if said party has acknowledged and accepted them (article 1119) and the power of the judge to ensure, in the event of price revision in a framework agreement, that the party who has reserved a discretionary right to adjust the price does not abuse of this right (article 1164) a solution established 20 years ago by the Cour de cassation.
The text does however contain innovations.
Some of which will not disrupt practitioners of franchise law. For example, the good faith duty when negotiating and concluding agreements (article 1104) or the general obligation of precontractual information, introduced in new article 1112-1 of the French Civil Code which makes no new addition to the obligation of franchisors and licensors subject to the provisions of the Doubin law (article L.330- 3 of the French Commercial Code) as interpreted by case law, which already made mandatory the disclosure of any information decisive to the franchisee’s consent.
Others, on the contrary, warrant attention in order to determine their significance.
The purpose of the present notice is not to establish an exhaustive list of all the innovations introduced by the reform but to apprehend in a summarized form and assess the practical implications of four innovations which affect (i) the formation of the agreement and (ii) its contractual balance and are likely to have an impact on franchise and distribution agreements.
- Economic violence (duress)
- Significant imbalance between rights and obligations of the parties
- Unforeseen circumstances (hardship)
- Interrogatory action
Economic violence (duress)
New article 1143 introduces the concept of economic violence (duress) in the French Civil Code: "it can be qualified as economic violence when a party, abusing the state of dependence in which the co-contracting party finds itself, obtains from the latter a commitment that the latter would not have subscribed if he had not been under economic violence and derives a patently excessive advantage therefrom."
The text thus enshrines a concept recently emerged from case law but rarely acknowledged in practice.
There are three strict conditions of application of the text:
- Firstly there must exist a "state of dependence" of one party on another, which is rarely the case when a franchise agreement is concluded;
- It must then be demonstrated that the dominant party has abusively exploited this state of dependence (which tends to indicate that there must be an intention to impose duress);
- Finally, the advantage must be "patently excessive", which means that it must be completely disconnected from the consideration granted.
Specific cases in which these three conditions are fulfilled are rare in practice implying that in our view, franchisors and licensors have little to worry about.
The Ordinance introduces in the French Civil Code the concept of "significant imbalance between the rights and obligations of the parties", which already exists in the French Consumer Code (article L.132-1) and in the French Commercial Code since the Act of August 4th, 2008 (article L.442-6, I, 2°).
New article 1171 provides that: "In a standard contract, any clause that creates a significant imbalance between the rights and obligations of the Parties to the contract is deemed unwritten. Appraisal of the significant imbalance concerns neither the main purpose of the contract, nor the adequacy of the price to the service rendered. "
The French Civil Code thus gives the judge the power to delete a provision of the contract which creates significant imbalance between the rights and obligations of the parties, on request of the party to whose detriment the term applies (the appraisal focusing neither on the purpose of the contract nor on the price).
In light of case law in matters of consumer and commercial law, a contractual clause is regarded as significantly unbalanced (therefore abusive) when it makes one party bear an onerous obligation or deprives it of a right (for example the right to compensation) without reciprocity or consideration or objective justification.
It should be noted however that the impact of this new provision on franchise agreements should be balanced since article 1105 in its paragraphs 2 and 3 expressly provides that: "The rules specific to certain contracts are established in the provisions specific to each of them. The general rules apply subject to these specific rules."
The report submitted to the President of the Republic published on 11 February 2016 states that "the general rules laid down by the Ordinance will notably be dismissed when it is impossible to apply them simultaneously with certain rules laid down by the French Civil Code to govern specific contracts, or those resulting from other codes such as the French Commercial Code or the French Consumer Code."
In addition, it should be emphasized that the new article 1171 only relates to contracts of adhesion (i.e. non- negotiated contracts).
One could certainly include franchise and license agreements in this category since franchisors and licensors seek contractual consistency within their networks and sometimes refuse any negotiation on their terms.
However, article 1110 of the new French Civil Code provides a definition of the contracts of adhesion as: "a contract the terms and conditions of which, excluded from negotiation, are determined in advance by one of the Parties.”
