The life of the franchise contract: the franchisee's obligations

Joining a franchise network offers undeniable advantages, such as benefit from a recognised brand and proven expertise. However, this partnership also implies important duties for the franchisee. Far from being a simple customer of the franchisor, the franchisee is a key player in the network, bound by precise commitments that determine the success of the business. the smooth running of the concept and the sustainability of the relationship. Understanding the extent and limits of these obligations is essential for any franchised entrepreneur. This article sets out to detail the fundamental duties incumbent on franchisees, as well as the constraints arising from the specific clauses frequently found in franchise agreements.

The fundamental duties of the franchisee

These obligations arise directly from the very nature of the franchise contract. They are the logical counterpart to the rights and benefits granted by the franchisor.

Meeting financial obligations

This is often the most visible aspect of the franchisee's commitment. In exchange for access to the network, know-how and assistance, the franchisee must pay various sums:

• Entrance fee : Also known as the initial fixed fee, it is paid at the start of the contract and remunerates integration into the network and the initial transmission of know-how. The amount is freely determined in the contract. However, the question of whether it is payable when the contract is simply renewed may arise, even though practice tends to provide for this.
• Royalties : Paid periodically (often monthly), they remunerate the continued use of the brand, the know-how and the benefit of the franchisor's assistance. They are usually calculated as a percentage of the franchisee's turnover. It is important to check the basis of calculation set out in the contract. The franchisor may reserve the right to monitor your turnover in order to check the accuracy of the royalties due, but this monitoring must remain within reasonable limits so as not to amount to excessive interference. Recent case law has even admitted, in a debatable manner, that a franchisor may reserve the right to unilaterally modify the rate of royalties (Com. 1 Dec. 2021), provided this is not abused.
• Advertising fees : If the contract so provides, the franchisee contributes to the national or regional advertising budget managed by the franchisor. These sums must be allocated to promoting the brand. As we have already seen, the franchisee is entitled to expect a degree of transparency regarding the use of these funds.

Non-payment of these fees on a regular basis constitutes a serious breach of contract, liable to result in the termination of the contract. termination of contract to the detriment of the franchisee.

Participate in training courses

Know-how is dynamic. To ensure that the concept is properly applied and adapted to new developments, the franchisor generally organises training sessions, both initial and ongoing. In most cases, the franchise contract stipulates a obligation for the franchisee (and sometimes its key staff) to take part in these training coursesa fundamental aspect of commitment to franchising. This is an essential condition for maintaining the required level of competence and uniformity of practices within the network. Refusing to take this training may be considered a breach of contract. However, the legitimacy of refusing access to the network on this basis may be questionable if the applicant has already signed the contract and paid an entry fee.

Respect the network's concept and image (loyalty obligation)

This is the franchisee's central obligation: faithfully and rigorously apply the know-how passed on and comply with network standards. This obligation to be "faithful" to the concept takes many concrete forms:

• Use the commercial, technical and management methods defined by the franchisor.
• Comply with store layout and presentation standards (graphic charter, layout, etc.).
• Comply with product or service quality standards.
• Comply with the promotional policies defined by the network (without going so far as to impose resale prices, which is prohibited by article L. 442-5 of the French Commercial Code).
• Use the brand and sign correctly, without damaging them.
• Refrain from developing a competing activity for the duration of the contract.

This discipline is the key to the coherence and strength of the network. However, it is not enough, loyalty does not mean blind submission. The franchisee remains an independent trader. They are generally allowed a certain amount of initiative, and above all, the franchisor cannot impose constraints that would deprive them of all autonomy and place them in a state of disguised legal subordination.

Maintaining legal independence... but to what extent?

By definition, a franchisee is a independent contractor. They run their business at their own risk. This legal independence is a cornerstone of the franchise model. However, the borderline with dependence can sometimes become blurred, and the risks are not negligible.

• The risk of reclassification as an employment contract : If the franchisor exercises too close and permanent control over the franchisee's activity (giving precise instructions on the organisation of work, working hours, monitoring performance, imposing penalties, etc.), the relationship of subordination characteristic of an employment contract could be recognised by the courts. This would have major consequences: application of the Labour Code, payment of social security contributions, etc.
• The risk associated with the status of branch manager : Independently of a subordinate relationship, the French Labour Code (articles L. 7321-1 et seq.) extends certain salary protections to "branch managers". This status may apply to a person selling goods supplied almost exclusively by a single company, in premises provided or approved by that company, and on terms and at prices imposed by that company. Some franchisees, particularly in food distribution or ready-to-wear clothing under disguised commission-affiliation, have had their contracts reclassified under this status.
• The risk of interference and de facto management : Even without requalification, excessive interference by the franchisor in the day-to-day management of the franchisee (control of bank accounts, intervention in staff recruitment, imposed strategic decisions, etc.) may render the franchisor liable. In the event of financial difficulties on the part of the franchisee, the franchisor could even be considered as a "de facto manager", with potentially serious consequences (payment of liabilities).

