European Civil Law, Franchise Agreements and the Duty of Good Faith

Since the late part of the last century, the doctrine has become controversial among French lawyers. Increasingly, many in the legal profession seems to be advocating that it should be more interventionist and less “liberal,” to ensure more “socially appropriate” outcomes, although some feel that this approach interferes too much with contractual freedom. The ascendency of the interventionist school is evidenced by the fact that, although the wording of the provision only requires good faith in the performance of the contract, French courts have extended this obligation to impose a duty of good faith at the earlier stages of pre-contractual negotiations, the formation of the contract and even its termination.

As in Germany, the notion of good faith has also been used by the French courts, in “restrictive,” “adaptive” and “collateral” manners, to import morality and justice into contracts, commonly by way of interpretation and implied terms. Although no judge can award an injured party more than the law allows under the contract, it is possible to prevent a party from exercising the fullest rights that the law would otherwise permit him to do. The French courts have taken a restrictive approach to hold that a party who has acted in bad faith cannot claim damages or require the other party to perform the contract as if nothing had happened. Cass. 1re ch. civ., 16 February 1999 no. 96-21997, Bull. Civ. I no. 52 p. 34. French courts have the power to terminate the contract when requested by the victim of the unfair behavior. In addition, a French court can prevent the breaching party from relying on a limitation or exclusion of liability clause when it acts in a deceptive manner. A restrictive approach was taken by the courts when an open price term, to be determined by the franchisor, was deemed enforceable under French law only so long as it was proportional. Cass. ass. plen. 1 December 1995 no. 91-19.653, Bulletin 1995 A.P.N.* 8 p. 15.

An adaptive approach to the concept of good faith comes into play when there is a change in circumstance that prevents a distributor from being competitive. The French duty of good faith requires the supplier in these circumstances to renegotiate the terms of the contract in order to allow it to be competitive. A more recent case raised an important doctrinal debate around a possible duty of “solidarity” between the parties (suggesting an adaptive approach to good faith), but the French Supreme Court failed to clearly state its position on the question. Cass. 1re civ., 16 March 2004, n* 01-15.804, D.2004, p. 1754. One party claimed that good faith imposed an obligation to renegotiate when a change in circumstances significantly altered the initial balance of the contract. The Supreme Court rejected the claim, on the basis that the imbalance already existed when the contract was formed, so failing to clarify whether or not the courts have the power to vary the terms of a contract in such circumstances. There are no cases suggesting that the concept of bonne foi can be applied to prevent encroachment by the franchisor.

The French courts have also considered adopting a collateral approach to the duty of good faith. From the formation of the contract until the end of the contract, a franchisor has the continuing duty to support its franchisees with commercial and technical assistance. A lack of advice and support during the start-up period can lead to the termination of the agreement. The level of support that needs to be provided depends on the needs of each franchisee, and therefore needs to be adapted.

The French concept of good faith has a substantial impact upon the franchisor/franchisee relationship and, as is evident from the above, reduces the risks to which both franchisors and franchisee are exposed and re-enforces the economic drivers that attract franchisees to franchising.

Conclusion

U.S. lawyers will be familiar with the collateral, adaptive and restrictive approaches being taken by the courts toward franchise agreements. However, the way that these approaches are used to impose a general concept of good faith, based on the court's general feeling of what is “fair,” is certainly not. Nevertheless, franchising in both Germany and France is well established and successful, so the imposition of a duty of good faith on the franchise relationship certainly does not inhibit its commercial use. Indeed some would suggest that it delivers a balance to the franchise relationship that actually promotes its use, by preventing unconscionable behavior by franchisors.

Dr. Mark Abell, a member of our Board of Editors, is a partner at Bird & Bird LLP, London.

The “restrictive,” “adaptive” and “collateral” approaches to a duty of good faith ' which we discussed in Part One of this article last month ' can be found in differing combinations and degrees in most of the civil jurisdictions in the European Union (EU), despite the fact that some of them have a very different historical perspectives and approaches to the concept of good faith. The two primary “families” of civil law in Europe are German and French, and each approaches the concept of good faith in a different way. Last month we took a look at the German system; now, we turn to the French.

