The Commercial Court of Pau in its judgment of May 26, 2020 (1) confirmed by the Court of Appeal of Pau on November 5, 2020 (2) has precisely taken up the principles laid down by the Pirelli (3) and Lola Fleurs (4) judgments of 2013, also reiterated by the Court of Appeal of Paris in 2015 (5).

In this case, a former franchisee, in accordance with the arbitration clause attached to the franchise contract, initiated arbitration proceedings before the International Chamber of Commerce (ICC) with a view to the annulment of its franchise contract to the detriment of the franchisor. HAROCHE AVOCATS acted as Counsel for the franchisor LA TAGLIATELLA SAS, and codefendants AMREST HOLDINGS and PASTIFICIO SERVICE.

The ICC has sent the parties a request to pay a provisional advance in an amount intended to cover the costs of the arbitration, assessed based on several criteria, in particular the financial claims before it. The Franchisor has refrained from advancing its share of the provision.

Indeed, pursuant to the Rules of Arbitration “Any party always has the option of paying the share of the advance on costs due by any other party if the latter fails to pay its share.(6) “

The ICC Rules also provide that “where a request for an advance on costs has not been complied with, and after consultation with the arbitral tribunal, the Secretary General may, direct the arbitral tribunal to suspend its work and fix a period of not less than fifteen days, on the expiry of which the requests to which the provision relates shall be considered as withdrawn. (…) such withdrawal shall not deprive the party concerned of the right to reintroduce the same claim in another proceeding at a later date (7) “.

Since the Claimant did not pay the advance on costs in full, the ICC Secretariat deliberated on the withdrawal of its claims. Given the termination of the arbitration proceedings, the former franchisee reiterated its action before the State Court arguing that the arbitration clause was manifestly unenforceable and that it had been the victim of a denial of justice.

However, as recalled above, the ICC Rules do not deprive the parties who have not complied with the requests for an advance on costs to reintroduce a request for arbitration, the arbitration clause then remaining in full force and effect, as the parties were not deemed to have waived it.

Consistent case law confirms this reasoning and indicates that the binding force of the arbitration clause is independent of the financial health of the signatory. The impecunious party cannot use this as an argument to escape arbitration jurisdiction. Thus, in the Pirelli decision of 28 March 2013, in which the defendant was unable to pay the advance claimed by ICC due to its judicial liquidation, ICC informed the arbitral tribunal and the parties, in accordance with Article 30(4) of the ICC Rules in force at the time, that the counterclaims were deemed withdrawn.

The Paris Court of Appeal, by judgment of 17 November 2011, had set aside the award on the grounds that it violated the right of access to justice and the principle of equality between the parties (8). However, the French Supreme Court held that the arbitration clause was not manifestly inapplicable and that such manifest inapplicability could not be inferred from the alleged impossibility of the defendant company’s liquidator to meet the cost of the arbitration proceedings.

The Paris Court of Appeal reiterated this principle in the Lola Fleurs decision, stating that: “the manifest inapplicability of the arbitration clause cannot be inferred from the alleged inability of Lola Fleurs to meet the cost of such proceedings due to her financial situation and the resulting denial of justice, whereas it is in any event up to the arbitral tribunal to allow access to the judge“.

The principles laid down in these two previous judgments were confirmed by the Paris Court of Appeals on April 7, 2015, which reaffirmed that the manifest inapplicability of an arbitration clause cannot be inferred from the alleged impecuniosity, whether the party claiming it is a claimant or a defendant in the arbitration proceedings, and that it is up to the arbitral tribunal to ensure freedom of access to justice (9).

More recently, the French Supreme Court has reinforced the position adopted by the judges on the merits of the case, considering that the manifest inapplicability of the arbitration clause cannot be inferred solely from the fact that one of the parties is unable to meet the costs of the arbitration proceedings (10).

Finally, in a case opposing the same franchisor, defended by HAROCHE AVOCATS, against another former franchisee, the Commercial Court of Montpellier confirmed “that when a request for an advance payment is not satisfied, the withdrawal does not deprive the party concerned of the right to withdraw from the arbitration proceedings” (11). This Judgment was confirmed by the Court of Appeal of Montpellier, on October 27, 2020 (12).

