Appeal submissions — Collorafi

CL - REF. 34690 16th CHAMBER A RG. 98/14119 N SERVED ON: 19 DECEMBER 1999 CLOSE OF PROCEEDINGS: DECEMBER 1999 PLEADINGS: 14 DECEMBER 1999 FINAL SUBMISSIONS AFTER EXPERT REPORT FOR: the company SEBOL Public limited company with share capital of 250,000 francs, registered with the Trade and Companies Register of ANTIBES under number RCS B 340 945 062 (88 B 656), whose registered office is CENTRE COMMERCIAL CARREFOUR, Chemin de Saint Claude, 06600 - ANTIBES represented by the Chairman of the Board of Directors, Monsieur Bernard COLLORAFI, domiciled at the registered office The company B et o limited liability company with share capital of 50,000 francs, registered with the Trade and Companies Register of ANTIBES under number RC B 408 592 236 (96 B 38) whose registered office is rond-point weiseller, route de Grasse, 06600 - ANTIBES represented by its manager, Monsieur Bernard COLLORAFI domiciled at the registered office the company LES PINS SARI with share capital of 50 000 francs, whose registered office is 32, avenue de Cannes 06160 - JUAN LES PINS represented by its manager, Monsieur Bernard COLLORAFI domiciled at the registered office Monsieur Bernard COLLORAFI born on 1 December 1945 in SOUSSE, TUNISIA of French nationality, acting in his personal capacity and in his capacity as signatory of the lease-management agreements b, chemin de l'Estelle, 06110 - LE CANNET ROCHEVILLE Me Jean-Paul CLEMENT Barrister of the PARIS Bar 78, avenue Mozart, 75016 - PARIS 01 45 27 63 02 - TELECOPIF 01 45 27 67 PALAIS B 405 and Me Rémi PAMART Avoué at the PARIS Court 9, rue Lincoln, 75008 - PARIS To 01 42 25 38 59 - FAX 01 45 61 91 33 Rémi PAMART Avoué at the Court :. Rue Lincoln 3008 PARIS AGAINST: The company MC DONALD'S FRANCE public limited company with share capital of 180,000,000 francs registered with the Trade and Companies Register of VERSAILLES under number B 722 003 936 whose registered office is 1, rue Gustave Eiffel, 78045 - GUYANCOURT CEDEX FRANCE represented by the Chairman of the Board of Directors having as counsel Me Jean-Marie LELOUP, Michèle LELOUP and Philippe MISSEREY Associated barristers of the law firm LELOUP 61, rue Renaudot, 86000 - POITIERS and as avoué at the Court the SCP FISSELIER CHILOUX Avoués at the Court 23, rue du Louvre, 75001 - PARIS MAY IT PLEASE THE COURT to accept these final submissions after expert report no. 2, taking up the final submissions after expert report previously served on 9 November 1999 and responding, from page 77 onwards, to the submissions in reply served by the company MC DONALD'S on 9 November 1999 Ruling on the appeal lodged on 26 May 1998 by the companies SEBOI, B & O and LES PINS and Monsieur Bernard COLLORAFI against a judgment delivered by the Commercial Court of PARIS on 18 May 1998 which: «. dismisses Monsieur Bernard COLORA and the companies SEBOL, B et O). and LES PVN of all their claims, • records the automatic termination on 2 January 1998 of the lease-management and licence agreements concluded between the SA MC DONALDY'S on the one hand and on the other the companies WEBOI. and Monsieur Bernard COLORAIT on 31 August 1987, Bet O and Monsieur Bernard COLLORAT on 9 October 1996, AS PINS and Monsieur Bernard COLLORA/T on 18 June 1997, by the effect of the termination clause inserted in each of the contracts. orders the eviction of the companies SERON. Bet OLES PINS and of Monsieur Bernard COLLORARI. as well as of all occupants deriving rights from them, from the fast-food businesses located respectively at: • Shopping gallery of the CARREFOUR store chemin de Saini Clande, 00600 - ANTIBES . 1190, rome de Grasse, 06600 - ANTTBES . 32, rue de Cannes, 06/60 - ANTTBES - JUAN LES PINS and enjoins each of these companies and Mr Bernard COLLORAI to hand over to the owner of the business, the SA MC DONALD'S: . the keys of the restaurants . the list of staff, the employment contracts as well as the files relating to each of the employees, in order to allow the normal continuation of the employment contracts the accounts of the operation until the day of abandonment of that operation rules that the companies and Monsieur Bernard COLLORAFI must carry out all of the provisions below on pain of a joint and several penalty payment between …Mr Bernard COLLORAFI and the company SEBOL for the ANTIBES 1 restaurant of 32,000 francs (arene. dent-mille francs) per day .Mr Rernard COLLORAFT and the company B & 0 for the ANTIRS 2 restaurant of 37.000 di. crenie sept mille francs) per day . Mr Bernard COLORA and the company LEY PINS of 26,350 f. Gringt six mille trois cent ringuame after ten working days from the service of the present judgment with limitation and 30 days appoints Maîtres ZONINO, bailiffs, 184 avenue Paul Cézanne le Colage, 06800 CAGNES SUR MER as a recorder in order to draw up, in the presence of both parties, in each restaurant, the inventory of the stock of goods and consumables, operating items, furniture and equipment of the business and the state of the takings orders jointly and severally to pay to the SA MC DONALD . the company SERON and Mr Bernard COLLORAT the sums of / X07 247.84 francs ‹ um million huit cen sotxante sept mille dent cent quarame sept frans quatre vingt quatre centimes) as unpaid royalties with interest at the legal rate from 1 August 1947 (RAR of 22/07) on / 266 300 francs (un million deur cem soixame sir mille trois cens transi from 1 December 1997, (ARAR of 27011) on 36/ 800 francs (trois cent soirante et un mille lit cents francs) from 1 January 1998 (art. 1 4) on 239,147.84 francs (demt cem treme neuf mille cent quarant sept franes quatre vingt quatre centimes) and 16,000 francs (sixteen thousand francs) as an occupation indemnity per day from 2 January 1998 until the day of the bailiff's report whose appointment is requested above, with interest at the legal rate • the company Ber Cer Mr Bernard COLLORA/ the sum of 1,533,548.87 francs (one million five hundred and thirty-three thousand five hundred and forty-eight francs eighty- seven centimes) as unpaid royalties with late-payment interest at the base bank rate increased by 3 points for each instalment from the date on which it should have been paid furt. (X 23 of the contract) and 24,000 francs (twenty-four thousand francs) as occupation indemnities per day, from January 1908 until the day of the bailiff's report whose appointment is requested above with interest at the legal rate •the company LIES PINS and Mr Bernard COLLORAFT the sums of: 504,474.42 francs (five hundred and four thousand four hundred and seventy-four francs forty-two centimes) as unpaid royalties with late-payment interest at the base bank rate increased by 3 points for each instalment from