The end of the partnership: understanding the termination of the franchise contract and the issues involved

Like any contractual relationship, the one between a franchisor and a franchisee - a a contract with specific characteristics - comes to an end. This stage, which is often dreaded, is nevertheless a normal part of business life. Whether it comes at the end of the contract, by mutual agreement, or as a result of a dispute, the termination of a franchise contract raises complex issues and is frequently the source of disputes. What are the different ways in which a contract can be terminated? What obligations remain after termination? How should restrictive competition clauses be managed? Can the franchisee claim compensation? This article explores the different end-of-contract scenarios and deciphers the major legal and practical issues for partners.

How does a franchise contract end?

The end of a franchise contract can occur in a "normal" way, foreseen or accepted by the parties, or in a "pathological" way, resulting from an incident or a profound disagreement.

The "normal" end: deadline, agreement or unilateral decision

• The end of the contract (for fixed-term contracts) : Most franchise contracts are concluded for a fixed term (often 5, 7 or 10 years). When the contract expires, it is automatically terminated. Important point: unless there is an explicit clause to the contrary (which is rare in practice), the franchisee has no automatic right to renew the contract. The franchisor is free to propose a new contract or not, and possibly on different terms.
• Unilateral termination (for permanent contracts) : If the contract is for an indefinite period (which may happen after tacit renewal of a fixed-term contract, for example, see article 1215 of the Civil Code), either party has the right to terminate it unilaterally at any time. This freedom to break a perpetual commitment is a fundamental principle. However, it is not absolute.
• Amicable termination (mutuus dissensus) : The parties can always decide, by mutual agreement, to end their contractual relationship early. In such cases, it is advisable to formalise this agreement in an end-of-contract protocol that will regulate the consequences of the termination (fate of stocks, post-contractual clauses, etc.). Please note that unless expressly waived, the signing of such an agreement does not prevent either party from subsequently claiming compensation for faults committed by the other prior to the termination.
• Temperaments and points to watch out for :
  • Abuse of rights : Even where there is no right to renewal, the franchisor may not refuse to renew or terminate an open-ended contract in an abusive manner. Abuse may be deemed to have occurred if, for example, the franchisor led the franchisee to believe that the contract would be renewed, encouraged it to make heavy investments shortly before the expiry date, or abruptly terminated the contract under unfair conditions intended to harm the franchisee (Com. 8 Oct. 2013). Proof of abuse, however, remains difficult to establish.
  • Adequate notice : In the event of termination of an "established commercial relationship" (as in the case of a continuing franchise agreement), the person who terminates the relationship must give notice in writing, taking into account the duration of the relationship and other circumstances (article L. 442-1, II of the French Commercial Code). Termination without sufficient notice gives rise to liability on the part of the terminator and entitles the victim to compensation (corresponding to the gross margin lost during the period of notice not respected). However, the law caps this notice period at 18 months.
  • The implicit minimum duration? Some people argue that a contract should not be terminated before the franchisee has had a reasonable opportunity to recoup its initial specific investment. Although not explicitly enshrined for franchising, this idea is sometimes taken into account by judges when assessing whether a termination is unfair.
  • The obligation to state reasons : Case law does not generally require franchisors to justify their refusal to renew or their decision to terminate a permanent contract. However, the requirement of good faith (article 1104 of the French Civil Code) should encourage greater transparency in a decision with such far-reaching consequences for the partner.

Pathological" break-ups: conflicts and incidents

The end of the contract can also result from more conflictual events:

• Invalidity of the contract : If the conditions for validity were not met from the outset (lack of consent, absence of real know-how, etc.), the contract may be annulled by the court, with retroactive effect (as if it had never existed). We have discussed the conditions of formation and validity of the contract in a previous article.
• Termination for fault : A sufficiently serious breach by one party of its contractual obligations may justify termination of the contract by the other party.
  • Judicial termination : The aggrieved party applies to the court to establish the fault and order termination (article 1227 of the Civil Code). The judge assesses the seriousness of the breach.
  • Resolutory clause : The contract may stipulate that in the event of a breach of certain specific obligations, termination will take place automatically after a formal notice has been served without result (article 1225 of the French Civil Code). Even with such a clause, the party invoking it must do so in good faith. The judge may set aside the clause if it is applied unfairly.
  • Unilateral termination by notice : Since the 2016 reform, article 1226 of the Civil Code allows the creditor of an obligation that has not been performed in a sufficiently serious manner to terminate the contract unilaterally, at its own risk, after giving formal notice to the debtor (except in an emergency). The debtor may always contest this termination before a court after the event.
• Force majeure : An unforeseeable, irresistible event outside the control of the parties that renders performance of the contract definitively impossible will result in its termination by operation of law (article 1218 of the French Civil Code).
• Unforeseen circumstances : If a change in circumstances unforeseeable at the time of conclusion makes performance excessively onerous for a party who had not agreed to assume the risk, that party may request renegotiation. If this fails, the matter may be referred to the court to revise or terminate the contract (article 1195 of the Civil Code). This could concern, for example, a major and unforeseen economic crisis in the sector.
• Lapse : The contract may lapse if one of its essential elements disappears during performance (article 1186 of the Civil Code). For example, if the franchisor definitively loses the rights to its trademark. Lapse terminates the contract for the future only.

