The concept of loyalty is frequently used as a general (and often fallback) principle by franchisees and franchisors in the litigation context. As a franchise agreement cannot identify every illegal behaviour of the parties, loyalty and good faith are often used as key principles to determine what is allowed and what is not.
The Court of Cassation recently considered the loyalty principle in a case opposing a franchisor and a franchisee in the computing school sector. As a result of difficulties experienced in the development of his business, the franchisee took several initiatives, including the creation of a franchisees' defence association using the franchisor's trade sign. The purpose of the association was "to pool together and support the franchisees of the brand so that they can highlight and get compensation for their economic, moral and professional losses arising from the failures of the franchisor and to assist them in litigation against the franchisor".
The franchisor considered that the franchisee's attitude was a serious breach of the franchisee's obligations under the agreement and consequently terminated the agreement on the ground of default.
The Paris Court of Appeal ruled that the creation and active participation by the franchisee in the association using the franchisor's trade sign to pool together the franchisees clearly demonstrated a serious mistrust of the franchisor and therefore amounted to a material breach of an essential obligation in the franchise agreement. The court also stressed that the agreement had been entered into in consideration of the specific person of the franchisee (ie, of an intuitu personae nature). To the extent that the association's purpose harmed the franchisor and the brand image of the network, the Court of Appeal held that, in such conditions, the franchisor was entitled to terminate the agreement early on the ground of the franchisee's default.
However, the Supreme Court overruled this decision and considered that the Court of Appeal had failed to determine how the mere fact of creating and participating in a franchisees' defence association – which is a fundamental freedom – could harm the franchisor's brand image or amount to a serious breach affecting the interests of the franchisor.(1)
The Supreme Court's decision was based on Article 11 of the European Convention of Human Rights (which provides for the freedom of assembly and association) and the principle of good faith. The decision clearly demonstrates the prevalence of an essential freedom over the binding force of agreements.
Franchisees' associations are common in sophisticated franchise networks and are often encouraged by franchisors to:
- promote exchanges of good practices between franchisees;
- facilitate the implementation of new developments in the network; and
- discuss procurement terms of the franchised outlets.
But what if the association is created by franchisees without the consent of the franchisor and turns out to be hostile to the franchisor?
The abovementioned decision by the Supreme Court illustrates that, irrespective of the clauses that a standard franchise agreement may contain, there are some fundamental freedoms which may not be derogated from, including franchisees' freedom of association.
However, such freedom is not absolute and the court has not said that a franchisees' association may never harm the reputation or the brand image of the franchisor; it has simply stated that the mere fact of creating and participating in a franchisees' defence association (even if it is hostile to the franchisor) is not enough to show a breach of loyalty vis-à-vis the franchisor.
In accordance with French law provisions on unfair trading, a franchisor must be able to demonstrate the existence of additional circumstances, such as denigration of the franchisor or its brand image by the association or its members or the disorganisation of the franchise network. In some cases, the franchisor may show that the association is a tool used by some dissenting franchisees to exempt themselves from their obligations with a view to joining a competitor of the franchisor or creating a competing network.
(1) Court of Cassation, 28 November 2018, 17-18619, available here (in French).
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