the date on which it should have been paid (art. AX 2 3 of the contract) and 16,000 francs (sixteen thousand francs) as an occupation indemnity per day from 2 January 1998 until the day of the bailiff's report whose appointment is requested above with interest at the legal rate rules that the interest owed to the SA MC DONALD'S shall itself bear interest in accordance with article 1154 of the CIVIL CODE. records for the SA MC DONALD's that it reserves the right to complete its claims in view of the conditions of restitution of the businesses unlawfully occupied by Mr Bernard COLLORAF and his three companies and to claim all damages and interest justified by the harm that may appear Dismisses the company MC DONALD'S from its claim for damages and interest for abuse of process Orders provisional enforcement of the decision to be delivered subject to the provision by the SA MC DONALD'S of a bank guarantee equal to the awards made as unpaid royalties Orders in solidum the companies SEBON, Ben Cer LES PINS and Monsieur Bernard COLLORAN to pay to the company MC. DONALDS the sum of 50,000 francs (fifty thousand francs) under article 700 of the NCPC dismissing the remainder of the claims and with costs, those to be recovered by the registry assessed at the sum of 324.99 francs incl. VAT (1st case App 10.50 + A/T 42.68 + lanol 184,X0 • /VA $4,02 287.00 F.) + 2nd case: A// 10.50 + Aff 21.00 ÷ 10 6.49 = 37.99)» As a result of this appeal, the Court, by an interim judgment delivered on 9 December 1998. « declared inadmissible - the application of the company SERO, the company B « O, the company LES PINS and of Monsieur COLLORAN seeking the requalification of the disputed lease-management agreements as commercial lease, possibly supplemented by a trademark licence agreement as a sign - the application of the same appellant parties for a declaration of nullity of the said lease-management agreements, whether for non-application of the law of 20 March 1956, for fraud, error or lack of consideration. Before ruling on the merits, appoints Monsieur Jean Luc DUMONT, Expert, 15, rue Beaujon, 75008 - PARIS and Monsieur Alain MARTIN, Expert, 101 rue de Prony, 75017 PARIS. mi fins, connaissance prise des rapports amiables GANDUR es DUMONTER (SEPT! et des pières qu'ils jugerom miles de se faire communiquer par les parties, de répondre aur questions que la Cour leur pose dans les motifs du présent arrêt, concernan tum la périone antérieure au /" juiller 1997 que celle postérieure. Dit que la société MO DONALD'S d'une part, et les sociétés SEBON, B « O, LES PINS es Monsieur COLLORAI d'aure port seront respertivemen tenus a titre d'avance sur la rémunération des experts, à verser la somme de 20 000 franes, soir 10 000 franos i chacun d'enr au service de la Régie d'ovances et de recettes de la Cour d'appel de PARIS. 34. qui des Orfèvres. 75055 - PARIS LOUVRES SP, ce qui fera un total de 40 000 franos et ce. dans le mois qui suivra le prononcé du présent arrêt, » It should be recalled that, by an order delivered on 7 June 1999, the President of the 16th Chamber of the Court decided that each party would pay each expert a further sum of 40,000 francs, that is a total outlay of 100,000 francs per party. said that the experts must file their report within five months of the referral. » The experts filed their report, dated 15 October 1999, on Wednesday 20 October 1999. (filed at the office of Maître Jean-Paul CLÉMENT on Wednesday 20 October) Before examining the conclusions of this report, the facts should be recalled. RECALL OF THE FACTS THE SITUATION FROM 1987 TO 1996 It should be recalled that: - Monsieur Bernard COLLORAFI opened a restaurant under the MC DONALD'S sign in the CARREFOUR shopping gallery in ANTIBES on 3 August 1987 subsequently signed, on 31 August 1987, a lease-management agreement to open this restaurant in the CARREFOUR shopping gallery in ANTIBES (exhibit 1) - the same day, 31 August 1987, he transferred, by a contract imposed and prepared by MC DONALD'S entitled "assignment amendment", to the company SEBOL, which he had set up and of which he held almost all the shares and of which he - these contracts were signed after he had resigned from his duties as branch manager of a bank in MOUGINS, completed an unpaid internship at his own expense in MC DONALD'S restaurants for nine months, thus making a considerable investment of time and money - he was thus the 18th franchisee of the MC DONALD'S network and the 4sth MC DONALD'S restaurant in FRANCE, thus placing his trust in the MC DONALD'S network at a time when the network was still largely unknown in FRANCE (the network currently has about 700 restaurants and 200 franchisees). The contract provided: - that the company MC DONALD'S FRANCE, licensee of the American parent company, MC DONALD'S CORPORATION, leased out under a lease-management agreement to Monsieur COLLORAFI the restaurant business located in the CARREFOUR gallery comprising the elements below: the right conferred by the licence to operate the restaurant according to the MC DONALD'S system and all benefits at the end of the licence the use of the trade names, signs, trademarks, patents, goodwill and the clientele attached to the said rights (WHICH IS FALSE AS REGARDS THE CLIENTELE WHICH DOES NOT YET EXIST) the enjoyment of the liquor licence relating to the restaurant where applicable d) the enjoyment of the right to occupy the restaurant premises all installations, equipment or fittings installed or placed in the restaurant (WHICH IS FALSE SINCE THE LEASE-MANAGER MADE INVESTMENTS OF 6,477,000 francs (SIX MILLION FOUR HUNDRED AND SEVENTY-FOUR THOUSAND all benefits arising from all contracts concluded prior to the start of the lease-management concerning the operation restaurant, in particular described - that an order authorising the lessor company to derogate from the time limits provided for in article 4 of the law of 20 March 1956 on lease-management had been made by the President of the Regional Court of GRASSE on 28 August 1987 - that the lease-manager undertook to comply with the obligations incumbent on the lessor company, arising from all contracts, described in article 1-1 f (namely the licence signed between MC DONALD'S CORPORATION and MC DONALD'S - that Monsieur COLLORAFI had to pay: * a security deposit of 100,000 francs excl. VAT (one hundred thousand * an initial payment of 120,000 francs excl. VAT (one hundred and twenty thousand francs excl. VAT) * a minimum monthly royalty of 150,000 francs (one hundred and fifty thousand francs incl. VAT) : uno redevance de baco de 1'17 it was on the strength of a very flattering brochure extolling the merits of franchising and of a personalised document entitled "STATEMENT OF PROFITS AND LOSSES" that he signed the contract. (exhibit 25) Contrary to what is asserted by MC DONALD'S and repeated by the Court, this personalised document is contractual, because it was drawn up and signed by Monsieur Brian GIBSON, at the time an executive at head office, who later became a franchisee (see the certificate produced by MC DONALD'S. Monsieur GIBSON was an operations consultant). This document provided for net sales of: • 12,500,000 francs (twelve million five hundred thousand francs) in the 1st year 000 000 francs (nineteen million) in the 3rd year, with a negative net income in the 1st year of 433,750 francs (four hundred and thirty-three thousand seven hundred and fifty francs), but a profit of 1,233,810 francs (one two hundred and thirty-three thousand eight hundred and ten francs) for the Jène Thanks to Monsieur COLLORAFI's hard work, and although he invested 6,474,000 francs in the company SEBOL, the turnover of 19,000,000 francs was practically reached in the 3rd year (18,329,000 francs in 1989) and increased steadily until 1993 (27,973,000 francs) (exhibits 45) ? At the same time, although the first two financial years showed a loss, (- 2,400,000 francs), profits began to appear in 1989 and the net results after tax were as follows: 311,000 francs : 301,000 francs : 1,015,000 francs 1992: 1,356,000 francs 1993: 1,453,000 francs : 1,339,000 francs : 1,010,000 francs 2,555,000 francs of losses in the first two years, it was only in 1993, from the remaining profits after the write-off of the previous losses, that six years after the start of his business, Monsieur Bernard COLLORAFI was able to begin paying himself a dividend. ie chiffre d'affal es o00 traint en 1994 (27 372 000 francs). 1, de meme quc while the year 1995 marked the start of a slight decline (24,754,000 francs) with results still of interest of 1,010,000 francs. It should be stressed that these results were achieved despite MC DONALD'S restaurants in a very close area, and this even before 1996: - April 1990, MANDELIEU - December 1993, GRASSE - July 1994, CAGNES - November 1995, CAGNES - and despite the opening of a competing restaurant, under the QUICK sign, a few hundred metres away in July 1995 (there were still 1,010,000 francs of net results after tax in 1995). it may already be noted that, as is demonstrated at the hearing by the exhibits produced, that - since the outset, Monsieur Bernard COLLORAFI has never received any unfavourable observation on his management, the accounting documents being examined each month by the company MC DONALD'S (exhibits 59 and 61) - that he has always been congratulated by the executives of the company MC DONALD'S (exhibits 5, 16, 17) - that, in terms of quality and compliance with MC DONALD'S standards, all the inspections carried out by the representatives of the company MC DONALD'S gave him the maximum scores for Quality, Service, Cleanliness (grade A or B) that is to say "exceptional" or "excellent". (exhibits 27 to 29 and 76 to 79) - that he was moreover a showcase restaurant (exhibit 83) 1st UNILATERAL DECISION OF MC DONALD'S (1996) 1-2 1 The decision of MC DONALD'S to open a new restaurant While the economic situation was beginning to become difficult in 1996 and the results had been worse for two years, Monsieur COLLORAFI learned in July 1996 that the company MC DONALD'S intended, in order to counter its competitor QUICK, to install a second restaurant a few hundred metres from the CARREFOUR shopping centre where the first restaurant managed by the Company SEBOL was located and in its primary catchment area, called by the company MC DONALD'S in its Pre-contractual Information Document (DIP) the "primary attraction area" (SI) the plan appearing in appendix 6 entitled "LOCAL MARKET STUDY" is perfectly eloquent, the two restaurants are very close (it is stated: "close to the site, in the CARREFOUR shopping centre, at the exit of the A 8" (exhibit 109-p. 3) and in reality a few hundred metres away by road, and one minute by car. Thus, not only is the second restaurant in the primary attraction area, but it is almost next to the 1st restaurant It should be noted that this appendix 6 given to Monsieur COLLORAFI contains photos of the restaurant already built. Monsieur COLLORAFI was therefore faced with a fait accompli, and was "urgently requested" to open this restaurant. Faced with this situation and to prevent another franchisee from setting up and thereby taking back part of his clientele, Monsieur COLLORAFI therefore decided to take over this new restaurant. To this end he set up the SARL B et o in the form of an EURL of which he is the managing sole partner, making a personal contribution to this company of his positive current account in the company SEBOL, and of the dividends distributed, that is the sum of 800,000 francs and making a significant investment effort, that is 3,909,000 francs in total. He therefore signed on his own account on 9 October 1996 a lease-management agreement with the Company MC DONALD'S and the same day, in accordance with the rules imposed by the company MC DONALD'S, an assignment deed to the SARL B et 0. (exhibit 2) On the opening of the restaurant, on 9 October 1996, he immediately expressed his fears as to the inevitable impact of this opening on his first restaurant. Yet no serious impact study was carried out by the company MC DONALD'S and its consultant, the company RD CONSULTANT. He was given only kind words as well as a document providing for a turnover of 20,000,000 francs (twenty million flow of 452,000 francs (four hundred and fifty-two francs) in the first year, and of 8,913,000 francs (eight million nine hundred and thirteen thousand francs) over the ten-year term, that is 891 francs per year (eight hundred and ninety-one thousand francs) (exhibit 26) Monsieur COLLORAFI could only have confidence in this document coming from the company MC DONALD'S whose forecasts for the company SEBOL in 1987 had come true. It should be stressed that the financial conditions were harsher since he was forced to accept: - a management royalty of 20% (the maximum royalty on MC DONALD'S's royalty scale) - a service fee of 5 $ - an advertising contribution fee of 4.5% - with a minimum royalty of 235,000 francs excl. VAT per month (two hundred and forty-five thousand francs) which was reduced by amendment to the contract on 10 June 1997 to 180,000 francs excl. VAT per month (one hundred and eighty thousand francs) and 17% royalties and this only for the year 1997, and increased again 10,000 francs per month from 1998 and for the following 19 years of the contract. This is what MC DONALD'S, followed by the Court, calls "an adjustment of these royalties". an