Pre-contractual information in franchise agreements under French law

  

Article L. 330-3, 1er of the French Commercial Code provides that “any person who makes a trade name, trademark or sign available to another person, requiring that person to give an undertaking of exclusivity or quasi-exclusivity in respect of the exercise of his activity, shall be required, prior to the signing of any contract concluded in the common interest of both parties, to provide the other party with a document giving genuine information enabling him to make a commitment in full knowledge of the facts”.

  

The obligation to provide a DIP therefore presupposes two conditions:

  

The scope of application of this article is therefore particularly broad, as the obligation to provide a DIP is likely to apply not only to franchising contracts, but also to other distribution contracts such as brand licensing contracts, commercial concession contracts and “contrats de commission-affiliation”. As article L. 330-3 of the French Commercial Code does not provide for any exceptions, it would also be appropriate to consider providing a DIP to a commercial intermediary, such as a commercial agent, provided that the two aforementioned conditions are met. 

  

Under the terms of the aforementioned article L. 330-3 of the French Commercial Code, the DIP and the proposed draft contract must be sent to at least 20 days before the contract is signed.

  

Since, according to this article, the DIP is required “prior to the signing of any contract”, case law requires that it also be provided to a candidate for renewal of a franchise agreement, even if the initial agreement is tacitly renewed (for a recent example, CA Douai, 19 May 2022, no. 20/02801).

      

The DIP must also be provided “when the payment of a sum is required prior to the signing of the above-mentioned contract, in particular to obtain the reservation of a zone” (article L. 330-3 of the French Commercial Code).

             

​The general provisions of article L. 330-3 of the French Commercial Code stipulate that the DIP contains “the content of which shall be laid down by decree, shall specify, in particular, the age and experience of the company, the state and development prospects of the market concerned, the size of the network of operators, the duration, conditions of renewal, termination and assignment of the contract and the scope of exclusive rights”.

  

The information to be provided in the DIP is precisely listed in article R. 330-1 of the French Commercial Code, to which the reader is invited to refer.

  

Applied to franchise, this information is divided into the following six categories: 

  

Information relating to the development of the franchisor and the network itself must be supplemented by (i) the head of the franchisor’s annual accounts for the last two financial years and (ii) a presentation of the general and local state of the market for the products or services to be covered by the contract and the prospects for the development of this market.

  

The general market report and the local market report must contain objective information on supply and demand. They should not be confused with the market study (comprising an analysis of supply and demand), which the franchisor is under no obligation to provide and which is the responsibility of the franchisee, an independent trader, who must carry it out in order to assess the potential economic profitability of his project. 

   

In this respect, the franchisor is not obliged to provide the prospective franchisee with an operating forecast, nor is it advisable to do so, since the transmission of over-optimistic sales forecasts by the franchisor could mislead the franchisee as to the profitability of the outlet and consequently render the franchise agreement null and void.

  

If the franchisor nevertheless provides such information, which is not compulsory, the franchisor must ensure that it is serious and sincere, and that it is not likely to vitiate the franchisee's consent.

  

Under the terms of the first paragraph of article 1112-1 of the Civil Code, resulting from Order 2016-131 of 10 February 2016 reforming contract law, “a party who is aware of information whose importance is decisive for the consent of the other party must inform the latter of that information if the latter is legitimately unaware of it or has confidence in the other party”.

  

This article specifies that “information which has a direct and necessary link with the content of the contract or the capacity of the parties is of decisive importance”.

  

French case law regularly accepts the combination of this general text with the special text of article R. 330-1 of the French Commercial Code, which means that the franchisor shall to provide the prospective franchisee with information that is decisive for the latter's consent, even if it does not appear in the list in article R. 330-1 of the French Commercial Code.

  

As a recent example, in a ruling dated 27 March 2024, the Court of Paris declared a franchise agreement null and void on the grounds of fraud, after recalling the provisions of article 1112-1 of the Civil Code, ruling that “the fraudulent concealment on the part of Body Concepts misled Smart Relax as to the profitability that the operation of the “Smart Body” concept could generate. This concealment, which related to the substance of the franchise agreement in which the expectation of profit is decisive, was a determining factor in the consent of Smart Relax, which would not have entered into the agreement or would have entered into it on substantially different terms, if it had known about the financial difficulties of the companies operating the neighboring “Point Soleil” concept given as an example and the insolvency proceedings in progress concerning them”. (Paris Court of Appeal, 27 March 2024, no. 22/12665).

  

​With regard to criminal penalties, under article R. 330-2 of the French Commercial Code, failure to send the DIP and the draft contract required at least 20 days before the contract is signed is punishable by a fine of 1,500 Euros under article 131-13, paragraph 5 of the French Criminal Code for fifth-class offences.

  

As far as civil penalties are concerned, failure to provide a DIP within the aforementioned period, or the provision of an inaccurate DIP, is likely to result in the nullity of the franchise agreement on the grounds of lack of consent. However, this breach of article L. 330-1 of the French Commercial Code does not in itself render the contract null and void, as franchisees are required to qualify and characterise the resulting defect in consent.

  

In a recent ruling dated 21 February 2024, the Paris Court of Appeal declared a franchise agreement null and void for failure to comply with the 20-day time limit for submission of the DIP, on the grounds that “the concomitance of the signing of the agreement and the submission of the DIP misled them [the franchisee's representatives] as to the cost of their commitment [...]. They were thus unable to assess the scope and usefulness of their commitment and the practical feasibility of the project covered by the contract. As these factors were decisive in determining the parties' consent, the defect is obvious and the contract is null and void”. (Paris Court of Appeal, 21 February 2024, no. 22/12529).

  

For the record, in accordance with article 1178 of the French Civil Code, nullity entails the retroactive annulment of the contract, and the parties must be restored to the state they would have been in had the contract not been concluded. As a result, nullity leads to restitution on both sides between the franchisor and the franchisee, and as far as the franchisor is concerned, restitution of the sums paid by the franchisee (in particular the entry fee, the royalties paid by the franchisee and the contribution to advertising).

    

The consequences of a franchise agreement being declared null and void, with the risk that other agreements entered into by the franchisor on the basis of the same non-compliant DIP may also be declared null and void, can be terrible for the network, which ultimately exists only through the agreements binding the franchisor to its franchisees.

                 

​In order to guarantee the validity of its franchise network, the franchisor will therefore have to ensure that the DIP is sincere, contains complete, accurate and up-to-date information (as required by article R. 330-1 of the French Commercial Code, but also as required by article 1112-1 of the French Civil Code to determine the consent of the prospective franchisee).

  

To this end, the franchisor may implement the following best practices: