Joining a franchise: the crucial process of contract formation

Joining a franchise network represents a considerable personal and financial commitment. It's an entrepreneurial venture that can prove fruitful, but its success depends to a large extent on the solidity of the foundations on which it is built. The phase preceding the signing of the contract, as well as the conclusion itself, are decisive moments. Incomplete information, unbalanced negotiations or a poorly understood contract can turn a dream into disillusionment. This article guides you through the essential stages in the formation of a contract. franchise contractWe'll look at pre-contractual information, negotiation, possible pre-contracts and the conditions required for a valid franchise agreement. We will look at pre-contractual information, negotiation, possible pre-contracts and the conditions required for a franchise contract to be validly formed.

Pre-contractual information: a fundamental stage

Before you even think about signing, French law requires franchisors to provide detailed information to prospective franchisees. The aim is to enable you to make a commitment in full knowledge of the facts.

The legal obligation to provide information: the "Doubin" law

The key mechanism is often referred to as the "Doubin Law", the provisions of which are now mainly set out in article L. 330-3 of the French Commercial Code. This obligation applies to any person who makes a brand, trade name or trade name available and requires the other party to give an undertaking of exclusivity or quasi-exclusivity in respect of its business. Franchising is therefore directly concerned. This obligation is not limited to the initial signing of the contract; it also applies in the event of renewal of the contract or transfer of the contract to a new franchisee.

The Pre-contractual Information Document (PID): what should it contain?

The obligation to provide information takes the form of a Pre-contractual Information Document (DIP). This document must be sent to you at least twenty days before signing of the contract, or before any payment required by the franchisor (for example, to reserve an area). This period cannot be exceeded, and is designed to give you time to analyse the situation calmly, possibly with the help of advisers (lawyer, chartered accountant).

What is included in the DIP? Article R. 330-1 of the French Commercial Code lists the compulsory information. This information includes

• The identity and experience of the franchisor (age of the company, history, etc.).
• The state of the market concerned (national and local).
• Information about the network (number of franchisees, list of companies, exits from the network in the previous year, etc.).
• Financial details (nature and amount of expenditure and investment specific to the brand that you will need to make before starting up).
• The main clauses of the proposed contract (duration, renewal conditions, termination, assignment, exclusivity, etc.).

Particular attention must be paid to the presentation of the local market. Jurisprudence has specified that this presentation must not be generic but adapted to the area in which the business is to be established, ideally including information on the population, local competition, etc. Similarly, information on companies that have left the network must be precise (reasons for leaving: expiry, termination, cancellation). The franchisor must prove that he has given you this complete document on time. A clause in the final contract in which you acknowledge having received the DIP is not sufficient proof for the franchisor and does not prevent you from contesting a lack of information at a later date.

Financial forecasts: prudence required

This is a key point and a frequent source of disputes. Is the franchisor obliged to provide forecasts, i.e. an estimate of the future sales and profitability of your business? The law (article L. 330-3) does not explicitly require the provision of a quantified market study forecast. Case law confirms that there is no strict legal obligation to provide forecasts.

However, if the franchisor chooses to communicate such figures to you (either directly or by providing you with the information you need to draw them up), he will be held responsible. These forecasts must be sincere and established on a serious and realistic basis. Excessively optimistic figures, disconnected from the reality of the local market or from the past performance of comparable units in the network, may constitute a serious breach by the franchisor. Such breaches, among others obligations of the franchisorIf you fail to comply with the terms of your contract, you may be liable to penalties. Under certain conditions, you may be able to obtain cancellation of the contract or damages. The question of whether an error in profitability, even if not caused by erroneous figures from the franchisor, can vitiate your consent is still open to debate (we'll come back to this later). In any case, a critical analysis of these forecasts, ideally with a chartered accountant, is essential.

Beware of advertising documents

Sales brochures and information disseminated by the franchisor at trade fairs or on the Internet may also be important. If these documents are sufficiently precise and detailed and if they have influenced your decision to enter into a contract, jurisprudence accepts that they can acquire a legal status. contract value. The franchisor would then be bound by the promises or statements contained in its advertising. You should therefore be careful to keep this information.

What does the franchisor risk in the event of a breach?

What are the consequences if the franchisor fails to fulfil his pre-contractual information obligation (absence of a DIP, incomplete or erroneous DIP submitted late, misleading information, etc.)? Penalties are not automatic. Case law holds that failure to comply with article L. 330-3 does not entail the imposition of a penalty. nullity of the contract if it has vitiated your consent (error or fraud). You must prove that if you had had the correct information, you would not have contracted, or would have contracted on different terms.

Even if it does not result in nullity, a breach by the franchisor may give rise to liability. civil liability. This situation, although early, may foreshadow the complexities of the termination of the franchise contract and what's at stake. You could then obtain damages and interestgenerally corresponding to the loss of chance not to take out a contract, or to take out a contract on more advantageous terms. This may cover some of the costs incurred unnecessarily. Article 1112-1 of the Civil Code, resulting from the 2016 reform, also enshrines a general pre-contractual information obligation for any party who is aware of information that is decisive for the other party's consent, which could strengthen the possibilities for action.

The negotiation phase and preliminary contracts

Once the information has been received and analysed, it's time to negotiate, even though in practice there is often little room for manoeuvre when it comes to modifying a standard franchise contract. It is therefore crucial to understand all the clauses, particularly those relating to obligations of the franchisee.