Therefore, the impecunious party to the arbitration proceeding may not prevail itself from a denial of justice; it is highly recommended that it refers, upstream, to third-party specialized funders.

1 Commercial Court of Pau, May 26, 2020, n°2019000106 LA TAGLIATELLA SAS ALREST HOLDINGS SE PASIFICIO SERVICES SLU Vs. V, E. and T.
2 Court of Appeal of PAU, November 5, 2020, n°20/01175, LA TAGLIATELLA SAS, AMREST HOLDINGS SE, PASTIFICIO SERVICE SLU Vs. V., E. and T.
3 French Supreme Court, 1st civ Chb, March 21, 2013, n°11.27770
4 Court of appeal of Paris, February 26, 2013, n°12/12953
5 Court of appeal of Paris, April 7, 2015, n°15/00512
6 Article 36.5 of ICC Arbitration Rules
7 Article 36.5 of ICC Arbitration Rules
8 French Supreme Court, 1st Civ Chb., March 28, 2013, n°11.27770
9 Court of appeal of Paris, April 7, 2015, n°15/00512
10 French Supreme Court, 1st Civ. Chb., July 13, 2016, n°15-19.389
11 Commercial Court of Montpellier, September 18, 2019, n°2018 014120, LA TAGLIATELLA SAS & PASTIFICIO SERVICES S.L. Vs. V.
12 Court of appeal of Montpellier, October 27, 2020, n°19/06837, La TAGLIATELLA SAS & PASTIFICIO SERVICES S.L. Vs. V

As a reminder, since the authority of res judicata is relative, the judgment has no direct effect on third parties. Thus, the third-party opposition constitutes a specific remedy available to any person who was neither party nor represented in the judgment with an interest to act2.

This procedure has, however, limits that are specified both by the legislative provisions and by case law.

These limits may, according to the case law, relate to the status of the third party likely to bring such an action.

Case law recalls that the guarantor is inadmissible to form third party opposition to the judgment rendered against the principal debtor, since it is supposed to be represented by the latter3. The same applies to the hypothecary creditor, represented by his debtor in the rights and obligations he holds from the latter4.

Third party opposition also finds its limits with respect to the decisions against which the third party intends to exercise this procedure: “any judgment is subject to third party opposition unless law provides otherwise”5.

Thus, what does the law say about third party opposition in international arbitration, and more specifically against a domesticated arbitral award rendered abroad?

The legislator makes a distinction between domestic arbitration where the award is granted in France and international arbitration where the award is granted abroad.

For the first category, the Code of Civil Procedure is noticeably clear: “the arbitral award rendered in France may be subject to third party opposition before the court that would have had jurisdiction in the absence of arbitration”6, but the same is not true of possible remedies against the order of exequatur for awards rendered abroad.
Against the latter, which is an enforceable title on French territory, there is no legal provision expressly prohibiting third party opposition.

Thus, it is appropriate to combine article 1506 of the Code of Civil Procedure, which does not refer to the text of article 1501 providing for third party opposition, and article 1525 of the Code of Civil Procedure, which provides that the only recourse against the exequatur decision of an arbitral award rendered abroad is an appeal.

Until recently, case law had rarely had the opportunity to rule on this point.
It was only on May 28, 2019 that the Paris Court of Appeal took a clear position on this issue, noting that “(…) the only recourse available against the order for enforcement of an award issued abroad is the appeal provided for by article 1525 of the Code of Civil Procedure in the opening cases enumerated by article 1520 of the Code of Civil Procedure which relate to the award itself and not to the order for enforcement.7 »

In its judgment of September 9, 2020, the Paris Court of Justice followed the line of conduct of the Paris Court of Appeal, thereby reinforcing the consistency of this case law and removing any ambiguity as to the possibility of bringing such an action. This decision has not been appealed; it is now final.

1 Paris, Judicial Court, September 9, 2020 n°18/07285
2 Article 525 of French Code of Civil Procedure
3 Agen, Court of Appeal, September 5, 2006, BICC 645, August 1, 2006, n°1677
4 French Supreme Court, 3rd Civ. Ch, May 18, 2017, n°16-12.169
5 Article 585 of French Code of Civil Procedure
6 Article 1501 of French Code of Civil Procedure
7 Paris, Court of Appeal, May 28, 2019, n°16/21946

This action differs from the “action oblique” (derivative action) of the former article 1166 of the Civil Code, which allows a creditor whose claim is certain, liquid, and due, to exercise in the name of his debtor, the rights and actions of the latter, when the debtor, to the prejudice of the creditor, refuses to exercise them.