adjustment that is ridiculously small compared with the scale of the harm that was going to be generated and which remained in any event far higher than those paid by the company SEBOI (exhibit 74) The negative impact for the company SEBOL Monsieur COLLORAFI's fears proved justified since the turnover of the company SEBOL for 1996 fell by 33%, that is 18,300,000 francs if one disregards the re-invoicing of costs to the company B et 0, and for 1997 by more than 50%, that is barely 11,500,000 francs on the same basis (exhibits 29 and 30 of the opponent). THAT IS TO SAY THAT IF MONSIEUR COLLORAFI HAD TAKEN THE DECISION TO LET A UNDER THE MC DONAID'S SIGN BE SET UP BY ANOTHER FRANCHISEE OR BY THE COMPANY MC DONALD'S ITSELF, HE WOULD HAVE FOUND HIMSELF WITH A TOTAL TURNOVER OF 11,500,000 FRANCS IN 1997 AGAINST NEARLY 28,000,000 FRANCS IN 1993 AND NEARLY 25,000,000 FRANCS IN 1995. As he had foreseen, this unilateral decision of MC DONALD'S which was imposed on him, immediate the opening of the second restaurant, as the documents produced demonstrate with evidence. The consequences suffered by Monsieur COLLORAFI should be stressed: the turnover and profitability of the company SEBOL decreased considerably - the company B et O did not achieve the turnover promised in the document given to him before the contract, which promised 20,000,000 francs of turnover with a cash flow of 452,000 francs in the 1st year and 8,913,000 francs over the ten-year term) since the company B et O achieved a turnover of 12,285,000 francs (from October 1996 to October 1997), for the year a turnover of francs and for the first five months of 1998 a turnover of 5,180,000 francs, that is 60% of the result promised by MC DONALD'S (exhibit 26) • the cumulative turnovers of the two companies are admittedly roughly identical to that previously achieved by the company SEBOL, but total costs are increasing since in particular the two restaurants employed 87 people whereas the first employed only 55, which therefore leads to lower profitability. The positive impact for the company MC DONALD'S While the immediate negative impact on the company SEBOL is established, the same is not true of the company MC DONALD'S. Indeed, by means of the minimum royalties contractually established, the company MC DONALD'S • receives 395,000 francs excl. VAT monthly from the two companies SEBOL and B et 0, • instead of the minimum 150,000 francs excl. VAT previously paid by the company SEBOL, that is a profit of more than 150% this simple observation shows that the spirit of partnership extolled by MC DONALD'S exists in reality only for its own profit. THE 2nd UNILATERAL DECISION OF THE COMPANY MC DONALD'S The decision of MC DONALD'S as the results, known week after week by both Monsieur COLLORAFI and the Company MC DONALD'S, kept deteriorating, Monsieur Bernard COLLORAFI learned at the end of 1996 that the DONALD'S was pursuing its policy of unregulated expansion contrary to the interests of franchisees, and in particular his own, by planning the imminent opening of two restaurants at ANTIBES OUEST and at VALLAURIS: the creation of the latter restaurant had been carefully concealed from him, (whereas the ANTIBES OUEST restaurant appeared in the DIP given for the creation of the ANTIBES NORD restaurant), company DONALD'S intended to entrust to the franchisee of CANNES, Patrick GILARSKI (formerly Vice-President of MC FRANCE) the 2 restaurants venture, the building permits requested by the company MC DONALD'S having and the constructions being under way. Rather than seeing another franchisee set up in his attraction area, Monsieur COLLORAFI was forced to request on 16 December 1996, reluctantly, from the company MC DONALD'S that these two restaurants be allocated to him, which could make it possible to mitigate the catastrophe by achieving cost savings. (exhibit 4) After having met with a first refusal, he returned to the charge on 10 January 199/ (exhibit 6) and finally succeeded in obtaining a third restaurant at ANTIBES OUEST, while Monsieur Patrick GILAKSKI opened at the same time a restaurant at VALLAURIS, located in the catchment area of Monsieur COLLORAFI's first restaurant (and much closer to it than to the one operated at CANNES by Monsieur GILARSKI) (exhibits 6, 7, 8, 39). In the document given to him beforehand, a turnover of 13,000,000 francs was mentioned for the first year (thirteen million francs) and thereafter an average of 14,235,000 francs (fourteen million two hundred and thirty-five thousand francs), with a cash flow of 426,000 francs for the first year (four hundred and twenty-six thousand francs) and of 957,000 francs on average (nine hundred and fifty-seven thousand francs) (exhibit As regards the contract, Monsieur COLLORAFI had to pass under the caudine forks of MC DONALD'S, the conditions being markedly harsher than for the 1st contract with the Company SEBOL, the proportional royalty being 15% with a monthly minimum of 100,000 francs excl. VAT, a service fee of 5% and an advertising contribution fee of 4.5% (exhibit 14)- Thus, for the three restaurants, Monsieur COLLORAFI had to pay, through his companies, to the company MC DONALD'S, whatever the turnover, a minimum monthly royalty of: 150,000 francs excl. VAT for the company SEBOL • 245,000 francs excl. VAT for the company B et o (reduced to 180,000 francs excl. VAT for the year 1997 only) 100,000 francs excl. VAT for the company LES PINS, that is 430,000 francs excl. VAT for 1997 (four hundred and thirty thousand francs) 495,000 francs excl. VAT of normal monthly royalties, that is • 5,940,000 francs excl. VAT per year Given the losses recorded since 9 October 1996 in the two companies SEBOL and B & 0, Monsieur COLLORAFI no longer had the possibility of investing and therefore of signing a STRAIGHT-type contract by which the franchisee must invest in the fittings and furniture. On 30 April (two days after the opening of the restaurant), he therefore accepted bilaterally the proposal of the company MC DONALD'S to sign a BFL contract, that is giving him an option until 31 December 1997 to buy back the BEL contract by realising his personal assets, without recourse to any loan, to finance 25 $ of the cost of the furniture, equipment and opening costs, that is about 800,000 francs. (exhibit 14) It should be noted that this contract governs the parties, even if the final contract, signed the same day, is dated only 18 June 1997, the date on which the company MC DONALD'S obtained from the President of the Regional Court of GRASSE the derogation provided for by the law of 20 March 1956. (exhibit 14) It may be noted that the contract of 30 April 1997 is two days later than the opening of the ANTIBES OUEST