Will the “Significant Imbalance” Concept weaken the Franchise Contract?
By Olivier Binder, Herald
The latest revised version of article 1110 of the Civil Code entered into force on 1 October 2018. It defines a standard form contract as a “contract which contains a set of non-negotiable clauses, determined in advance by one of the parties”.
As early as 2008, the French legislator introduced into the French Commercial Code the control of contractual balance, aimed at sanctioning any behaviour characterised as having an intention to “subject or attempt to subject a commercial partner to obligations creating a significant imbalance in the rights and obligations of the parties”. (Article L.442-6 I 2° of the French Commercial Code).
Thus, clauses that are nonreciprocal, restrictive, or which do not have any countervailing benefits may lead the Judge to declare them null and void, to award damages to the victim and, more rarely, to declare the entire contract null and void. These unfair terms have been found mainly in contracts between suppliers and the central purchasing function of major food retailers, that use their market power and the absence of alternative purchasers to obtain objectively unjustified supply conditions and to impose unfair terms.
Such balance of economic power is not found in franchising, since the prospective franchisee may decide to join another network if it is not satisfied with a franchisor’s proposal. Above all, the transfer by the franchisor to the franchisee of identified, secret and substantial know-how and the need for the uniform application of the components of the know-how by all franchisees, are objective reasons for the apparent imbalances in a franchise contract.
Since October 2016, the “significant imbalance” approach has been incorporated into Article 1171 of the Civil Code. While it is logical to consider that the Civil Code cannot apply in the fields already regulated by the Commercial Code, franchisors should endeavour to increase the negotiability of some clauses. The introduction of the concept of “significant imbalance” in Civil Law reflects the legislator's willingness to strengthen, in respect of standard form contracts, the control of the contractual imbalances.
Franchise contracts may be considered as standard-form contracts. The quite common imbalance between the rights and obligations of the franchisor and the franchisee results from specific features of the franchise relationship which cannot be attacked, whether on the basis of Commercial Law or Civil Law. In this respect, several recent decisions have been rendered by the Court of Appeal of Paris, in which clauses in franchise agreements have been upheld:
- A post-contractual non-competition clause in accordance with the regulation on vertical restraints (CA Paris, 14 December 2016, n°14/14207): “the purpose of this obligation is to protect the former franchisor's know-how and to prevent it from being disclosed in another network. It is, therefore, a restriction of competition justified by the object of the franchise itself”.
- A clause requiring the franchisee to make specific changes to its marketing materials (CA Paris, 22 November 2017, n°15/01067): “this obligation inherent in the franchise agreement is justified, because it ensures the uniformity and common identity of the network and, consequently, its development, and it constitutes the counterpart to the transfer of the franchisor's know-how. It is, therefore, necessary for the balance of the contract”.
The burden of proof of a significant imbalance lies with the franchisee, who must demonstrate, if necessary, by means of material, precise and relevant evidence, that it was effectively deprived, during the pre-contractual period, from negotiating the terms of the franchise agreement with its franchisor (CA Paris, 20 December 2017, n°13/04879). As for the franchisor, it will be able to demonstrate the existence of the elements in respect of which the franchisee has benefited from, once admitted in the distribution network, in particular, the transfer of know-how and assistance services.
In order to minimise any risk, it seems important for the franchisor to justify the legitimate imbalances that may result from the franchise agreement, by:
- Specifying the financial and commercial background along with constraints and opportunities for each party in the preamble of the franchise agreement;
- Creating links within the contract between different clauses in order to provide an objective justification for potential imbalances resulting from the need to protect the know-how, distinctive signs, homogeneity and reputation of the franchise network;
- Including a statement in the franchise agreement by which the franchisor and franchisee acknowledge having had the possibility to discuss the content of the franchise agreement.
Published: GGI Insider, No. 100, March 2019 l Photo: Sergey Novikov - stock.adobe.com