The law firm HAROCHE AVOCATS, in defense of the interests of a franchisor, has initiated a paulian action to have the fraudulent acts of a former franchisee declared unenforceable to escape its obligations towards the franchisor. The franchisor won the case by Judgment of December 1, 2020, rendered by the Lille first instance Court2 (Tribunal judiciaire de Lille).
In this case, a franchise agreement was terminated by an international arbitral award dated April 12, 2013, which became enforceable by order of the Paris first instance court on June 5, 2013, confirmed on appeal on March 10, 2015, and ordered the franchisee to pay franchise fees and advertising costs.

The franchisor and the former franchisee have been involved in several proceedings, including before the enforcement judge in Lille, with a view to liquidating the penalty payment also imposed in the award.

The franchisee benefited from an initial over-indebtedness procedure in Lille, and then settled his personal debts by selling his real estate asset. Following this sale, the former franchisee obtained a balance to cover the professional debts owed to its former franchisor. He refrained from doing so, choosing to hand over the totality of this remainder to his son.
The franchisor invoked before the Lille first instance Court the manifestly fraudulent nature of this payment, having impoverished, and rendered the former franchisee insolvent.
To characterize the fraudulent character, the judges of the merits must seek if the operations carried out constitute factors of reduction of the value of the pledge of the creditors and impoverishment of the debtors3.

It was held that “Paulian fraud does not necessarily imply the intention to harm; it results from the mere knowledge that the debtor and his co-contractor for valuable consideration have of the prejudice caused to the creditor by the disputed act4”. January 2021

In principle, any act of impoverishment may be considered as having been performed in fraud of the creditor’s right, if it would compromise payment. It emerges from case law practice that most of these acts are gratuitous acts5, i.e., direct, indirect, or disguised donations6.

In a decision of principle of May 11, 1995, the French Supreme Court defined the act of misappropriation as “any act of voluntary disposal carried out on an element of the debtor’s patrimony after the cessation of payments in fraud of the creditor’s rights” and thus deprived of its pledge7.

As regards proof of the fraudulent nature of the act, it can be established by any means since fraud is a legal fact. This is done through presumptions such as the anteriority of the claim in relation to the contested act8.

In a decision of December 12, 2000, the French Supreme Court confirmed that “paulian fraud results from the mere knowledge that the debtor has of the prejudice caused to his creditor”9.
Moreover, a gratuitous act such as a donation presumes a fraudulent act. Thus, the French Supreme Court ruled on October 13, 2015. The Court acknowledge the paulian fraud of a mother with “numerous professional debts for several years”, and unable to ignore the state of her finances and accounts, who had donated to her two daughters, whereas she “could only be aware that she was not in a position […] to meet her debts”10.

In our case, the Lille Court, by judgment of December 1, 202011, recalled the two cumulative conditions for the success of the paulian action: on the one hand, the plaintiff must have a claim that is certain in principle at the time of the disputed act. On the other hand, the creditor must demonstrate the existence of an act of his debtor done in fraud of his rights, the effect of which is to create or aggravate his insolvency.

The Court followed the reasoning of HAROCHE AVOCATS on behalf of the franchisor: the transfer from the former franchisee to his son was analyzed as a gratuitous act that impoverished the former and generated his insolvency. The franchisor may therefore ignore the transfer of funds realized and proceed to enforcement measures, to recover his claim.