restaurant by the company LES PINS (an opening which took place on the same day as that of the VALLAURIS restaurant by Monsieur GILARSKI). The negative impact for the company SEBOL from 16 December 1996 (exhibit 4), and 10 January 1997 (exhibit 6) and 17 January 1997 (exhibit 237) as well as throughout 1997, Monsieur COLLORAFI continued to alert the company MC DONALD'S to the considerable impact caused by these openings all while requesting compensation, the principle of which was accepted and notified on 12 February 1997. (exhibit 8) Seeing these promises not materialise, Monsieur COLLORAFI had his Counsel write on February 1997 to Monsieur Denis HENNEQUIN, CEO of the company MC DONALD'S (exhibit 9) The latter did not reply directly but replied to Monsieur COLLORAFI on 27 March 1997 with a dismissal (exhibits 10 and 11), save for a later modest reduction of the royalty of B & O (exhibit 94), making no valid proposal to help Monsieur COLLORAFI out of the situation into which the company MC DONALD'S had plunged him. Still having no news, Monsieur COLLORAFI asked his Counsel to write again to Monsieur Denis HENNEQUIN on 5 May 1995 (exhibit 15) No reply was given and, tired of the struggle, Monsieur COLLORAFI decided to summon the company MC DONALD'S for compensation on 26 1997, in the name of the companies SEBOL and B & O alone and in his own name. The latter attempted to exclude him from the seminar gathering all the franchisees (exhibit 18) Instead of following up on its promise of 12 February and meeting Monsieur COLLORAFI's expectations, the company MC DONALD'S hardened its position and issued a series of formal notices on 22 July (exhibit 19) to which Monsieur Bernard COLLORAFI replied on 1 August 1997 by stating: "you are perfectly aware of the catastrophic situation of these two restaurants. Since October 1996, the date on which you imposed several openings of the chain which competed with my restaurants" (exhibit 20) on 1 September 1997, he asked MC DONALD'S to: "kindly let me know, as soon as you are able, the financial, human and promotional means you intend to put into action so that I can achieve these objectives" (exhibit 21) On 23 September he followed up with MC DONALD'S (exhibit 22) - His letter crossed with that of the company MC DONALD'S, which expressed surprise at the financial and cash-flow difficulties of the three companies, whereas it knows the results weekly (exhibit 49) On 3 October 1997, Mr COLLORAFI alerted MC DONALD'S again (exhibit 50) On 9 October 1997, he confirmed that it was impossible for him to pay a certain number of direct debits (exhibit 51) On 20 October 1997 the tone hardened again, Monsieur HENNEQUIN speaking of hostile behaviour and "vague and unfounded reproaches" (exhibit 52) On 30 October 1997, Monsieur COLLORAFI recalled: "If I chose the judicial route, it is because you left me no choice. I remind you of the meeting you granted me on 8 January 1997 in PARIS where for those 20 minutes you stuck to your position, telling me ironically that you did not care about my personal situation and my commitments and that you did not feel responsible for the future of my staff (exhibit 53) On 27 November, the company MC DONALD'S sent formal notices invoking the termination clause. From 1 December 1997 Monsieur COLLORAFI indicated perfectly both through our exchange of correspondence and through the operating accounts that I send you regularly the reasons for this late payment. for a year I have been alerting you to the extremely serious consequences of your openings in all directions, impacting my first restaurant managed by the company SEBOL and now the restaurant managed by the company If you are perfectly entitled to open whichever restaurant you please, you must still take the precaution that these openings do not cause harm to existing franchisees and in any case that you take into account the impacts of the restaurants in and adding: "to your formal notices based on the contracts you made me sign, I will raise the exception non adimpleti contracti, a principle of French law which allows each contracting party not to perform its obligations when the other contracting party is itself in breach" (exhibit 99) He reiterated his letter on 26 December 1997 (exhibit 88) The impact for the company SEBOL of the opening of this third restaurant was considerable, since turnover of 27,973,000 francs in 1993 (down to 24,750,000 francs in 1995, down to 18,300,000 francs in 1996) fell to 11,500,000 francs in 1997, the first five months of 1998 confirming this spectacular fall in turnover (1,300,660 francs for five months) (exhibits 23-24). It should be noted that no study on the nevertheless foreseeable impact that the opening of this restaurant would have on the first two restaurants had been carried out by the company MC DONALD'S. However, a study entitled "DATA FOR THE SETTING UP OF A MC DONALD'S RESTAURANT IN ANTIBES" dated March 1995 was handed over only a few days before the opening of ANTIBES OUEST (LES PINS) and states that the restaurant managed by the company SEBOL in the CARREFOUR shopping centre is indicated as a competitor located in zone 2 (exhibit 110 bis page 17) The negative impact for the Company B et O Likewise, the company B et o which had opened in October 1996, immediately suffered a strong impact from the opening of ANTIBES OUEST and VALLAURIS (- 35% against forecasts). In the end, the turnover of the three restaurants slightly exceeded in 1997 the turnover achieved by the company SEBOL (nearly 28,000,000 francs) since it is 32,826,246 francs, but represents only 65% of the forecasts drawn up by the company Mc DONALD'S (50,000,000 francs for the three restaurants, taking into account a financial year of eight months for ANTIBES OUEST) and achieved by 102 employees in the three restaurants (to be compared with the 55 employees employed by the company SEBOL before the opening of the B et O restaurant, in October 1996)- 1-3 4 The positive impact for the company MC DONALD'S demonstrates its bad faith The decision to open the two restaurants of ANTIBES OUEST and VALLAURIS, a unilateral decision taken by MC DONALD'S despite the impact already suffered by the company SEBOL from the opening of the second restaurant at ANTIBES NORD, is a unilateral decision taken in bad faith to the detriment of its franchisee, Monsieur COLLORAFI and his companies SEBOL and B et O. Alongside the harm suffered by Monsieur Bernard COLLORAFI and his companies, the minimum royalties should be compared, which went from less than 150,000 francs excl. VAT per month for the company SEBOI, to 495,000 francs excl. VAT per month for the three companies (reduced to 420,000 francs for the year 1997 only). Thus, on