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According to French commercial law, a contractual term or clause under a contract entered into between professionals or businesses may be annulled by the court if it causes a significant imbalance in the parties’ rights and obligations arising under the contract.

Decision #2017005123 by the Paris Court, dated October 13, 2020

Following a national investigation into the business practices of Subway with its 400 franchised restaurants by the French Bureau for Competition, Consumer Affairs and Prevention of Fraud (DGCCRF), the Paris commercial court annulled seven clauses of the franchise contracts entered into by Subway as they caused significant imbalance between the rights and obligations of the franchised restaurants.

The clauses creating a significant imbalance within the meaning of Article L442-1, I-2 of the French Commercial Code are in particular those relating to:

  • applicable law (Dutch law) and jurisdiction (arbitration clause stipulating arbitration in New York);
  • the possibility to terminate unilaterally the contract by the Franchisor in case of two annual late payments by the franchisee – including insignificant amounts – or in the event of the franchisee’s insolvency;
  • the duration of the contract which cannot exceed the maximum legal duration of exclusivity clauses in franchise contracts i.e. 10 years.

The Court also sanctions Subway with a fine of 500,000 euros – equivalent to 3.5% of its turnover with franchisees – for serious and manifest disturbance to economic public order.

The court’s solution is important for all franchise networks and franchise contract drafters as it provides a renewed assessment grid for clauses characterizing a significant imbalance of rights and obligations.