The decision ruled by the Poitiers Court of Appeal on 9 July 2024 (Poitiers Court of Appeal, 9 July 2024 no. 24/00079) is a good opportunity to review franchisor’s pre-contractual information obligations.
In this case, a franchisee who recently joined a car agency franchise network sought to have the reservation agreement and the franchise agreement entered with the franchisor declared null and void.
The franchisee’s plans to open a business soon failed, as just under a year after signing the franchise agreement, the franchisor notified the termination of the franchise agreement to the franchisee for contractual breaches.
The Poitiers Court of Appeal had to rule on a number of issues, which will be dealt with in turn below:
- When the reservation contract is void
Before entering into the franchise agreement, the franchisee signed a reservation agreement. Under this agreement, the franchisee was granted the exclusive rights to open an agency under the network’s trademark in a defined geographical area. In return, the franchisee was required to pay a reservation fee of €8,100 (including VAT).
The Court of Appeal ruled that the reservation agreement was null and void, since the franchisor had not provided the franchisee with a Franchise Disclosure Document (FDD) prior to signing the agreement.
If the franchisor is required to provide a FDD at least 20 days before signing the franchise agreement, he is also required to provide such a document at least 20 days before signing an area reservation agreement.
In practice, the franchisor can provide the prospective franchisee with a FDD setting out the legal and financial terms of both the reservation agreement and the franchise agreement
- Validity of the franchise agreement
Several claims were put forward by the franchisee.
But before considering them, the Poitiers Court of Appeal recalled the cardinal principle: the franchisor’s failure to fulfil his pre-contractual information obligation does not ipso facto render the franchise agreement null and void.
The franchisee shall prove that the breach or breaches vitiated its consent.
In this respect, the franchisee claimed that the information contained in the FDD was seriously misleading, and caused a mistake regarding the profitability of his branch.
More specifically
- a) The franchisee criticized the franchisor for concealing from it the fact that many franchisees in the network had gone bankrupt
However, the Court of Appeal rejected this argument on the grounds that these bankruptcies had all occurred after the FDD had been submitted to franchisee and almost all after the franchise agreement had been signed.
In a decision dated 26 June 2024 (Cass. com. 26 June 2024 no. 23-14.085), the Court of Cassation ruled that if, between the date of delivery of the FDD and the date of signature of the franchise agreement, insolvency proceedings are opened against members of the network, the franchisor’s failure to provide this information to the franchisee is likely to vitiate the franchisee’s consent. As a result, the franchise agreement may be null and void.
- b) The franchisee questioned the relevance of the market study provided by the franchisor
However, the Court of Appeal rejected this argument, holding that the franchisee had not demonstrated that the market study was inaccurate.
This point provides an opportunity to point out that the franchisor is under no obligation to provide a prospective franchisee with a market study.
But only general and local market statements.
However, if the franchisor provides such a market study, he must ensure that the information it contains is accurate and not likely to mislead the prospective franchisee.
- c) The franchisee claimed that the business forecast submitted by the franchisor was illusory and had misled him
However, the Court of Appeal rejected this argument, noting that:
- The FDD stated that the forecast provided to the prospective franchisee was intended to enable him to assess the average profitability of agencies of the network, and that this forecast was provided for information purposes only.
- The franchisee did not demonstrate that the sales figures and results of this forecast were manifestly unrealistic.
- The fact that a number of franchisees in the network had been placed in bankruptcies did not mean that the concept was unprofitable.
- The franchisee in question had obtained bank financing and financial support in setting up a business, which were indications of the feasibility of the franchisee’s project.
If the franchisor wishes to communicate certain financial figures to a candidate, it is recommended inter alia to:
- Provide average performance figures for existing members of the network – and not just those for successful franchisees
- Specify that these performances are purely indicative and that the candidate is responsible for drawing up his own business forecasts with the help of his own advisers.
- Remember that these figures in no way presage the franchisee’s future success, which depends on many factors such as the premises chosen, the franchisee’s involvement in the business, the economic climate, etc.
- d) The franchisee criticized the franchisor for not advising him against opening his agency in the premises he had chosen
The Court of Appeal rejected this argument, holding that the franchisee’s choice of premises was a matter for… the franchisee. In addition, the franchisee knew the area where he had opened his agency because he lived there, unlike the franchisor. And finally, the parameters of the premises in no way suggested that they were unsuitable.
As a reminder, franchisees are independent businesspersons. It is therefore essential for them to carry out solely of all the formalities involved in launching their business, particularly when it comes to choosing their premises.
The franchisor shall not interfere in this choice, although he can help the franchisee in this task.
For example, the franchisor can provide the franchisee with a file setting out the desired characteristics of a network point of sale (opening in a town centre/on the outskirts of a town; an area with a high proportion of a particular age group or socio-professional category; a town with specific characteristics, etc.). It can also recommend service providers (e.g. real estate agents) who can help with the search.
- The Court of Appeal concluded that the franchise agreement in question should not be invalidated because the franchisee’s consent had not been vitiated.
It also noted that the failure of the franchisee’s project was in fact linked to its many contractual breaches, such as the lack of attractiveness and cleanliness of the premises, the failure to set up a website, the failure to display the network’s trade sign, recruitment difficulties, etc.
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