the one hand the objectives assigned to the three companies in turnover as in profitability are not achieved, and by a wide margin. on the other hand, the maintenance or slight increase in the overall turnover of the three restaurants comes at the expense of the profitability of the franchised companies, and enables MC DONALD'S to collect three times more royalties, while Monsieur COLLORAFI and his three companies are running at a loss. Moreover, it may be stressed that for 30 francs the Company MC DONALD'S for the three restaurants, it has already recovered 42,540,000 francs by way of royalties (37,182,487 francs from the company SEBOI, 3,809,982 francs from the company B & O, 1,547,427 francs from the company LES PINS - exhibit 116). The economics of the lease-management agreement While in all the documents of the company MC DONALD'S partnership is extolled and while it is a contract concluded in the common interest of the parties, the perverse consequences of the lease-management agreement should be stressed when it is performed in bad faith by the franchisor, who takes decisions in his own interest, which the franchisee cannot suspect when he signs a contract. The franchisee is in reality a false franchisee since he is a lease-manager for a term of twenty years, and at the end of the contract, he has accumulated nothing since he is not the owner of the business, whereas for the fittings and the equipment, (as in this case where Monsieur COLLORAFI invested 11,000,000 francs of which a sum of 2,600,000 francs is still owed to the banks) and that if he is late in paying the royalties, he can be evicted, like Monsieur system necessarily implies the making of profits by the lease-manager which, added to the normal remuneration for the work of the franchisee, allows him to obtain a return that must be equivalent to that which a franchisee owning his business would obtain. This supposes that the contract is performed in good faith, which, obviously, was not the case. It should also be noted: - that although the spirit of partnership is extolled in all the DONALD'S documents, and although it is a matter of the common interest of the parties, in accordance with article 1 of the law of 31 December 1989, this partnership is in reality one-way, since in its application, it is distorted! - if the franchisee's turnover increases, the franchisor benefits through the royalty (of 12% for the company SEBOL, 20 $ for the company B et 0, 15% for the company LES PINS, added to the service fee of 5%), with a flat-rate minimum of 495,000 francs excl. VAT per month. - If the franchisee's turnover falls, his profitability decreases and may even become negative (which is the case here) while this situation has no impact on MC DONALD'S since the franchisor has provided a flat-rate minimum royalty of 495,000 francs excl. VAT per month for the three restaurants, that is 5,940,000 francs excl. VAT per year. Thus, all the risks are borne by the franchisee who, if he is below the threshold, always pays the same royalty for a turnover that may be declining, and which leads him to no longer be able to pay the royalty (this is what happened in this case). To maintain, as the company MC DONALD'S did at first instance, that Monsieur COLLORAFI has a consolidated turnover of 31,000,000 francs higher than the previous turnover is absurd and ineffective since if he had achieved this turnover with his sole restaurant of the company SEBOL, he would have paid an annual royalty of: 31,000,000 x 12 = 3,720,000 francs excl. VAT whereas he has to pay a minimum annual royalty of 5,940,000 francs, that is a difference of 2,220,000 francs excl. VAT per year (except for the year 1997 where the difference is 1,440,000 francs excl. VAT). That is to say that, in this particularly unequal partnership, the company MC DONALD'S has an interest in opening a maximum of restaurants in order to collect the maximum of royalties by means of the minimum royalty, which moreover enables it to eliminate external competition, which it boasts about in its submissions at first instance (elimination of BURGER KING) • The strategy of the Company MC DONALD'S and its effects It should be stressed: - that on the one hand MC DONALD'S franchisees and in particular those of the region in which Monsieur Bernard COLLORAFI is located, have seen their turnovers steadily decline, the average turnover having evolved as follows: - 17,000,000 francs in 1993 - 18,000,000 francs in 1994 - 18,600,000 francs in 1995 - 15,600,000 francs in 1996 - 14,800,000 francs in 1997, (report of the Consultant, Robert GANDUR, (exhibit 53, page 6) that on the other hand the French turnover of the MC DONALD'S network, in own operation as in lease-management, went from 5.4 billion in 1994 to 8.4 billion in 1997 (an increase of 55%) (exhibit 63, page 5) and to nearly 9 billion in 1998, and this with a profit of 208 million in 1998, (solely on the royalties received from franchisees) up 33% on 1997 (exhibits 236 and 237) This increase is due to the increase in the number of restaurants which went from 354 to more than 700 (that is more than 100%) and not to the increase in the turnover of the franchised restaurants which, on the contrary, is falling. It therefore appears that the strategy of the company MC DONALD'S is to cap the turnovers of franchisees by refusing to let them open new restaurants or by doing so reluctantly (which would enable its franchisees to amortise their costs) while the Company MC DONALD'S itself continues to improve its performance both in terms of turnover (+ 50%) and in terms of the profits obtained, in particular through the minimum royalty. The risks are therefore for the franchisees and the profit always for the franchisor, whatever the hypothesis Where is the contract concluded in the common interest of the parties provided for by the law of 31 December 1989 expressly applicable in this case? Where is the much-vaunted partnership? (exhibits 34 to 38 and 40) In the event of a new restaurant opening, even "impacting" the area of the first restaurant, the profits of the company MC DONALD' S are as follows: - the new flat-rate minimum royalty which is added to the first - the proportional royalties which will be paid subsequently in the event the minimum is exceeded. On the other hand, the franchisee is condemned to open new restaurants, failing which he will lose turnover and profitability, going from a substantial profit to a loss (turnover of 27,000,000 francs down to 11,500,000 francs for the company SEBOL and average profits of more than 1,000,000 francs become He is thus forced to open new restaurants so as not to let them be opened by other franchisees or by the company MC DONALD'S