1 Article 1167 (old) and 1341-2 (new) of French Civil Code
2 Lille First instance Court, December 1st, 2020, n°19/05795 Subway International BV Vs F and C
3 French Supreme Court, December 20, 2000, n° 98-19343
4 French Supreme Court, May 29, 1985, n°83-17.329
5 French Supreme Court February 6, 1996, n°92-19.895; September 26, 2007, n°05-13.224
6 French Supreme Court, November 14, 2000, n°97-12.708; February 17, 2004, n°01-15.484
7 French Supreme Court, May 11, 1995, n°94-83515
8 French Supreme Court, October 23, 2007, n°06-21.388
9 French Supreme Court, December 12th, 2000, n°98-19.341
10 French Supreme Court, October 13th, 2015, n°14-13.972
11 Lille First instance Court, December 1st, 2020, n°19/05795 Subway International BV Vs F and C

The main objective of this ordinance and its application decree is to improve the effectiveness of trademark protection systems through several new measures, including:
– an enlarged possibility of opposing to a trademark application: this possibility is no longer only open to the holder of an earlier trademark, but also from now on to the holder of a domain name, to any legal entity on the basis of its denomination, as well to any person on the basis of the trade mark under which it carries out its activity or the sign designating the place where this activity is carried out;
– the transfer from judicial to non-judicial resolution of part of the current trademark lawsuits, with the creation of an administrative procedure in charge of dealing with certain invalidity or revocation of trademarks requests; henceforth, these lawsuits will fall within the competence of the President of the French National Institute of Industrial Property, and no longer within the competence of the judicial courts (with the exception of appeals) (French Intellectual Property Code, articles R. 411-19 et seq.);
– the modification of the terms of renewal of trademarks: the owner of a trademark is informed by the President of the French National Institute of Industrial Property at the latest six months before the expiration of the trademark registration; the new declaration must be submitted within a period of a year before the day preceding the expiration of the registration (French Intellectual Property Code, articles R. 172-13 et seq.) ;

LEGAL NEWS

– an enlarged group of persons authorized to take action for infringement, the legal provisions on this matter being now included in articles L. 716-4 et seq. of the French Intellectual Property: the action may now be brought, without the authorization of the trademark owner, by non-exclusive licensees and by persons authorized to use a collective or guarantee trademark;
– loosened requirements concerning graphic representation of trademarks, thus allowing sound, multi-media or so-called “moving” trademarks to be registered as such if their representation is clear, precise, easily accessible, comprehensible, sustainable and unbiased.
This ordinance became effective on December 15, 2019.
https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000039373287&categorieLien=id

BRUTAL TERMINATION OF TRADE RELATIONS AND ABUSE OF A DOMINANT POSITION

Decision: Paris Commercial Court, January 16, 2020, n°2020001069 (https://www.doctrine.fr/d/TCOM/Paris/2020/U953B021D5E565BE4A56A)
Main takeaway from the decision: article L. 420-2 of the French Commercial Code prohibits the abusive use by a company of a dominant position it holds on a market and specifies which behaviours may characterize such abuse: refusal to sell, tied sales or sales with discriminatory terms, or the brutal termination of established trade relations. This judgement provides an example of an abusive behaviour by a dominant company on a market, characterizing a brutal termination of the trade relations between the two parties. It thus allows to have a better understanding of the connections between brutal termination of trade relations and abuse of a dominant position.
In its rendered decision, the Paris Commercial Court illustrates the principle clearly established by the French Supreme Court in a judgement dated January 19, 2016 (n°14-21.67), according to which article L. 420-2 of the French Commercial Code only applies if the brutal termination of the trade relations has had an actual or potential anticompetitive purpose or effect. Thus, a brutal termination alone cannot be considered as abusive but may, in the event of a breach of the market, constitute an abusive of a dominant position.

CASE LAW

Such is the case in the facts presented to the judge in the decision rendered. Trade relations between Coca-Cola and Intermarché (a major French supermarket), where the soda company supplied the distributor, had been established for several decades. A termination of the relations announced by Coca-Cola, with only nine days’ notice, leading to a stock shortage and a risk of loss of customers for Intermarché (given the large share held by Coca-Cola on the cola market, set between 75% and 95%), constitutes a brutal termination of trade relations which only a company with a dominant position on a market would be able to carry out.
It is yet to be seen if the Paris Court of Appeal, which may be seized, will confirm this judgment or not.

