Source: Maître François-Luc SIMON, managing attorney Simon associés, member of the FFF's College of Experts
The Paris Court of Appeal recently ordered a franchisor to pay over two million euros in compensation to a former franchisee for lack of prudence and assistance. The author, a lawyer, looks back at this decision and examines the conditions under which a franchisor can be held liable for forecasts.
In a ruling handed down on January 7, 2015, the Paris Court of Appeal made some unexpected - and, to put it bluntly, very surprising - changes to franchise agreements, and in particular to the franchisor's liability with regard to forecasts made by the franchisee.
There is much to be said about this decision, which will shortly be examined by the Cour de cassation. We will confine ourselves here to the question of the conditions under which a franchisor can be held liable for forecasts.
In this case, a multi-franchisee, who had undertaken to open 18 sales outlets in a given region within 5 years, in return for exclusivity, complained about the poor sales performance of the first sales outlets opened. The sales generated by these outlets were well below those forecast in the sales forecasts.
Following the suspension of the framework partnership agreement which provided for the development plan, an audit of the holding company and franchised subsidiaries was carried out. Following this audit, a restructuring plan for the group was proposed, which was rejected by the franchisee. The franchisor then terminated the framework partnership agreement which provided for the development plan, and the multi-franchisee sought to engage the franchisor's liability, essentially on the grounds of over-optimistic forecasts.
To block this liability action, the franchisor argued that the forecasts had been drawn up by the franchisee himself, without validation by the franchisor. Very classically, the franchisor can only be held liable for the forecasts if he is the author, or at least if he has validated them.
"The franchisor can only be held responsible for the forecasts if he is the author, or at least if he has validated them".
In this case, the franchisor had not drawn them up; he had simply provided in the DIP (Document d'Information Précontractuelle) the average ratios used by the franchisee to draw up the forecasts. The franchisee then sent the projected financial statements to the franchisor, without the franchisor making the slightest comment or observation, which the Court expressly noted.
Nevertheless, the Paris Court of Appeal ruled that the franchisor's silence upon receipt of the forecasts necessarily implied his validation of said forecasts. This is a surprising decision. The franchisor is not obliged to provide forecasts, nor to carry out a market study.
However, to be able to comment or make observations upon receipt of forecasts, you need to have the analytical elements to enable you to do so. It is precisely for his or her expertise in the field and knowledge of the local market that a prospective franchisee is selected.
But if the franchisor doesn't carry out a market study or prepare forecasts, how can he be in a position to express reservations when the franchisee sends him his own? What's more, under French law, silence does not in principle constitute acceptance or approval. Nevertheless, the Court justifies its reasoning by the fact that the franchisor had transmitted average ratios, which would characterize a "close collaboration" in the elaboration of the forecasts, and it is this "close collaboration" that would make the silence observed upon receipt of the forecasts imply validation of said forecasts.
"Legally questionable, this decision may also appear to be highly inappropriate".
The reasoning behind this may be perplexing, or at least sufficiently so that the franchisor has decided to appeal to the French Supreme Court. Since the rulings of the last decade, franchisors have rarely provided or validated forecasts. However, in order to provide franchisees with useful information, it is common practice - and until now accepted in case law - for franchisors to transmit average ratios, without being held responsible for forecasts drawn up by franchisees using these average ratios.
If the Paris Court of Appeal's decision is upheld by the French Supreme Court, there's no doubt that this information will no longer be made available to prospective franchisees. While questionable in law, this decision may also be seen as highly inappropriate.
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