Negotiating the franchise agreement: freedom and good faith

The principle is freedom of negotiation. Everyone is free to enter into, conduct and terminate contractual negotiations. However, this freedom is subject to the requirement of good faithThis is set out in article 1104 of the French Civil Code. Abruptly breaking off advanced negotiations without a legitimate reason may constitute a fault.

In the event of wrongful termination, however, compensation is limited. Article 1112 of the Civil Code specifies that compensation for loss cannot be intended to compensate for the loss of benefits expected from the contract that was not concluded. You could therefore obtain reimbursement of certain expenses incurred (studies, travel, etc.) but not the equivalent of the expected gain.  

During negotiations, an obligation to confidentiality also has a bearing on the information exchanged (article 1112-2 of the French Civil Code).

Useful pre-contracts

To secure the negotiation phase or prepare for the final signature, various pre-contracts can be concluded:

• Confidentiality agreement : Indispensable if the franchisor communicates elements of its know-how or strategic data to you before signing.
• Area reservation contract : This is a common type of agreement, which guarantees you exclusivity in a given area for a given period, while you finalise your project (finding premises, finance, etc.). In return, you pay a sum (immobilisation indemnity). Article L. 330-3 of the French Commercial Code requires the services provided in return and the obligations in the event of withdrawal to be set out in writing. Beware of clauses stipulating that this sum remains with the franchisor even if the final contract is not signed; their validity may be questioned if you are not responsible for the non-signature.
• Promise to enter into a contract subject to a suspensive condition : The franchise contract may be signed, but its entry into force is subject to the fulfilment of a future and uncertain event, such as obtaining a bank loan or signing a commercial lease. If the condition is not fulfilled through no fault of your own, the contract is deemed never to have existed (article 1304-6 of the Civil Code).

Conditions for a valid contract

For a franchise contract to be legally valid, it must comply with the general conditions for the validity of contracts set out in article 1128 of the French Civil Code.

Consent: must be free and informed

Your consent, like that of the franchisor, must not be vitiated. Three defects in consent can lead to the contract being null and void:

1. The mistake: It is a false representation of reality. To be a ground for nullity, the error must relate to the essential qualities of the service or the co-contractor and be excusable (you could not reasonably have avoided it). Mistakes about the economic profitability of the franchise are a special case. For a while, case law seemed to accept that a substantial error as to profitability, even if not caused by the franchisor, could justify cancellation. However, a more recent decision (Com. 24 June 2020) has restricted this possibility, stating that an error as to profitability can only lead to nullity if it data established and communicated by the franchisor. This brings misrepresentation of profitability closer to fraud, limiting the number of cases in which a franchisee's "spontaneous" misrepresentation of his or her earnings prospects can lead to cancellation.
2. Fraud : This is an error caused by manoeuvres, lies or the intentional concealment of decisive information (fraudulent concealment) by the contracting party (article 1137 of the French Civil Code). If the franchisor has deliberately misled you (for example, by providing knowingly false forecasts, or by concealing important negative information about the network or the local market), the contract may be cancelled. Unlike a simple error, an error caused by fraud is always excusable and may relate to value or a simple reason.
3. Violence : This is the act of extorting consent through coercion. It may be physical or moral. Article 1143 of the Civil Code specifically refers to the abuse of the state of dependence in which the co-contractor finds himself, obtaining from him a commitment that he would not have entered into without this coercion and deriving a manifestly excessive advantage. Although more difficult to prove in the context of the initial formation of a franchise, this economic violence could be invoked in certain situations of forced renewal, for example.

The capacity of the parties

Each party must have the legal capacity to enter into a contract. For an individual starting up a franchise, this generally means being of legal age and not being subject to a protective measure (guardianship, curatorship) preventing them from managing their affairs. If the franchisee is setting up a company, it is the capacity of the company and its legal representative that is important.

Legal and certain content

The contract must have a lawful and certain content (object) (article 1128 of the Civil Code).

• Specified or determinable object : The obligations of each party must be clear. The know-how transferred must be sufficiently identified. With regard to the price of goods supplied by the franchisor (if applicable), article 1164 of the Civil Code allows it to be set unilaterally by the franchisor, subject to the franchisor giving reasons for the amount in the event of a dispute and not abusing it (possible sanction: termination or compensation).
• Consideration that is not illusory or derisory: The commitment of each party must have a real counterpart in the commitment of the other (article 1169 of the French Civil Code). If the promised know-how turns out to be non-existent, commonplace or unproven, the consideration for your financial obligations (entry fee, royalties) disappears, and the contract may be cancelled for lack of cause/counterparty.
• Legality : The contract must not be contrary to public policy (article 1162 of the Civil Code). This includes compliance with competition rules. Certain clauses (very broad exclusive supply agreements, total ban on online sales, etc.) could be deemed unlawful if they excessively restrict competition without any legitimate justification linked to the very nature of franchising (protection of know-how, network image).

The training phase of the contract is dense and technical. Taking the time to fully understand each stage, to check the information received and to analyse the draft contract is essential if you are to start your franchise business on a sound footing.

Advice tailored to your situation during this preparatory phase could save you time and resources. Contact us to find out more.

Sources

• Commercial Code, in particular articles L. 330-3 and R. 330-1 (Pre-contractual information).
• Civil Code, in particular articles 1104 (Good faith), 1112 (Negotiation), 1112-1 (Duty to inform), 1128 (Conditions of validity), 1130-1144 (Vices of consent), 1162 (Legality of content), 1163-1165 (Object and price), 1169 (Consideration), 1171 (Clause creating a significant imbalance), 1178-1187 (Nullity and nullity), 1304-1304-7 (Suspensive condition).