itself. This is how Monsieur COLLORAFI asked to open the restaurant of and proposed to his colleague DAUFES, MC DONALD'S franchisee of GRASSE who was selling his point of sale, to take over his restaurant from him, subject to the agreement of the company MC DONALD'S to which the copy of the letter was sent, specifying: "in order to bear all the overheads" (opposing exhibit 74) The unilateral setting-up policy of the company MC DONALD'S therefore forces franchisees and in this case Monsieur COLLORAFI into a headlong rush forward. The franchisee has no alternatives other than the following two: - either he accepts the opening in his catchment area by other franchisees or by the company MC DONALD'S and his turnover falls below the break-even threshold, leads to losses and the filing for insolvency; - or he follows the policy decided by MC DONALD'S hoping that the increase in staff costs and investments in particular will be offset by a substantial increase in turnover, with a correlative and proportional reduction in costs. This is what Monsieur COLLORAFI hoped for and what he was unable to achieve, having been helped in no way by the company MC DONALD'S which seemed to have decided on his ousting from the network and a quasi-free takeover of his restaurants. IT SHOULD INDEED BE KEPT IN MIND THAT IF MONSIEUR COLLORAFI HAD LET ANOTHER FRANCHISEE OR MC DONALD'S OPEN IN HIS PLACE THE ANTIBES NORD RESTAURANT {COMPANY B ET O) OR ANTIBES OUEST (COMPANY LES PINS), HE WOULD NOT HAVE RECOVERED THE TURNOVER OF THESE RESTAURANTS AND WOULD THUS HAVE SEEN HIS TOTAL TURNOVER FOR HIS SOLE RESTAURANT GO FROM 27,000,000 FRANCS IN 1993 THEN 24,000,000 FRANCS IN 11,500,000 FRANCS IN 1997 (5,516,331 FRANCS IN THE 1ST HALF AND 6,059,510 FRANCS IN THE ZiNE QUARTER (pages 42 and 55 of the expert report) LI WHICH FELL FURTHER IN 1998 | 4,300,660 FRANCS FOR THE FIRST FIVE MONTHS) AND 11,021,240 francs FOR THE WHOLE OF 1998 14,826,733 FRANCS IN THE 1* HALF AND 6,194,50% FRANCS IN THE 2ND HALF) (pages 55 to 59 of the expert report) The dispute between Monsieur COLLORAFI and his companies and MC DONALD'S FRANCE is not a solitary battle. Several MC DONALD'S franchisees have gone to court because of the financial conditions imposed by the franchisor which, through its policy of massive expansion, generates a significant fall in franchisees' profits, parallel to an increase in the royalties collected by the company MC DONALD'S. On the development policy of the company MC DONALD'S It should be stressed that the company MC DONALD'S controls the entire operation and is the sole decision-maker as to the choice of the location of the site. - It is generally the owner of the land (purchase of the land eighteen months to two years before the opening) - it is always the owner of the buildings (filing of the building permit several months before the opening) - it is always the owner of the business (entrusted under lease- management) - In practice, franchisees are informed only a few weeks before the opening and the Company MC DONALD'S "calmly chooses the lucky one who will be authorised to open". It is an abuse of language that the company MC DONALD'S was able to write in its submissions at first instance that: "Monsieur COLLORAFI wished to take this restaurant on lease- séranec satisfaction airs ste atee parte o aciers l densification wished to continue to participate in MC DONALD'S restaurants by asking to become lease-manager of a business at ANTIBES OUEST." These assertions are odious insofar as the policy decided unilaterally by the company MC DONALD'S forced Monsieur COLLORAFI to open restaurants on pain of disappearing. The counterpart should have been, had the company MC DONALD'S respected the rule of partnership, common interest and good faith that it advocates, a significant reduction in the royalties which it had moreover promised in its of 12 February 1997. the repeated requests during nothing of the kind took place, symbolic of 562,434 francs for the year 1997, largely offset by the franchisee's taking on of an invoice for works and by an increase in the base rent of 10,000 francs per month for 19 years (that is 228 months x 10,000 = 2,280,000 francs over the 19 years of the contract remaining to run, an increase of 345%! Finally, if it is true - and this point will be returned to later - that the does not formally provide for territorial exclusivity, it is no less the case that the company MC DONALD'S is bound to leave each restaurant an attraction area defined in the market study of the Pre-contractual Information Document (supplied by MC DONALD'S) enabling it to achieve the forecast turnover drawn up by MC DONALD'S before each opening. As will be indicated below, the opening of a new restaurant in this attraction area - a fortiori in the primary attraction area - is a serious fault causing very significant harm to the appellants. On Monsieur COLLORAFI's profit The tables commented on in the submissions made at first instance by the company MC DONALD'S are eloquent, even though they take care not to mention the year 1997, a catastrophic year for Monsieur COLLORAFI's restaurants since the impact of the new openings, which began at the end of 1996, continued throughout the whole of 1997 and beyond in 1998. (opposing exhibit) these tables show that over eleven years of activity, only the years 1991 to 1995, that is five years, produced a significant net result corresponding to the promises contained in the documents supplied before the signing of the contract by MC DONALD'S. the results of the first two years (1987 and 1988) were largely negative (- 2,500,000 francs), (exhibit 45) • the next two years were very slightly positive (300,000 francs per year) only the years 1991 to 1995 generated significant results, Monsieur COLLORAFI however receiving his first dividends only in 1993 out of part of the 1992 profits since losses of 2,500,000 francs had had to be absorbed. • the year 1996 saw a significant deterioration • as for the year 1997 which does not appear, and for good reason, in the tables supplied by the company MC DONALD'S, it is very largely negative, as will be the years 1987 and 1988 (see exhibit 45). The tables appearing in the submissions at first instance of the company MC DONALD'S must be supplemented as follows: LOSSES OF THE THREE COMPANIES FROM 1996 TO 1998 (in francs) SEBOL ... B& 0 .. LES PINS ... - 1,226,477 TOTAL - 2,695,122 Total ... That is: (1997 SEBOI carry back, which reduces the losses but which are only repayable 5 years later and weigh on cash flow.) - 1,399,276 - 4,860,539 - 5,210,539 The cumulative losses for the three companies are therefore - 5,210,539 francs The annual net results for the 11 years of operation are therefore negative, Since the cumulative profits were 6,785,000 francs. And the cumulative losses of - 2,555,000 (years 1987 and 1988) - 5,510,539 francs (years 1996 to 1998) That is a total net loss of .. 