31 May 2017

Formation of a franchising agreement under French law

What is a franchising agreement?
A franchising contract is a collaboration agreement between two legally and financially independent companies in which the franchisor authorizes the franchisee to use a number of its distinctive signs (trademark, brand, architectural concept, graphic charter, etc.) as part of its relationships with customers.
In legal terms, a franchising agreement includes the following:

  • two independent trading companies;
  • among which one party (the franchisor) grants the right to use some of its intangible assets (such as its trading name, a brand, licences, business approaches) to the other party (the franchisee);
  • In consideration of which the franchisee agrees to pay an entry fee plus a revenue-based royalty to the franchisor, in addition to fulfilling various mutually agreed obligations. 
Different types of franchising agreements
Three types of franchising agreements can be distinguished, namely service, production and distribution franchise agreements. This paper only addresses distribution franchise contracts.
Service franchise agreements:
Under such contracts, the franchisee’s purpose is to provide services (such as hotel or catering services).
Production franchise agreements:
The franchisee is to manufacture a product as per franchisor’s indications, and the product is subsequently marketed under franchisor’s trademark.
Distribution franchise agreements:
In its judgement dated 28 January 1986 (Case C-161/84), the European Court of Justice defined distribution franchising as abusiness relationship in which ″an undertaking which has established itself as a distributor on a given market and thus developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful. Rather than a method of distribution, it is a way for an undertaking to derive financial benefit from its expertise without investing its own capital. Moreover the system gives traders who do not have the necessary experience access to methods which they could not have learned without considerable effort and allows them to benefit from the reputation of the franchisor’s business name″.
How to enter into a franchising agreement - a stepwise process:
Prior to signing the franchising agreement, the franchisor must first provide the franchisee with some pre-contractual information (pursuant to Article L.330-3 of the French Commerce code), after which the parties negotiate as part of a preliminary contract, then sign the final franchising agreement.  
Pre-contractual information:
Article L.330-3 of the Commerce code provides that ″Any person who provides to another person a trade name, brand or corporate name, by requiring therefrom an exclusivity or quasi-exclusivity undertaking in order to carry out their activity, shall be bound, prior to the signing of any contract concluded in the common interest of both parties, to provide the other party with a document giving truthful information allowing the latter to commit to this contract in full knowledge of the facts″.
In particular, the franchisee must be provided with the following information:
  • franchisor’s seniority and experience in the market,▪ current market conditions and development prospects,
  • scale of the distribution network,
  • contemplated contract term,
  • applicable renewal, termination and assignment terms,
  • scope of exclusivities. 
Pursuant to applicable civil law, should the franchisor fail to provide the franchisee with the above document or provide the latter with inaccurate information, then the franchisee would be entitled to start a legal action to have the agreement declared invalid by the court.
Nevertheless, in such a case, the franchisee would need to disclose evidence proving that the contract was signed based on a lack of consent (see for instance French Supreme court – decision Nr 08-20678 of 15 December 2009).
The preliminary contract:
Again, as provided for under Article L.330-3 of the Commerce code, pre-contractual information must be provided to the franchisee along with a preliminary contract no later than 20 days prior to signing the final contract.
The purpose of the preliminary contract is for the parties to start negotiating; in addition, the franchisor may also agree to provide assistance to the franchisee when the latter starts operating under the agreement, in particular where a special permit must first be applied for pursuant to commercial urban planning regulations.
The final franchising agreement:
The agreement sets out the parties’ respective rights and obligations, including the amount of the entry fees usually paid by franchisees;rights to use franchisor’s licenses and know-how which are granted to the franchisee; technical assistance provided by the franchisor.
In addition to the above, franchising agreements are subject to ordinary contract law, competition law and regulations in matters of restrictive trade practices, which the parties must comply with. 

Attorney at law