FRANCE
- Significant imbalance: the provisions which prohibit significant imbalances in B-to-B relationships are not international public policy rules says the Paris Court of Appeal
- Franchising and significant imbalance: liability of the franchisor's parent company
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FRANCE
Significant imbalance: the provisions which prohibit significant imbalances in B-to-B relationships are not international public policy rules says the Paris Court of Appeal
Paris Court of Appeal, 29 October 2024, No. 23/02368
In a ruling dated 29 October 2024, the Paris Court of Appeal held that the provisions of the French Commercial Code prohibiting significant imbalances in B-to-B relationships are not international public policy rules.
The case that gave rise to this ruling opposed Søstrene Grene International, a company registered under Danish laws, which operates an international franchise network selling Danish-style stationery and small furnishings, to one of its French franchisees.
The ruling was rendered in the context of the enforcement in France of an arbitration award issued in Denmark.
The facts were as follows: a framework franchise agreement for the development of Søstrene Grene franchised points of sale in France had been entered into by the parties. Each opening of a new point of sale was the subject of a separate franchise agreement. These agreements included an arbitration clause giving jurisdiction to an arbitral tribunal having its seat in Denmark.
As the relationship with the French franchisee deteriorated over the years, the Danish franchisor decided to terminate the framework agreement as well as several franchise agreements.
The franchisee, who had, in the meantime, initiated safeguard proceedings, challenged the termination of the agreements and initiated arbitration proceedings. The arbitral tribunal ruled in favour of the franchisor and ordered the franchisee to pay the amounts due to the franchisor, and reimburse the franchisor's legal costs.
The franchisor then requested and obtained the partial enforcement of the decision before the French enforcement judge.
The franchisee appealed to the Paris Court of Appeal to have the decision overturned, arguing that the arbitration award was contrary to international public policy rules, in that it violated (i) the principle of freedom of contract, (ii) French insolvency law, (iii) French and EU competition laws and (iv) the French law which prohibits the significant imbalance in the respective rights and obligations of the parties in b-to-be relationships.
The Court of Appeal rejected the appeal.
It started by pointing out that, pursuant to article 1520-5 of the French Code of Civil Procedure, the French courts may only refuse to recognise an arbitration award rendered abroad in very specific cases, and in particular where the recognition or enforcement of that award would be contrary to international public policy rules (defined as the key values and principles that the French legal system would not tolerate being disregarded, including in an international context).
With regard to the violation of the freedom of contract principle, the Court dismissed the franchisee's argument, holding that the enforcement judge was not entitled to substitute itself for the arbitrator's assessment and did not have the power to review the award, and then emphasising that, in any event, freedom of contract did not in itself constitute a value falling within the scope of international public policy.
With respect to the violation of French insolvency laws, the franchisee pointed out that the arbitrator had ordered the payment of amounts payable prior to the opening of the insolvency proceedings, which was indeed contrary to international public policy rules (Court of Cassation, 1st Civil Chamber, 6 May 2009, No. 08-10281). However, the franchisor had been well advised by its French legal counsels and had applied only for partial enforcement of the decision before the French enforcement judge, and the enforcement judge had not ordered the enforceability of this part of the award, but had simply granted recognition to the said part. In that respect, the franchisor had previously submitted to the procedure for prior verification of claims before the French insolvency judge and the latter declined jurisdiction to the benefit of the arbitral tribunal who had sole jurisdiction to rule on the validity of Franchisor’s claims.
Regarding the violation of antitrust rules (Articles L.420-1 and L.420-2 of the French Commercial Code and Article 101§1 of the Treaty on the Functioning of the European Union), the Court also recognized that these provisions are also international public policy rules since they are intended to protect the market and the general interest (this is in line with a precedent of the Court of Cassation, 1st Civil Chamber, 17 May 2023, no. 21-24106). However, here again, the Court of Appeal dismissed the franchisee's claim because he had not demonstrated how the solution given to the dispute by the arbitrator concretely and obviously infringed the aforementioned antitrust rules.
Finally, about the alleged violation of the rules that prohibit significantly imbalanced provisions in b-to-be relationships, while considering that the provisions of the French Commercial Code which prohibit significant imbalance constitute “internal overriding mandatory provisions”, the Par Court of appeal considered that the violation of these rules cannot as such be considered as violating international public policy, given that in the case at stake “the invocation of these provisions by [the franchisee] aims at protecting private interests”.
It can be deduced from this decision that if a rule (even one which is considered as an overriding mandatory rule) is invoked for the protection of private interests, its violation cannot fall within the definition of international public policy and cannot allow for the cancellation of an arbitration award.
This solution is certainly applicable to all the restrictive practices mentioned in the French Commercial Code (i.e. (i) significant imbalance, (ii) advantages without proper consideration and (iii) abrupt termination of a well-established business relationship).
In so doing, the solution adopted by the Paris Court of Appeal helps (i) preventing plaintiffs from circumventing the principle that final and binding arbitral awards cannot be reviewed on the merits and (ii) preserving the notion of international public policy by limiting it to the major principles of French public policy which protect the general interest.
Franchising and significant imbalance: liability of the franchisor's parent company
Court of Cassation, Commercial Chamber,14 November 2024, n° 23-15.321
This case is a new episode of the Pizza Sprint/Domino’s Pizza saga, which has already given rise to a great deal of discussions regarding significant imbalance in b-to-b relationships between a franchisor and a franchisee (see Newsletter no. 37 - Significant imbalance: continuation and end of the Pizza Sprint and Domino's Pizza case).
In the present case, a franchisee sought the annulment or termination of its franchise agreement against both the franchisor and its parent company (i.e. Domino’s Pizza, following the acquisition of the Pizza Sprint).
The parent company pointed out that it did not have the capacity to defend itself in the proceedings against the claims for annulment or termination of the agreement and that the claims against it should be dismissed because it had not designed, entered into, nor participated in the discussions for the conclusion of the disputed agreement.
The parent company also denied having had any “active role” in the relationship with the franchisees following the acquisition of the franchisor and referred to the principle of autonomy of the legal entities within a same group.
The Paris Court of Appeal (i) rejected the parent company’s arguments regarding its lack of capacity to defend itself and (ii) highlighted that the parent company had actively “contributed to the contractual breaches of the franchisor and the resulting damage as from 2016” (i.e. the year of the acquisition of Pizza Sprint by Domino’s Pizza) by implementing “its own development strategy”. According to the Court of Appeal, the parent company incurred tort liability and this justified its joint sentencing with its subsidiary, i.e. with the franchisor (Paris Court of Appeal, 8 February 2023 - No. 20/04557).
The Court of Appeal also ruled that the franchise agreement should be terminated for breach by the franchisor and its parent company.
This last part of the decision was not coherent since the parent company was a third party to the agreement.
The Court of Cassation first considered that the decision of the Court of appeal to terminate the agreement for breach by both the franchisor and its parent company was a simple writing mistake that could be easily rectified directly by the Court of cassation itself and did not justify that the decision of the Court of appeal be overturned.
The Court of cassation then confirmed the extra-contractual liability of the parent company which, through the implementation of its development strategy, had contributed to the contractual breaches of the franchisor.
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