The immediate consequences of the end of the contract

Whatever the cause of termination, it has immediate consequences for both parties.

For the franchisee: return and loss of use of the signs

As soon as the contract ends, the franchisee loses the right to use the brand, the trade name and all the distinctive signs of the network. Continuing to use them would expose them to legal action for counterfeiting or economic parasitism. The franchisee must also return all material and documentary evidence to the franchisor which had been entrusted to it: the operating manual ("bible"), advertising material, sometimes specific equipment on loan or hire, etc.

The post-contractual obligation of confidentiality

The know-how communicated during the contract remains the property of the franchisor. The franchisee is therefore bound by a an obligation not to disclose or use this know-how after the end of the contract. This obligation is natural and derives from the confidential nature of the know-how. Its breach would constitute an act of unfair competition. It is often useful for the contract to specify the duration of this post-contractual confidentiality obligation.

The complex fate of customer files

Who owns the customer data collected by the franchisee during the contract? This is an increasingly sensitive issue with digitalisation and the RGPD. In principle, the franchisee, as an independent trader who has compiled and used this file, is the "producer" within the meaning of database law and the "controller" within the meaning of the RGPD. The customer file is an essential asset of the franchisee's business.

However, many franchise contracts contain clauses organising the sharing, or even the transfer of ownership or a right of use of this data to the franchisor, during and after the contract. The validity and scope of these clauses are open to debate, particularly in the light of the RGPD (need for informed consent from customers, specific purposes, etc.) and the risk of customers being diverted to the detriment of the outgoing franchisee. A recent decision (Com. 27 Sept. 2023) accepted that a former franchisee could apply in summary proceedings to prohibit the franchisor from using his customer file after the termination, suggesting that the franchisee's right to his data may be protected.

The headache of post-contractual non-competition and non-reaffiliation clauses

These clauses are very common and are designed to protect the franchisor after the franchisee has left. They are, however, subject to strict controls, as they infringe the franchisee's entrepreneurial freedom and right to work.

Post-contractual non-competition clause: highly restricted validity

This clause prohibits the former franchisee from carrying on a business competing with that of the network for a certain period and in a defined geographical area. To be valid, it must meet several conditions cumulative :

1. Be limited in time: The duration of the ban must be reasonable (often a maximum of 1 year).
2. Being limited in space: The geographical area must be restricted to that where competition from the former franchisee would be likely to cause real harm to the franchisor (for example, the catchment area of the former outlet, or a limited radius around it). A clause covering the whole of France or Europe is generally considered excessive.
3. Be justified by a legitimate interest of the franchisor : The clause must be necessary to protect the franchisor's interests. In franchising, this justification is based mainly on the protection of substantial and secret know-how transmitted to the franchisee, which the latter could use to compete with the network. If the know-how is commonplace or non-confidential, the clause is not justified.
4. Be proportionate : The prohibition must not prevent the former franchisee from pursuing any professional activity corresponding to his skills and experience. If the clause is so broad that it forces the former franchisee to change jobs completely or to move far away, it will be deemed disproportionate and therefore null and void.

The courts monitor these conditions fairly strictly. A clause that does not comply with one of them is null and void and has no effect.

The question of financial compensation

Under employment law, a post-contractual non-competition clause is only valid if it provides for financial compensation ("non-competition indemnity") for the employee. As the law currently stands, there is no such requirement for franchise agreements. The Court of Cassation refused to extend the solution applicable to employees to franchisees, considering that they are independent traders.

This position is criticised by some academics. The former franchisee, even if independent, is deprived of the possibility of exploiting his own clientele (which the Trévisan ruling of 2002 recognised as belonging to him) and earning a living in his field of activity. Certain arguments based on the right to property (protected by the European Convention on Human Rights) or the right to work could justify a change, but this has not happened to date. The absence of financial compensation makes these clauses particularly burdensome for the outgoing franchisee.