It is therefore essential, for both the franchisee and the franchisor, to maintain the right balance between the necessary integration into the network and the preservation of the franchisee's management autonomy.

Specific clauses and their constraints

In addition to these fundamental obligations, franchise agreements very often contain clauses that provide a stricter framework for the franchisee's activity. It is important to understand the scope of these clauses and the limits to their validity.

Exclusive or quasi-exclusive supply obligation

The contract often requires the franchisee to obtain all or a large proportion of its supplies (quasi-exclusivity, often set at more than 80%) from the franchisor or from suppliers listed by the franchisor. The stated aim is to guarantee the uniformity and quality of products or services, and sometimes to enable the franchisor to make a profit on these supplies.

However, the validity of these clauses is strictly regulated:

• Duration: Article L. 330-1 of the French Commercial Code limits the duration of exclusive supply clauses to ten years.
• Justification: To be lawful under competition law, the clause must be indispensable the preservation of the network's identity and reputation or the correct application of know-how. It is not justified for banal or standardised products for which other suppliers could offer equivalent or better conditions. Imposing exclusivity on cash registers, for example, has been deemed unlawful.
• European Union law : If the network has a European dimension, the Vertical Agreements Exemption Regulation (currently EU Regulation 2022/720) applies. It provides a strict framework for non-competition obligations (which include exclusive supply beyond 80%), particularly in terms of duration (in principle a maximum of 5 years, unless there are exceptions linked to the nature of the franchise).

A franchisee faced with a very broad supply clause must therefore consider whether it is really necessary and whether it is proportionate.

Approval and pre-emption clauses in the event of a sale

The character intuitu personae (linked to the person) of the franchise contract justifies the franchisor's wish to control who joins his network. This is why contracts almost always contain :

• An approval clause : Franchisees wishing to sell their business or shares in their company must obtain the franchisor's prior agreement on the person to be purchased.
• A pre-emption clause : It gives the franchisor the right to buy back the business or shares on the terms proposed by the initial buyer.

These clauses are valid in principle. Pre-emption enables the franchisor to prevent a competitor from taking over a strategic outlet. Approval enables the franchisor to ensure that the new franchisee has the required skills and resources. However, they must be implemented faithfully. A franchisor may not abuse his right of approval (by issuing successive and unjustified refusals) to discourage potential buyers and force the franchisee to sell him his business at a low price. Such behaviour could be punished by the courts on the grounds of abuse of rights (application of the obligation of good faith under article 1104 of the Civil Code).

Target or performance clauses

To stimulate the activity of franchisees and ensure the dynamism of the network, the franchisor may insert clauses setting targets for sales, profitability or market share. Failure to meet these targets can sometimes be grounds for terminating the contract.

These clauses are valid provided that the objectives set are realistic, objective (based on verifiable criteria) and non-discriminatory (do not impose impossible objectives on certain franchisees in order to get rid of them). Compliance with these targets must also be assessed in good faith, taking into account the economic context and the efforts actually made by the franchisee.

The promise to transfer the business to the franchisor

More rare, and particularly dangerous for the franchisee, is the clause that contains a unilateral undertaking to sell of the franchisee's business to the franchisor, which can be activated by the franchisor at the end of the contract or in certain circumstances. Imagine the situation: if the business is flourishing, the franchisor exercises the option and gets back a business that has been enhanced by the franchisee's work, often at a price fixed in advance that is potentially disconnected from its real value. If the business collapses, the franchisor does not exercise the option, leaving the franchisee with his difficulties. What's more, to be valid, such a promise relating to a business must comply with strict tax formalities: it must be recorded in a notarial deed or in a private deed registered within ten days of its acceptance by the beneficiary (article 1589-2 of the French Civil Code).

In short, while franchisees benefit from the framework and support of the network, they are also bound by contractual obligations that are sometimes onerous and clauses that can limit their freedom of action. A good understanding of these commitments is essential for managing the relationship on a day-to-day basis and anticipating any potential sticking points.

For a personalised analysis of your contractual obligations and your rights as a franchisee, our team lawyers specialising in commercial law is at your disposal.

Sources

• Civil Code, in particular articles 1104 (Good faith), 1194 (Consequences of contract), 1589-2 (Formalities of promise to sell business).
• Commercial Code, in particular articles L. 330-1 (Duration of exclusivity), L. 442-5 (Prohibition of fixed prices), L. 7321-1 et seq (Branch manager).
• Regulation (EU) 2022/720 of 10 May 2022 on vertical agreements.
• Case law relating to financial obligations, compliance with the concept, the limits of independence, and the validity of exclusive supply, approval, pre-emption and performance clauses.

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