Assignment of Franchise Agreement

The assignment of the franchise contract is closely linked to the intuitu personae character that is attached to this type of distribution contract.

If  the franchise agreement is concluded by the franchisor in consideration of the qualities of a natural person – partner and/or manager of the franchisee company -,  the intuitu personae character of the franchise agreement vis-à-vis the franchisor is non-existent, the franchisee contracting according to a brand and know-how and not because of specific qualities attached to the franchisor company.

Jurisprudence has sometimes considered that the franchise contract included a reciprocal intuitu personae, the assignment of the contract by one of the parties consequently requiring the agreement of the assigned party to the assignment operation.

In the event of an assignment of the contract by the franchisor, the agreement of the franchisee would therefore, for some, be required.

Although the substitution of franchisor may result from an outright transfer of the franchise agreement, it is most often part of a restructuring operation of the franchisor operating wealth transfer (division, merger, merger-absorption, partial contribution of assets). In such a case, obtaining the agreement of all the franchisees of the network to the transfer of the contract may prove difficult for the franchisor or even constitute a brake on the management or sale of its network, as soon as one or more franchisees refuse to give their consent to the proposed transaction.

In order to avoid this type of situation, it is possible – and recommended – for the franchisor to include a clause in its franchise agreements:

–    stating the absence of intuitu personae of the franchisee vis-à-vis the franchisor, the first having contracted not because of the franchisor but in consideration of a brand and know-how;
–    authorizing ab initio the transfer of franchise agreements by the franchisor as well as the transfer of its control and any operation on its capital.

The assignment of the contract by the franchisee requires the agreement of the franchisor to the assignment operation.

While the franchisee may assign its franchise agreement or goodwill, the franchisor, who entered into the agreement based on the franchisee’s specific qualities (financial capabilities, professional skills, etc.), wishes to maintain the brand image and the reputation of its network. It is therefore legitimate for the latter to be able to control the franchisees benefiting from its know-how.

To this end, there are two contractual mechanisms for control, by the franchisor, of the transfer of its franchise agreement by the franchisee:

–    the approval clause, under the terms of which the transfer of the franchise agreement to a third party is subject to the prior authorisation of the franchisor.

In the event of approval of the assignee by the franchisor, if the assignee continues to perform the assignor’s contract with the franchisor, the franchisor must – in application of current case law (Cass.com. February 21, 2012 appeal n° 11-13.653, recalled several times in particular by the Paris Court of Appeal) – provide a pre-contractual information document to the new franchisee.

–    the preference clause by which the franchisee undertakes, in the event that he wishes to assign his franchise contract, in particular in the context of an assignment of his business, to offer it in priority to the franchisor who benefits from a conventional pre-emption right to be exercised under the conditions proposed by a third party.

The validity of the insertion of these clauses in franchise agreements is consistently accepted in case law.

The contractual right of pre-emption of the franchisor, in the event of the transfer of its business  or its shares by the franchisee, must nevertheless not be exercised in fraud of the provisions of Article L.141-23 of the Commercial Code – created by the law relating to the social and solidarity economy of 1 August 2014 – allowing employees of companies with less than 250 employees, to submit an offer in the event of the transfer of business, but also in the event of the transfer of shares (shares or securities) giving access to the majority of the share capital of the franchisee company that employs them.

The franchisee who does not comply with these procedures, as long as they are provided for in the franchise agreement, incurs its contractual liability; the franchise agreement may then be terminated by the franchisor.

The contractual right of pre-emption of the franchisor, in the event of the transfer of its business  or its shares by the franchisee, must nevertheless not be exercised in fraud of the provisions of Article L.141-23 of the Commercial Code – created by the law relating to the social and solidarity economy of 1 August 2014 – allowing employees of companies with less than 250 employees, to submit an offer in the event of the transfer of business, but also in the event of the transfer of shares (shares or securities) giving access to the majority of the share capital of the franchisee company that employs them.