The presence of arbitration clauses in franchise contracts is not a novelty[1]– on the contrary, it is a practice being used frequently in such type of contracts. But when such contracts are imposed, and the arbitration clause creates an onerous task for parties to exercise their right to access to justice, should the clause be enforced? This is a question that was put to the test in France regarding the arbitration agreement in franchise contracts between Subway and its franchisees. Initially, The Paris Court of Appeal rejected several challenges to the enforcement of arbitral awards based on disputes deriving from the franchise contract with Subway, but a decision of the Paris Commerce Tribunal might be a game changer. This blog post will address the development of the French case law in this matter, and the employment of contractual significant imbalance (déséquilibre significatif) as an argument to invalidate arbitration agreements in franchise contracts with Subway.
In French law, there is no principle of equivalence of benefits in the name of which the obligations of the parties should be balanced.[2] As a consequence of party autonomy and the will theory – envisaged by French law as the best means of carrying out socially useful and just transactions – an imbalanced contract may be perfectly valid. It is presupposed that the contracting parties, who are deemed to be on an equal ground, can only agree on balanced reciprocal benefits, on a contractual content that is good for all.
With the advent and intensification of imbalanced social relations, in which the contracting parties have little to no bargaining power, it has, however, led the French legislator to fight certain imbalances, not just the manifest ones. These are the imbalances with special gravity related to the stronger party taking advantage of its position and, as a result, imposing unfavourable conditions to the weaker party, to the point where the contract no longer meets the requirements of contractual justice. This is the case with anyone who concludes an adhesion contract, that is, a contract without having been able to negotiate its structure or framework imposed by the other party.[3] This is common between a consumer who concludes a contract with a trader, and with any trader, like the franchisee who is placed in a situation of inequality vis-à-vis the franchisor. To all these ‘weak’ parties, French Law offers protection on different grounds.
The franchisee, in particular, can rely on the former Article L. 442-6, I, (2) of the Commercial Code (now Article L. 442-1, I (2)).[4] The provision, without defining the notion of significant imbalance,[5] nevertheless, provides for its sanctions, that is, liability and the removal of the clause(s) at the origin of the significant imbalance, which might be considered as void by a court.[6] The purpose of this mechanism is to ensure a certain balance in the contractual relationship between the parties, to the detriment of contractual freedom which is then legitimately limited.
The first need is to prove that the clause creates such a significant imbalance, which calls for a very concrete examination. It is to this end that, using the powers conferred by the former Article L. 442-6, III of the Commercial Code (now Article L. 442-4),[7] the French Minister of the Economy and Finance brought an action, in which numerous franchisees and ex-franchisees intervened, for the annulment of the arbitration clauses contained in the Subway franchise agreements. This is addressed below.
The contracts between Subway and its franchisees have an arbitration clause stipulating that disputes will be decided outside of France, normally in New York with a foreign law governing the contract. For the franchisees, submitting disputes in New York might be too onerous and such option is not viable. Be that as it may, the cases in France were triggered by Subway, enforcing arbitral awards issued in New York. So far, all seven cases were decided by the Paris Court of Appeal where the challenges to enforcement of an arbitral award issued in New York was rejected.
The first two cases were decided in 2015. In the first case,[8] the franchisee resisted enforcement arguing the lack of jurisdiction of the arbitral tribunal, the violation of the principle of contradiction and the fact that the arbitral award was against public policy. The judgment asserted that arguments about lack of jurisdiction were unfounded as neither the choice of law – in this case the law of Liechtenstein – nor the designation of New York as the seat of the arbitration are grounds for lack of jurisdiction of the arbitral tribunal. In relation to the principle of contradiction, it was not disrupted because the language used was not French. The parties were able to participate in the arbitration using the English language without any obstacles. Lastly, the public policy plea was based on the violation of Article 6 of the European Convention of Human Rights; that is, the franchisee did not have the right to a fair trial. Again, this was based on the fact that using a foreign forum, an alien law and a different language, was all a method to exclude French law, which would benefit the franchisees. The Court found that it was not demonstrated how the choice of law and the mere absence of a link with France offends public policy. In the second case,[9] the same claims about the principle of contradiction and public policy were revisited. The Court rejected them again because it was clear that the franchisee was able to take part in the arbitration, in a foreign language.
In 2016, another case challenged the enforcement of an arbitral award.[10] The claims of lack of jurisdiction and the violation of the principle of contradiction were raised again, together with the infringement of inequality of arms. The arguments were all rejected but the interesting part in the judgment was the question about inequality of arms. This point was raised together with the principle of contradiction on the grounds that the case was heard in a language that the franchisee does not understand and that various procedural documents were not communicated to the franchisee. The Court showed that the franchisee received all the communications regarding the arbitral procedure with reasonable time to respond. Thus, even though the documents were in a foreign language, the franchisee had the opportunity to present a defence.
