Global Development

Introduction

In France, Subway is not just a sandwich maker; it also makes case law. The American sandwich seller Subway is one of the fastest-growing franchises worldwide. In France, since the opening of its first restaurant in 2001, the brand has become the second biggest restaurant operator. Subway’s franchise contracts are subject to arbitration – generally with a New York seat – and contain choice of law provisions designating a law other than French law (either Liechtenstein or Dutch law). Since 2015, Subway has participated in no fewer than seven proceedings before the Paris Court of Appeal (the ‘Court of Appeal’) where franchisees were appealing exequatur orders in Subway’s favour. These proceedings have generated decisions on the validity of arbitration agreements as well as on the requirements of due process in international arbitration.

In all seven instances, Subway started arbitration against its French franchisees, some of which decided not to take part in the proceedings altogether while others initially appeared in the proceedings before withdrawing. Default awards were rendered in all seven instances, awarding Subway damages for breach of the franchise agreements. Following those victories, Subway then sought leave to enforce the awards before the French courts and obtained exequatur orders against the franchisees. Those franchisees, in turn, appealed the exequatur orders, in most instances on the grounds that the arbitral tribunals lacked jurisdiction and violated due process. On each occasion, Subway successfully defeated those arguments, and the exequatur orders were upheld (1).¹

In 2015, in parallel with the Court of Appeal’s issuance of its first decision in favour of Subway, the French Directorate General for Competition Policy, Consumer Affairs and Fraud Control launched an investigation against Subway. Following the investigation, in February 2017, the French Ministry of Economy sued Subway before the First Instance Commercial Court of Paris (the ‘Commercial Court’), requesting that certain clauses of the Subway franchise agreements, including the arbitration and choice of law provisions, be held null and void on the ground that they had been imposed and not negotiated. On 13 October 2020, the Commercial Court found in favour of the Ministry of Economy and held that these clauses were null and void (2).

1. The Court of Appeal’s approach to arbitration clauses concluded by franchisees

In the framework of their appeal against the exequatur orders, three franchisees had applied for a stay of the enforcement proceedings pending the decision of the Commercial Court on the validity of the arbitration clauses in the franchise agreements, arguing that this decision could have an impact on the arbitral tribunal’s jurisdiction.

The Court of Appeal denied those applications, because a French domestic law argument is irrelevant to the judicial review of international arbitration awards.²

Moreover, according to most franchisees, the arbitral tribunals lacked jurisdiction due to the parties’ bargaining power imbalance.³

In two instances, the Court of Appeal held that the franchisees’ failure to take part in the arbitral proceedings did not amount to a waiver of their right to raise their objection to the arbitrators’ jurisdiction when appealing the exequatur orders.⁴

The Court then applied the so-called ‘validity principle’ to find that the imbalance between the parties to a contract has no effect on the validity of the arbitration clause due to its autonomy from the contract in which it is contained.⁵

Furthermore, some franchisees had argued that the arbitral tribunals lacked jurisdiction on the basis that the additional costs associated with the arbitration jeopardised their access to justice. In support of their contention, they submitted that they had been denied access to justice because the seat of the arbitrations was in New York, which meant that the proceedings had been more costly. They alleged that they had been under an undue burden given their impecuniosity.⁶

The Court of Appeal, without directly rejecting the second argument, focused on the evidence of the franchisees’ impecuniosity, holding that in each case, each franchisee had failed to prove it was impecunious during the arbitration.

In previous cases, including the renowned Pirelli decision,⁷ the issue of impecuniosity was only relevant to establishing whether an award complied with the principles of access to justice and equality of arms. In the Subway decisions, the Court of Appeal seems to take a further step by considering that the financial status of a contracting party may constitute a basis to have the arbitral clause declared null and void, with a view to challenging the arbitral tribunal’s jurisdiction. The structure of the Court’s reasoning shows that an arbitration clause that is objectively valid may be subjectively invalid. Notwithstanding a clause that is in itself valid, an arbitral tribunal may lack jurisdiction if the financial difficulties faced by one of the parties created access to justice issues.

