Pre-contract disclosure requirements under French law and international franchise agreements

British franchisors: if you intend expanding in France, you  should be aware that, contrary to British law, French law has a set of rules imposing franchisors to provide a pre-contract disclosure document to their prospective franchisees.

The mandatory pre-contract disclosure, created in 1989 (with the so called Doubin law), is now to be found under article L.330-3 of the Commercial Code.

The very purpose of the law is to give the prospective franchisee (considered as the weaker party in the contractual relationship with the franchisor) the possibility to obtain specific prior information from the franchisor to allow it to enter into the agreement with full knowledge of the facts.

Article R.330-1 of the same code gives a detailed list of what must be included in the disclosure document. In brief, the document must contain five sections:

1. Information on the franchisor (corporate information, financial information, but also history of the company, information on its owners, their experience, information on the trademark used by the franchisor);
2. Information on the network (list of the franchisees, list of the members of the network who left in the past 12 months and the reasons why they left);
3. Information on the contract (scope of the exclusivity undertakings, term, renewal conditions, termination, transfer, post-term non-competition undertakings) but also a draft of the franchise agreement itself;
4. Information on the expenses and investments to be made by the franchisee at the start and in the course of the business (including the royalty fees);
5. Information on the general and local state of the market plus a market development outlook.

This information must be communicated to the prospective franchisee at least 20 days before the signature of the franchise (or master franchise) agreement or, as the case may be, 20 days before payment of any amount of money to the franchisor (e.g. for being granted an exclusive negotiation right on a particular area).

Non-compliance with these rules is criminally sanctioned by a fine of Euros 1,500 and may lead a Court to annul the entire agreement and/or grant damages to the franchisee if the Judge considers that the consent of the latter has been vitiated.

As a consequence, although the sanction is not automatic, abstaining from giving all or part of the information required may lead to annulment of the agreement.

That being said, it is worth bearing in mind that French Courts consider that any important information that could influence the prospective franchisee’s choice to enter into the agreement, should also be disclosed by the franchisor, be it or not in the list of article R.330-1 above cited.

Are these rules applicable to foreign franchisors?

The answer is definitely yes if the parties choose French law to govern their franchise or master franchise agreement.

The answer is more uncertain if the parties choose a foreign law (for example English law).

Indeed, although the parties may freely choose the law governing their agreement pursuant to article 3 of EC Regulation n° 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) it is worth noting that article 9 of the said Regulation provides that “nothing in this regulation shall restrict the application of the overriding mandatory provisions of the law of the forum” being mentioned that “overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract.”

In a ruling of 30 November 2001 (n° 1999-21972, Cohen vs Société Punto FA SL) the Paris Court of Appeal decided that the Doubin law was mandatory in domestic contractual relationships but was not an overriding mandatory rule that would be applicable to international contracts if the parties have chosen a foreign law.

In other words, the choice of a foreign law would exempt the franchisor from drawing up and making available the pre-contract information provided by French law.

However, the Supreme Court has still not had any opportunity to adopt a position on that question.

Therefore, the debate remains open. It is all the more so true that the decision rendered by the Paris court has been criticized by many, on the ground that the Doubin law is criminally sanctioned and  should therefore be considered as overriding mandatory provisions.

In such a context, in order to avoid having the sword of Damocles hanging over their heads, foreign franchisors would be well advised to comply with the requirements of French law on pre-contract disclosure.

If you are interested in knowing more about French franchise law, please contact Gregoire Toulouse at g.toulouse@taylorwessing.com