Two years later, another challenge to an enforcement was decided by the Court of Appeal.[11] This time, the franchisee argued that the agreement to arbitrate in New York generated a huge cost for the franchisee, limiting their right to access to justice and creating a significant imbalance between the parties. The Court said that due to the autonomy of the arbitration agreement, the significant imbalance has no effect to the arbitration clause. In relation to access to justice, because the arbitration was financed by Subway and the franchisee could not prove how much it would have spent if they had taken part in the arbitral procedure, there was no evidence that the right to access to justice was curtailed. There was also a plea of inequality of arms and the offence against the principle of contradiction (which were refuted in the same manner as the 2016 case) and a claim of public policy offense. This again was repudiated based on the fact that the franchisee was aiming at revising the merits of the arbitral award, which is not allowed at this stage.
In 2019,[12] the same arguments were raised, that is, significant imbalance, inequality of arms, public policy and lack of jurisdiction of the arbitral tribunal. Again, the Court of Appeal, following the same grounds of the previous cases, rejected the challenge to enforcement of the arbitral award.
The last two cases to refuse enforcement of an arbitral award were decided in 2020. The first case dealt with the same issues as in the previous cases.[13] Interestingly, the Court said that arbitration in English, by itself, is not sufficient to constitute an infringement to the principles of contradiction and equality of arms since the English language was chosen by the parties in a commercial relationship with international character. The second case invoked the lack of jurisdiction and the offense to the principle of contradiction, together with a new argument that the arbitral tribunal’s decision was outside the scope of their power due to the fact that they exceeded the time limit for the proceedings.[14] The first two pleas were vetoed in the same manner as the previous decisions. The new claim was rejected because although the tribunal issued a final decision four days after the set deadline, the rules applicable to the dispute allowed thirty days to render an award, which despite being four days after the scheduled date, was still within the thirty days established by the arbitral rules.
In all the cases from 2018 to 2020, the franchisees also alleged that owing to an investigation made by the French Regional Directorate for Competition and Consumer Policy and the Repression of Fraud about the clauses used by Subway, [15] the claims could not continue. This plea was rejected but the investigation to assess the commercial practices employed by Subway, especially practices restricting competition and contractual clauses generating imbalance between the parties,[16] became a court action aiming at imposing fines and determining Subway to cease the employment of certain boilerplate clauses in their franchise contracts. Among the clauses targeted by the investigation was one related to the language of the contract, the governing law and the one employing arbitration to solve disputes. [17] The Paris Commerce Tribunal understood that this was an adhesion contract that left no room for negotiation between the parties and, there was an absence of reciprocity between the parties in relation to the contractual obligations.[18] When analysing the arbitration clause, the Tribunal asserted that arbitration is a common form of dispute resolution in international commerce. However, the Tribunal was of the view that a retail trader in France, would not, voluntarily, choose arbitration to settle contractual disputes with a seat in New York and with Dutch law using the English language. The Tribunal asserted that the ‘arbitration clause is far from the legal field in which retail traders operate in France’ and considered that the constraints imposed on the franchisee create a significant imbalance against the franchisee.
The jurisprudence of the Paris Court of Appeal is quite stable in the sense that in the Subway franchise agreements, arguments about significant imbalance will not be accepted. However, the Paris Commerce Tribunal diverged from the Court of Appeal. The type of claim faced by the Paris Commerce Tribunal was different from those in the Court of Appeal, but, be as it may, if there is an appeal from the Paris Commerce Tribunal decision, it is likely that the Court of Appeal will reverse the first instance ruling.
Although there is some inequality of bargaining power between the franchisees and Subway, the decision is more in line with the approach to domestic arbitrations. The Paris Commerce Tribunal turned a blind eye to the international character of the contract and the liberal regime that goes with it (a French trader can perfectly well agree to submit to disputes in an international contract to be regulated by a foreign law, which was indeed the case of Subway). Moreover, The Commerce Tribunal considered that arbitration is not made for ‘retail traders’ whereas this possibility is explicitly offered by the Commercial Code, notably at the international level! Lastly, significant imbalance would result from the combination of the foreign choice of law clause and the arbitration clause, which is nevertheless common in international matters and accepted in French law.