BRUTAL TERMINATION OF TRADE RELATIONS AND GROUP OF COMPANIES

Decision : French Supreme Court, October 16, 2019 (n°18-10806) (https://www.legifrance.gouv.fr/affichJuriJudi.do?oldAction=rechJuriJudi&idTexte=JURITEXT000039285463&fastReqId=463539339&fastPos=1)
Main takeaway from the decision: established trade relations, as understood by article L. 442-1, II of the French Commercial Code, shall not be assessed by considering the supplier’s relations with all the companies belonging to the same group. The principle of the autonomy of legal entities within a group of companies is recalled by the French Supreme Court, which confirms that “the notion of trade relations can only be understood as relations that are effectively and genuinely pursued between entities, and this excludes the possibility to assess this relations in a global manner at the level of a group of persons that are legally distinct from one another and independent.” The French Supreme Court also reiterates that a group of companies which does not have legal personality cannot constitute a trade partner within the meaning of the above-mentioned article of the French Commercial Code.
In the case of the decision rendered, a company specialised in the selection, import and sale of carpets had concluded contracts with several entities belonging to the Galeries Lafayette group (a French department store chain), for the exploitation of sales stands in various stores owned by these entities. These contracts were terminated between 2010 and 2011, and the carpet company contested the length of the notice periods granted: it sued one of the Galeries Lafayette Group’s company for brutal termination of established trade relations and extended its claim to the other brutal terminations of contracts practiced by the other entities of the Group.
The carpet company argued that a single trade relation existed between it and the group of companies, and that therefore the period of notice should be fixed according to the duration of all these relations and the various contracts concluded. In answer to this argument, the French Supreme Court first considered that a listing contract concluded between an entity of the group, acting in the name and on behalf of the others, and the seller did not constitute a single agreement governing all the relations between the seller and the group. Second, it considered that in spite of a group purchasing organisation, of interlocutors attached to the same management and of the fact that three of the four notice letters concerning the termination of the contracts took place on the same day, there is no “concerted policy” of the group’s entities that can be characterised.

BRUTAL TERMINATION OF TRADE RELATIONS AND SERIOUS MISCONDUCT

Decision: Paris Court of Appeal, October 2nd, 2019, n° 17/04523 (https://www.doctrine.fr/d/CA/Paris/2019/C19EB5AA6C10A5C0920FC)
Main takeaway from the decision: the French Supreme Court considers that the termination of established trade relations cannot be qualified as brutal when it is the consequence of wrongful conduct by the contracting party, consisting of significant and repeated late payments due.
In the case of the decision rendered, as a result of unpaid bills and late payments, a wine supplier terminated its long-established trade relations with a merchant distributor. The Paris Court of Appeal considered that the supplier’s refusal to supply the distributor if the sums owed by the latter were not paid was legitimate, given the damage and serious contractual breach which the default of payment characterised. Thus, default of and late payments of invoices constitute sufficiently serious breaches of contracts to legitimately justify a brutal termination of trade relations without notice.

BRUTAL TERMINATION OF TRADE RELATIONS AND AMENDMENT OF THE CONTRACT

Decision : Paris Court of Appeal, October 3rd, 2019, n° 17/01356 (https://www.doctrine.fr/d/CA/Paris/2019/C85D9AF91F978504617F0)
Main takeaway from the decision: the Court recalls that the brutal termination of trade relations may result from a party’s proposition to amend the contract on the triple condition that the proposal (i) is unfavourable to the other party, (ii) relates to a substantial aspect of the trade relation and (iii) is a condition to the pursuit of the relation.
In the case of the decision rendered, a group purchasing organisation concluded successive provision of service contracts with the company X, entrusting it with the selection, on its behalf, of suppliers, products and monitoring of purchases. A few years later, the group purchasing organisation opposed itself to the renewal of the contract because of a new group strategy to which it belonged aimed at centralising purchases within the group. The company X consequently sued the group purchasing organisation as a result of a brutal termination of the established trade relations.
The group purchasing organisation tried to blame the company X for the brutal termination of the trade relations, arguing that when the contract was renewed, the company X disrupted the contract’s equilibrium by wishing to add stipulations prohibiting the group purchasing organisation from contracting directly with suppliers selected by the company X. The Court of Appeal rejected this argument, and observed that the company X merely formulated simple proposals to amend the contract to which the group purchasing organisation did not respond, and in any case the company X had never set the amendment as a condition for the renewal of the contract. Consequently, it was indeed the central purchasing organisation which brutally terminated the trade relations, by ceasing orders without any notice given to the company X.