Another objection raised by six of the franchisees,⁸ was the fact that the arbitration was conducted in English, which denied them due process and violated the adversarial principle. The Court of Appeal rejected this argument and held that access to justice had not been denied, noting in particular that (i) counsel for one of the franchisees responded in English when accepting the jurisdiction of the arbitral tribunal and that such counsel had sufficient time to prepare his client’s defence;⁹ (ii) two of the franchisees had been given sufficient time to prepare their defence;¹⁰ and (iii) for the three other franchisees, the choice of English language was valid given the international nature of the commercial relationship, thus preventing a finding that the advesarial principle had been violated.¹¹

Some franchisees also alleged that the choice of a foreign law amounted to a fraud against French law, which is more protective of the franchisees’ rights than the law designated in the contracts.¹²

The same franchisees also argued that the arbitration agreements were invalid under Article 2061 of the French Civil Code which, in its then applicable version, only allowed arbitration agreements concluded for the purpose of a professional activity. The Court rejected this argument, deciding in a classic application of the French principle of validity of the arbitration agreement, that Article 2061 is not applicable to international arbitration.¹³

2. The implications of the Commercial Court’s ruling that the arbitration clause and the choice of law provision are null and void

On 13 October 2020, the Commercial Court handed down its ruling on the Ministry of Economy’s February 2017 application to have certain clauses of the Subway franchise agreements declared null and void.

In a ruling that diverges from the Court of Appeal’s decisions that upheld the validity of the arbitral clause in the franchise agreements, the Commercial Court held that the arbitration and choice of law clauses had to be set aside, as they created an unfair balance between the rights and duties of the parties.¹⁴

The Commercial Court found that the imbalance in economic power between the parties meant that the arbitration and choice of law clauses had been imposed on the franchisees. In particular, the Court emphasised that these clauses could not be negotiated by the franchisee. It further found that the facts that the seat of the arbitration was New York and the proceedings were to be conducted in English indicated that the franchisees had yielded to Subway's bargaining power, as no French franchisee would agree to such contractual stipulations through balanced negotiations. The Commercial Court therefore concluded that the arbitration and choice of law clauses had been imposed on the franchisees and declared them null and void. It further ordered Subway to cease inserting them in future franchise contracts.

If the decision of the Commercial Court is upheld, arbitration agreements in franchise contracts, which provide for a non-French seat, could be set aside by French courts when the parties are found to be in unequal bargaining positions. Such a finding would require detailed consideration by the courts of all the elements necessary to establish inequality between the parties. Such a factual inquiry, however, is generally incompatible with the competence-competence principle, which normally prohibits a French court from asserting jurisdiction over a dispute referred to arbitration, unless the clause is manifestly inapplicable or null.

The Commercial Court decision echoes a decision rendered by the French Cour de Cassation relating to the validity of an arbitration agreement in a consumer contract.¹⁵ In that case, the Cour de Cassation decided that the competence-competence principle did not apply due to the consumer’s weaker bargaining position. The Court then examined the clause and decided that it was abusive because it had not been negotiated by the parties but had been imposed upon the consumer. The implications of the Cour de Cassation’s decision are limited, in particular since it deals only with arbitration agreements concluded in the specific context of consumer agreements.¹⁶

It is unclear whether such reasoning could be extended to the franchisee/franchisor relationship, i.e. when an agreement is concluded between two professionals (regardless of their economic bargaining powers).

Conclusion

The Subway saga is not over yet, and the decision of the Commercial Court only adds further uncertainty to the future legal framework of franchise contracts. Going forward, the French courts will have to decide whether to extend the consumer exception to the competence-competence principle to franchisees. The same courts will also have to examine what degree of protection a merchant, such as a franchisee, requires vis-à-vis the franchisor, and whether it should be the same as that enjoyed by a consumer.

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