Without examining whether or not access to court is effectively limited (for instance, without the need to investigate whether or not the cost is higher or lower than that of proceedings before the French courts), the question that should be addressed is whether the purpose or effect of the arbitration clause was to prevent or make it more difficult for the franchisee to have access to justice. This could be done by verifying if there was an abuse on the part of Subway due to geographical location, costs, etc. The Paris Commerce Tribunal rationale mixed up points that are not so relevant and, therefore, it is not really changing the view established by the Paris Court of Appeal.
[1] See for academic discussion Christopher R. Drahozal & Keith N. Hylton, The Economics of Litigation and Arbitration: An Application to Franchise Contracts, 32 J. Legal Stud. 549 (2003); Christopher R. Drahozal, Arbitration Clauses in Franchise Agreements: Common (and Uncommon) Terms, 22 Franchise L.J. 81 (2002); Walter H. Monroe II, Commercial Arbitration: A Substitute for Franchise Contract Litigation, 2 Cumb-Stamford L. Rev. 175 (1971); James Zimmerman, Restrictions on Forum-Selection Clauses in Franchise Agreements and the Federal Arbitration Act: Is State Law Preempted, 51 Vanderbilt Law Review. 759 (1998) and Tatiana Sister Dratovsky & Thiago del Pozzo Zanelato, The New Brazilian Franchise Act and Arbitration, 17 Rev. Bras. Arb. 7 (2020).
[2] Article 1168 of the Civil Code states: ‘In synallagmatic contracts, a lack of equivalence in the acts of performance of the parties is not a ground of nullity of the contract, unless legislation provides otherwise.’
[3] Article 1171 of the Civil Code states: ‘Any term in an adhesion contract which creates a significant imbalance in the rights and obligations of the parties to the contract is deemed not written.’ Adhesion contracts are defined by Article 1110 of the Civil Code as ‘one whose general conditions are determined in advance by one of the parties without negotiation’. The ‘non-written’ in Article 1171 is a means of dissuading the stronger party from inserting such clauses in contracts since the contract survives a legal challenge with the said clause being ‘amputated’, which is considered non-existent (Article 1184 of the Civil Code states: ‘Where a ground of nullity affects only one or more terms of the contract, it entails the nullity of the whole act only if this term or these terms constituted a decisive factor in the undertaking of the parties, or of one of them. The contract is upheld where legislation deems a contract term not written, or where the purposes of the rule not followed requires it to be upheld.’) It is interesting to note that the non-written sanction is not exactly equivalent to the fact that the clause is void because a claim for non-written is not subjected to statutory limitations whereas a claim to void a clause is.
[4] Article L. 442-1 I (2) says: ‘I – A party acquires responsibility and is obliged to repair the damages caused by the fact that, within the framework of the commercial negotiation, the conclusion or the execution of a contract, by any person carrying out activities of production, distribution or services … (2) Subject or attempt to subject a business partner to obligations creating a significant imbalance in the rights and obligations of the parties.’
[5] The French Legislator did not even define this notion which was established in the Consumer Code. See Gaël CHANTEPIE and Natacha SAUPHANOR-BROUILLAUD, ‘Déséquilibre significatif’, Répertoire Dalloz de droit civil, May 2019.Haut du formulaire
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[6] Article L. 442-4 of the Commercial Code states: ‘The Minister in charge of the economy or the State Prosecutor’s Office may apply to the court to which the matter is referred to order the cessation of the practices mentioned in Articles L. 442-1, L. 442-2, L. 442-3, L. 442-7 and L. 442-8. They may also, for all these practices, have recorded the nullity of the illicit clauses or contracts and apply for the restitution of the improperly obtained benefits, provided that the victims of these practices are informed, by any means, of the brining of this judicial action.’
[7] Ibid.
[8] CA Paris, 27 January 2015, n° 14/05126.
[9] CA Paris, 10 March 2015, n° 13/20664.
[10] CA Paris, 14 June 2016, n° 14/16113.
[11] CA Paris, 11 September, 2018, n° 16/19913.
[12] CA Paris, 21 May 2019, n° 17/07210.
[13] CA Paris, 2 June 2020, n° 17/18900.
[14] CA Paris, 15 September, 2020, n° 18/01360.
[15] The investigation is based on the provision in Book IV – Pricing freedom and competition, Title IV – Transparency, restrictive competitive practices and other prohibited practices, of the French Commercial Code.
[16] This was focused on the provision in Article L. 442-6 I (2) of the Commercial Code in force in 2016 (today Article L. 442-1 of the Commercial Code).
[17] The claim also focused on other clauses such as the insurance clause, the duration of the contract, the contract formation clause and the opening times clause.
[18] Tribunal de Commerce de Paris, 1 Ere Chambre, Jugement Prononce le 13/10/2020, RG 2017005123.
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