As a key component of any franchise agreement, the franchisor must assist the franchisee. Franchisors assist franchisees in various fields, such as marketing, management, operations, human resources and accounting. This assistance is usually provided through training sessions, hotlines and operational manuals. In a December 20 2017 decision, the Paris Court of Appeal held that this assistance obligation is exclusively technical and commercial and constitutes purely a ‘best efforts’ obligation (obligation de moyens). The existence of financial difficulties for the franchisee does not per se mean that the franchisor has failed to fulfil its assistance obligation.
A franchise agreement had been entered into between two French companies in relation to a sushi and Japanese food restaurant in the south of France. About two years later, the franchisee informed its franchisor that it was facing financial difficulties and asked for assistance.
A few months later, the franchisor sent its franchisee a formal notice to pay outstanding royalties. Then, to justify the suspension of the payment of the royalties, the franchisee alleged that the franchisor had failed to comply with its obligation to provide assistance and training. It eventually ceased operating the restaurant.
The franchisor filed suit against the franchisee to get payment of the outstanding franchise fees, plus damages for early termination of the franchise agreement and breach of the non-compete clause.
On November 15 2013 the Paris Commercial Court held that the franchisee was exclusively responsible for the termination of the franchise agreement and ordered the franchisee to pay outstanding invoices to the franchisor. The franchisee, which had become bankrupt in the meantime, lodged an appeal against this decision.
On December 20 2017 the Paris Court of Appeal confirmed that the franchisee was exclusively responsible for the termination of the franchise agreement. The court considered that the franchisee had failed to demonstrate that the franchisor had not fulfilled its assistance obligation:
“If during the term of the contract, the franchisor must provide assistance, the latter is exclusively technical and commercial and constitutes only a best efforts obligation. The franchisee is an independent entrepreneur, who is sole responsible for the operation of its business. The franchisor’s defaults cannot be deduced from the only fact that the franchisee faces financial difficulties.”
In particular, the court considered that the insufficient margin made by the franchisee was not enough to argue a contractual breach attributable to the franchisor; nor could it justify the suspension of the payment of royalties by the franchisee. According to the court, only “a serious non-performance of contractual obligations of the franchisor can justify that the franchisor be held responsible for the termination of the franchise agreement”.
The French courts often address the issue of whether a franchisor has properly fulfilled its assistance obligation. This decision confirms that franchisors, which have an assistance obligation, need not provide financial assistance to their franchisees. It has been held that the franchisor has no obligation to financially assist the franchisee (eg, through a temporary waiver of royalties), even if the franchisee faces cash-flow problems. This assistance obligation consists only of helping the franchisee to operate the business from a commercial and technical standpoint.
This decision clearly states that this is an obligation of best efforts. In other words, the franchisor may not guarantee that this assistance will result in the franchisor’s business succeeding.
This decision also makes clear that any default in the franchisor’s duties alleged by the franchisee must be proved based on the circumstances and facts of each case. It cannot be inferred from the fact that the franchisee’s business was unsuccessful.
Source: International Law Office