Non-reaffiliation clause: aligned regime?

Sometimes, the contract does not prohibit the exercise of a competing activity, but only of join another competing franchise network (non-reaffiliation clause). Although distinct in theory (it leaves open the possibility of self-employment), this clause has very similar effects to a non-competition clause in sectors where membership of a network is economically indispensable (e.g. supermarkets). Jurisprudence therefore tends to apply to it the same principles as to a non-competition clause. same conditions of validity (time/space limitation, justification, proportionality).

The impact of the "Macron Law" (Art. L. 341-2 C. com)

The Law of 6 August 2015, known as the "Macron Law", introduced a specific article (L. 341-2 of the French Commercial Code) governing post-contractual clauses restricting the operator's freedom to operate in certain distribution contracts (aimed in particular at operators of "retail shops"). For these contracts, the clause is only valid if it meets even more specific conditions, inspired by European competition law:

• Involve competing goods/services.
• Be limited to the land and premises from which the operator carried on business.
• Be indispensable protecting know-how substantial, specific AND secret.
• Do not exceed one year after the end of the contract.

If your contract falls within the scope of this text (which is debated for pure service franchises), these conditions are in addition to or specify the general case law requirements.

The question of compensation at the end of a contract

Can the end of the contract give rise to the payment of compensation? There are two different situations.

Compensation for wrongful termination

If the termination of the contract is attributable to a fault of one of the parties (for example, termination at the franchisor's expense for failure to comply with its contractual obligations), the franchisor is liable to pay the costs of the termination. obligation to provide assistanceor to the detriment of the franchisee for non-payment of fees. fees), the injured party may request damages and interest to compensate him for all his losses (incurred and lost earnings).

Contracts often include a penalty clause set a fixed amount of compensation due in the event of wrongful termination (for example, an amount equal to the royalties that should have been paid up to the initial term of the contract if the franchisee is at fault). However, the judge may always reduce a penalty clause if it is deemed "manifestly excessive" (article 1231-5 of the Civil Code). This is frequently the case for penalty clauses based on future royalties, as the franchisor no longer provides the corresponding services after termination and may reallocate the area to a new franchisee.

End-of-contract compensation for loss of clientele: an unrecognised right?

This is a recurring and sensitive question: is a franchisee who leaves the network (through no fault of his own, for example when the term expires) and thereby loses part of the customer base he has helped to develop, entitled to compensation from the franchisor, similar to what exists for commercial agents?

As French law currently stands, the answer is no. The Cour de cassation refuses to grant such a customer indemnity to the outgoing franchisee. In particular, it has rejected arguments based on the franchisor's unjust enrichment (Com. 23 Oct. 2012) or on the analogy with the mandate of common interest.

However, there are solid arguments in favour of such compensation:

• The franchisee is recognised as the owner of his local clientele (Civ. 3e, 27 March 2002, "Trévisan"). To deprive him of this value without compensation, in particular by means of an unpaid non-competition clause, could be construed as an infringement of his right to property (protected by Article 1 of Additional Protocol No. 1 to the European Convention on Human Rights).  
• Comparative European law and certain harmonisation projects (Von Bar Principles) suggest compensation for goodwill in distribution contracts.

Despite these arguments, recognition of a customer indemnity for the outgoing franchisee would require a reversal of case law or intervention by the legislature, neither of which is currently the case (April 2025).

The termination of a franchise contract is a complex stage that requires a careful analysis of the contractual and factual situation. Post-contractual obligations, particularly restrictive clauses, and questions of compensation are often at the heart of disputes.

If you find yourself in a conflictual situation at the end of a contract, or if you are anticipating the end of your partnership and wish to manage the consequences, do not hesitate to contact our firm to discuss your options and benefit from our expertise. expertise in commercial law.

Sources

• Civil Code, in particular articles 1104 (Good faith), 1186 (Sunset), 1195 (Imprévision), 1211 (Termination of permanent contract), 1212 (End of fixed-term contract), 1217-1229 (Penalties for non-performance, Termination), 1231-5 (Penalty clause), 1589-2 (Promise to sell funds).
• Commercial Code, in particular articles L. 330-1 (Duration of exclusivity), L. 341-1 and L. 341-2 (Post-contractual clauses - Macron Law), L. 442-1 II (Notice of termination).
• European Convention on Human Rights, Additional Protocol 1, article 1 (Protection of property).
• Case law relating to the end of a contract, non-renewal, termination, non-competition and non-reaffiliation clauses and compensation.