A Novlaw Practical Guide to Establishing a Franchise in France:
What is a franchise agreement?
« Franchise agreements as defined in this Regulation normally improve the distribution of goods and/or the provision of services as they give franchisors the possibility of establishing a uniform network with limited investments, which may assist the entry of new competitors on the market, particularly in the case of small and medium-sized undertakings, thus increasing interbrand competition. They also allow independent traders to set up outlets more rapidly and with higher chance of success than if they had to do so without the franchisor’s experience and assistance. They have therefore the possibility of competing more efficiently with large distribution undertakings »
What does a franchise agreement consist of and how is it written?
Franchise agreements are held together by the franchisor’s responsibility or duty to inform the franchisee (art L.330-3 of the French Code of Commerce). This essential step in the contract takes place before the agreement is signed, typically 20 days before the parties’ respective signatures.
Under French law a franchisor’s failure to comply to this duty to inform is followed by a fine of up to 1 500 euros and may bring about the nullity of the agreement. However, damages will not be awarded based on the franchisee’s failure to obtain their expected financial results.
What are the different elements to look out for in a successful franchise agreement ?
First, the contract must require that the franchisee be provided with proper « know-how » as well as the right to use the franchisor’s particularities and signs of success. This is handed over in exchange for compensation.
This « savoir faire », or industry knowledge, is often understood as representing the different methodological elements such as management or commercial tactics that are most likely to explain the company’s initial success. It can also encompass technical knowledge, such as a transmissible secret or an un-patented technology.
According to the EU Regulation 330/2010, the knowledge must be:
– kept secret, i.e. not generally known or easily accessible;
– substantial, understood as significant and useful knowledge
– Be properly identified and with sufficient description for future verification
This passing of « savoir-faire » by the franchisor to the franchisee is a substantial condition for the validity of the franchise agreement. Any failure on the part of the franchisor has the potential to lead to the nullity of the contract itself.
The contract is also conditioned by the franchisor’s own element of notoriety. In practice, this means that the franchisor must have certain distinctive elements capable of justifying the franchisee’s extra expenses. Some examples of distinctive signs may be the brand trademark, the brand’s name or its logo. The franchisor must therefore have the full rights of ownership or of use of these different elements before entering into a franchise agreement.
If these conditions are not met, parties may find their franchise agreement nullified.
What are the different obligations of the respective parties throughout the franchise agreement?
For the franchisor, there are a variety of obligations must be respected throughout the duration contract:
– Communicate and continuously update your franchisee on the different experiences and pieces of knowledge acquired and related to the franchise itself. (ex: training can be provided to the franchisee or an instruction manual can be sent over)
– Make sure the franchise’s distinctive elements available to the franchisee. It should be noted that necessary steps to renewing trademark registration and paperwork are made the exclusive burden of the franchisor – failure to do so renders the franchise agreement null and void.
– To properly assist the franchisee to repeat the success of the franchise (ex: recourse to visits, communication of technical information and/or the tax return)
– To assist the franchisee in the event of difficulties
The franchisee also has obligations over the course of the franchise agreement:
– The payment of fixed fee to the franchisor
– Requirements to respect the « brand » identity and the franchise network (ex: training for employees, commitment to the « savoir-faire »
– Protection of IP rights (ex: informing the franchisor of infringements, anticompetitive behaviors etc…)
The franchisee’s failure to comply with these obligations may also result in the termination of the contract.
It should be noted that given the nature of the franchise agreement and the independent status of the franchisee, the franchisor cannot impose strict resale price. This would be against EU competition law rules. However, a franchise agreement does allow for advice and pricing consultations to take place between contracting parties.
How can I terminate my franchise agreement?
terminated at any time. However, it should be noted that a franchise agreement containing an exclusive supply clause may not exceed 10 years.
The franchise agreement may be terminated by a breach of contract by one of the parties or by a termination clause.
For further information on how to properly navigate your franchise agreement, reach out to our team at contact@novlaw.fr or directly at b.robelin@novlaw.fr