The result is that a negotiation of the franchise agreement by the parties, even if it focuses only on a few clauses, would exempt the agreement from the scope of application of the text.
It would be advisable, in this regard, on the one hand to clarify in the preamble of the agreement that the franchisee has had the opportunity to negotiate the agreement with the assistance of advisors and on the other hand to conserve proof that these negotiations indeed occurred.
Unforeseen circumstances (hardship)
By tradition, the Cour de Cassation has always been attached to the binding force of contracts and has always rejected the unforeseeability theory (théorie de l’imprévision), despite some recent inflections related to contractual solidarity.
Contrary to that established case law, new article 1195 stipulates that: "If a change of circumstances unforeseeable at the time of the conclusion of the agreement renders its performance excessively onerous for one party, who did not accept to bear such risk, that party can request renegotiation of the agreement from the other party. The requesting party continues to perform his obligations during the renegotiation period. In the case of refusal or failure of the renegotiation, the parties may agree to rescind the agreement, upon the date and conditions they determine, or together request the judge to proceed with its revision. Failing agreement within a reasonable period of time, the judge may, at the request of one of the parties, revise the agreement or terminate it at the date and under the terms and conditions he himself fixes."
These provisions, which align French law with most of the laws of other European member states, allow in very precisely defined circumstances to request renegotiation of the agreement.
Three conditions must be fulfilled:
- The change in economic circumstances has to have been "unforeseeable";
- It should render execution of the agreement "excessively onerous";
- The party which is victim of this change of circumstance must not have accepted to bear the risk in the agreement.
These are therefore exceptional situations and thus quite rare.
In addition, the third condition authorizes the parties to expressly exclude application of article 1195 in the contract if they so decide.
Franchisors and licensors are therefore free to exclude the renegotiation obligation borne by the parties and to exclude the judge’s option to revise the agreement.
The last significant innovation, likely to have a particular impact on franchise and distribution relationships, is interrogatory actions.
It is a potentially attractive way forward for franchisors and licensors.
Indeed, interrogatory actions allow a party to put an end to an ambiguous legal situation by interrogating the co- contracting party or a third party.
There are three interrogatory actions in the reform.
One of them allows a party, in the event of existence or discovery of a potential vice and future risk of cancellation of the agreement, to request the other party either to confirm the agreement or to bring action for annulment within a timeframe of six months under penalty of being time barred by virtue of article 1183.
This action could be useful to the franchisor or licensor who may have omitted to provide an important information during the pre-contractual phase of the agreement and who wishes the franchisee to adopt a position in order to remove the risk of cancellation of the agreement related to an error on a “key feature of the service due” (article 1132).
The two other interrogatory actions which are not related to either the formation or the balance of the contract do however warrant being pointed out as they are of practical interest to franchisors and licensors:
- The first allows a third party to ask the beneficiary of a pre-emptive right (for instance the franchisor) to confirm, within a reasonable timeframe, the existence of such a right and if he has the intention to invoke it (article 1123, paragraphs 3 and 4). This provision will thus allow the purchaser of a franchised business or of shares in the franchisee, to waive any uncertainty as to the existence of the rights of the franchisor and his intention to enforce them.
It can also be questioned whether the purchaser who does not bother inquiring about the rights of the franchisor could not be more easily considered to be of bad faith (since pre-emptive rights to the benefit of the franchisor or licensor are very frequent in franchise and license agreements), which would enable the latter to have the sale/transfer cancelled in his favor. Case law will tell.
- The second allows a contractor to ensure the powers of representation of the signatory of a contract by asking the represented party (i.e. the legal entity) on the extent of the signatory’s powers (article 1158).
The objective set by the legislature on the government to improve readability and effectiveness seems to have been achieved, since the new provisions codify numerous case law solutions in terms which are both clear and short, at the same time increasing legal certainty.
As to the aforementioned innovations introduced by the reform, which relate to formation and balance of the agreement, they could have raised concerns for franchisors and licensors but should eventually not cause disruption to franchise lawyers.