FRANCHISOR AND PRECONTRACTUAL DISCLOSURE REQUIREMENTS

Decision: Versailles Court of Appeal, October 24, 2019, n° 18/02778 (https://www.doctrine.fr/d/CA/Versailles/2019/C83A42BFDDE8F98DDF658)
Main takeaway from the decision: judgement providing an example of absence of any breach of a franchisor, regarding his obligation of pre-contractual information due to a franchisee as defined by article L. 330-3 of the French Commercial Code, in spite of his submission of projected accounts qualified as “fictitious” by the franchisee.
In this case, a franchisor operating a network of restaurants provided a prospective franchisee with pre-contractual information and projected accounts. The franchisee’s company was later declared bankrupt only seven months after opening the restaurant establishment. The franchisee hence sued the franchisor for a nullity of the franchise contract, on the grounds of the fact that he had submitted erroneous and incomplete pre-contractual information as well as misleading provisional accounts.
In regards of the pre-contractual information, the Versailles Court of Appeal points out that the state of the local market presented by the franchisor does not correspond to an analysis of the market, this analysis being the prerogative of the sole franchisee. Information on the local state of the market presented by the franchisor is merely a general presentation of the local situation, and the intended assistance of the franchisor to conduct the analysis of the market does not mean that the franchisor must carry it out himself.
Concerning the projected accounts, the Versailles Court of Appeal reminds that the franchisor is not bound to provide the franchisee with such document, but that if he decides to do so, the projected accounts must contain honest and truthful information: otherwise, the franchisor is liable for erroneous or misleading information provided. In this decision, the Court of Appeal adopts a position clearly in favour of the franchisor: the Court rules that a franchisor can avoid being liable if he shows sufficient restraint and reserves in the precontractual documents he provides the prospective franchisee with, even if he sends projected revenues (for example, by writing on the documents sent to the franchisee the mentions “non-contractual” or “draft”, or by specifying that the hypothesis formulated must be confirmed by a market analysis).
This decision which excludes any liability of the franchisor must be understood and read with caution, especially regarding the communication of projected accounts. Communication of objective historical data by the franchisor to the prospective franchisee for him to establish account forecasts, as was the case in the decision rendered, does not constitute completely uncertain projections constructed by the franchisor. It is therefore appropriate, as in the case of the judgement, to encourage the franchisee to have such assumptions evaluated by a market analysis or submitted to an accounting professional in order to avoid the franchisor being liable in any way.

SIGNIFICANT IMBALANCE & LEGAL ACTION OF THE FRENCH MINISTER OF ECONOMY (STATUTE OF LIMITATIONS)

Decision: Commercial Court of Rennes, October 22nd, 2019, n°2017F00131
Main takeaway from the decision: according to the Commercial Court of Rennes, the starting point of the statute of limitations of the claim on significant imbalance the French Minister of Economy can file on the grounds of article L. 442-1, I, 2° of the French Commercial Code is the day on which he knew or should have known the facts allowing him to file his claim. To recall, this legal action by the Minister of Economy designed to obtain the cancellation of an abusive contract clause has a statute of limitations of five years. The Commercial Court of Rennes considers, in the case presented to its Court, that the starting point of the statute of limitations for the Minister corresponds to the day on which the first acts of investigation into the litigious contracts were carried out. This position adopted by the Court is open to criticism, as it leads to the legal action brought by the Minister of Economy benefiting from an absence of statute of limitations.
In regards of the claim on significant imbalance the franchisees can file, the statute of limitations is fixed to five years and its starting point is the day of conclusion of the franchise contracts. Concerning the franchisees who voluntarily intervene in the Minister’s legal action, the Commercial Court of Rennes rejected the franchisor’s argument that the statute of limitation has its starting point also at the signature of the respective franchise contracts.
Instead, as with the Minister of Economy, the Court sets the starting point of the statute of limitations at the time where these voluntarily intervening franchisees knew or should have known the litigious facts, and in the case presented to the Court, on the date of their “hearing by the Minister’s services.” Again, this stance taken by the Court is dangerous in the sense that until the Minister investigates, the legal action would have no statute of limitations attached to it.