Bonne Foi: The French Approach to Good Faith

In France, although the general concept of good faith or bonne foi is found in Article 1134 of the French Civil Code, until the last quarter of the 20th century, it was substantially limited by the judicial view that “if a person says something it is fair” (“Qui dit Contractuel dit juste“). (Other provisions of French law also contain notions of good faith.)

Since the late part of the last century, the doctrine has become controversial among French lawyers. Increasingly, many in the legal profession seems to be advocating that it should be more interventionist and less “liberal,” to ensure more “socially appropriate” outcomes, although some feel that this approach interferes too much with contractual freedom. The ascendency of the interventionist school is evidenced by the fact that, although the wording of the provision only requires good faith in the performance of the contract, French courts have extended this obligation to impose a duty of good faith at the earlier stages of pre-contractual negotiations, the formation of the contract and even its termination.

As in Germany, the notion of good faith has also been used by the French courts, in “restrictive,” “adaptive” and “collateral” manners, to import morality and justice into contracts, commonly by way of interpretation and implied terms. Although no judge can award an injured party more than the law allows under the contract, it is possible to prevent a party from exercising the fullest rights that the law would otherwise permit him to do. The French courts have taken a restrictive approach to hold that a party who has acted in bad faith cannot claim damages or require the other party to perform the contract as if nothing had happened. Cass. 1re ch. civ., 16 February 1999 no. 96-21997, Bull. Civ. I no. 52 p. 34. French courts have the power to terminate the contract when requested by the victim of the unfair behavior. In addition, a French court can prevent the breaching party from relying on a limitation or exclusion of liability clause when it acts in a deceptive manner. A restrictive approach was taken by the courts when an open price term, to be determined by the franchisor, was deemed enforceable under French law only so long as it was proportional. Cass. ass. plen. 1 December 1995 no. 91-19.653, Bulletin 1995 A.P.N.* 8 p. 15.

An adaptive approach to the concept of good faith comes into play when there is a change in circumstance that prevents a distributor from being competitive. The French duty of good faith requires the supplier in these circumstances to renegotiate the terms of the contract in order to allow it to be competitive. A more recent case raised an important doctrinal debate around a possible duty of “solidarity” between the parties (suggesting an adaptive approach to good faith), but the French Supreme Court failed to clearly state its position on the question. Cass. 1re civ., 16 March 2004, n* 01-15.804, D.2004, p. 1754. One party claimed that good faith imposed an obligation to renegotiate when a change in circumstances significantly altered the initial balance of the contract. The Supreme Court rejected the claim, on the basis that the imbalance already existed when the contract was formed, so failing to clarify whether or not the courts have the power to vary the terms of a contract in such circumstances. There are no cases suggesting that the concept of bonne foi can be applied to prevent encroachment by the franchisor.

The French courts have also considered adopting a collateral approach to the duty of good faith. From the formation of the contract until the end of the contract, a franchisor has the continuing duty to support its franchisees with commercial and technical assistance. A lack of advice and support during the start-up period can lead to the termination of the agreement. The level of support that needs to be provided depends on the needs of each franchisee, and therefore needs to be adapted.

The French concept of good faith has a substantial impact upon the franchisor/franchisee relationship and, as is evident from the above, reduces the risks to which both franchisors and franchisee are exposed and re-enforces the economic drivers that attract franchisees to franchising.

Conclusion

U.S. lawyers will be familiar with the collateral, adaptive and restrictive approaches being taken by the courts toward franchise agreements. However, the way that these approaches are used to impose a general concept of good faith, based on the court's general feeling of what is “fair,” is certainly not. Nevertheless, franchising in both Germany and France is well established and successful, so the imposition of a duty of good faith on the franchise relationship certainly does not inhibit its commercial use. Indeed some would suggest that it delivers a balance to the franchise relationship that actually promotes its use, by preventing unconscionable behavior by franchisors.

Dr. Mark Abell, a member of our Board of Editors, is a partner at Bird & Bird LLP, London.