It all began when the French Minister for the Economy brought an action before the Paris Commercial Court, seeking a declaration that several clauses in the Subway franchise contract were “significantly unbalanced”.
The case continues with the decision of the Paris Commercial Court on October 13, 2020, which granted some of the Minister’s requests and annulled several clauses deemed significantly unbalanced, ordering Subway to pay a civil fine of €500,000.
The following clauses were deemed unbalanced
- A clause relating to restaurant opening hours, which required restaurants to be open only “7 days a week, for a minimum of 98 hours a week”.
- A clause giving the franchisor an “unlimited right” to compete with the franchisee. Although the absence of territorial exclusivity is possible in franchising, the Court criticized the clause “in that it does not allow the franchisee to pre-empt a new location decided by Subway that would compete with it territorially, and to be able to terminate the contract relating to its current location in such circumstances”.
- A clause requiring the franchisee to take out insurance and providing for the reimbursement of costs incurred by the franchisor to ensure compliance with this insurance obligation in the event of the franchisee’s default; the Court criticized the absence of a ceiling on the amount of costs that could be charged to the franchisee.
- A clause setting the duration of the franchise agreement at 20 years, whereas under French law an exclusive supply clause cannot exceed 10 years (article L.330-1 of the French Commercial Code), so the duration of the franchise agreement could not exceed 10 years.
- A clause allowing early termination of the contract on the grounds of the franchisee’s “insolvency” – without defining what constitutes insolvency.
- A combination of clauses enabling the franchisor to terminate the contract in the event of failure to pay twice within a one-year period, with such a clause leading to termination of the contract in the event of non-payment of minute sums.
- A clause requiring the franchisee, on termination of the contract, to remove customer rallying signs “within a reasonable time” in return for payment of €175 per day’s delay – whereas the notion of reasonable time is “of a potestative nature”.
- A combination of clauses relating to choice of language (English), applicable law (Dutch) and jurisdiction in the event of dispute (New York arbitral tribunal), the accumulation of which is unbalanced.
Although Subway had lodged an appeal and we were all impatiently awaiting the position of the Paris Court of Appeal, the French Minister of the Economy (who had initiated the proceedings), the vast majority of franchisees (who had intervened voluntarily) and Subway finally reached an agreement.
As a result, Subway – having brought its franchise agreement into line with the law – complies with the Commercial Court’s decision and pays a compromise indemnity of €450,000.