980,000 francs That is to say that after the company MC DONALD'S investment EVERYTHING THAT MONSIEUR COLLORAFI HAD EARNED WITH THE COMPANY SÉBOT UNTIL 1996 WAS LOST IN LESS THAN TWO YEARS It is true that Monsieur COLLORAFI received dividends for the 5 good years, but these are offset by the losses of the first 4 years and the last years and he very largely reinvested them in the other companies. His remuneration of about 50,000 francs per month therefore provided him with the bulk of his resources to live on. net remuneration before tax of about 5,740,000 francs for eleven years less social security contributions of 1,000,000 francs makes a net remuneration before tax of 4,740,000 francs, that is 430,000 francs net before tax, (lower than or at most equal to the average remuneration of MC DONALD'S franchisees having a restaurant with a similar turnover). Closing remarks on the facts In an attempt to counter a contribution made by Monsieur Robert GANDUR, court-appointed Expert, at the request of the appellants (exhibit 63), the company MC DONALD'S asked Monsieur Alain HUSSON DUMOUTIERS, former court-appointed Expert, to produce a report (exhibit 89). one can read on page 43 "SHOPPING CENTRE SA SEBOL (see photos) This restaurant of the MALI type is old. It offers 230 seats inside, 80 outside. 9 tills are noted at the counter. It is more than ten years old and the decoration shows it. The state of cleanliness leaves something to be desired but this is probably due to the current circumstances. The restaurant is now outside the main flows of customer traffic. Indeed, until 1995 entrance no. 1, 50 metres from the MC DONALD'S, was the only entrance of the shopping centre onto the car park which has about 500 spaces. Since 1995, more than 2,700 additional spaces have been created on the other side of the CARREFOUR. The main entrances (number 2 and number 3) are served by these very large car parks. The link between the two areas (the old one and the new one) is delicate: a single cramped route. People present in or accessing the large car park cannot see the MC DONALD'S. Moreover, there is no MC DONALD'S advertising on site. "This restaurant is currently marginalised both by its appearance and by its location" Thus, the company MC DONALD'S signs twenty-year contracts, and does not react when economic circumstances change, or rather leaves the franchisee to "fend for himself" and opens restaurants to counter him, while it continues to collect, as in this case for the company SEBOL, rents of 1,800,000 francs, while paying the company CARREFOUR, its landlord, 450,000 francs, thereby making at the expense of its franchisee a super profit of 1,350,000 francs. RECALL OF THE PROCEEDINGS THE PROCEDURAL INITIATIVE OF THE APPELLANTS It was in these circumstances that, faced with the refusal of the company MC DONALD to make any offer to compensate the companies SEBOL, B et 0, and Monsieur Bernard COLLORAFI, and/or to find a solution to the problem of the "degeneration of the restaurant located in the CARREFOUR shopping centre, the companies SEBOL, B et O and Monsieur Bernard COLLORAFI took the initiative of summoning on 26 June 1997 the company MC DONALD'S before the Commercial Court of PARIS in order to have it "declared and ruled that the company MC DONALD'S did not perform its obligations in good faith - order it consequently to compensate the claimants for the harm suffered by paying • the company SEBOL the sum of 30,000,000 francs subject to increase • the company B et O the sum of 5,000,000 francs subject to increase • Monsieur Bernard COLLORAFI the sum of 10,330,000 francs subject to increase • as well as 50,000 francs to each under article 700 of the NCPC" THE FORMAL NOTICES OF THE Co. MC DONALD'S AND THE SUMMARY PROCEEDINGS While the proceedings were under way, the company MC DONALD'S, which had not yet filed submissions, thought it necessary to give formal notice on 27 November 1997 by registered letters with acknowledgment of receipt to the 3 companies to pay the overdue royalties (exhibits 15, 16 and 17 of the opponent) and, faced with the manifest impossibility for them of paying these royalties, which the company MC DONALD'S knew perfectly well since it receives the accounts monthly, it: - on 2 January 1998 terminated the contracts (exhibits 43, of the opponent) - on 9 January 1998 applied to the President of the Commercial Court of PARIS sitting in summary proceedings (*référé*) for the purposes of: "- ordering the companies SEBOI and B et 0, and the EURL LES PINS to cease all acts of operation of the fast-food business belonging to the company MC DONALD'S FRANCE and ordering the eviction of the said companies from the premises • enjoining the said companies to hand over to the owner of the businesses a certain amount of equipment, the list of staff, the employment contracts, etc." By an order delivered on 15 January 1998, the President of the Commercial Court of PARIS: - held that there was no ground for summary proceedings and - dismissed the application of the company MC DONALD'S, which lodged an appeal, the case being pending before the Court. THE JUDGMENT OF THE COMMERCIAL COURT Following the summary proceedings hearing, the company MC DONALD'S submitted a petition to the President of the Commercial Court of PARIS, to summon the company EURL LES PINS on the same basis, requesting an order joining these proceedings with the case between the company MC DONALD'S and Monsieur COLLORAFI, the companies SEBOL and B et O The latter asked the Court to record their agreement to the joinder of the two cases. The Court delivered on 18 May 1998 the judgment recalled above. ENFORCEMENT PROCEEDINGS It should be stressed that following the judgment delivered by the Commercial Court of PARIS on 18 May 1998, the companies SEBOL, B&O and LES PINS as well as Monsieur Bernard COLLORAFI immediately lodged an appeal by deed of 26 May 1998 and summoned before the First President of the Court of Appeal of PARIS to obtain the suspension of the provisional enforcement of the judgment of 18 May 1998. Although the appellants showed the utmost diligence, they have been faced since that date with genuine judicial harassment. By deed of 27 May 1998, Maître ZONINO, bailiff, served and issued an order to vacate the premises and to hand over the keys. At the same time, the company MC DONALD'S had an attachment-assignment (*saisie attribution*) carried out through SOCIÉTÉ GÉNÉRALE on Monsieur COLLORAFI's personal accounts, an attachment at the CARPA on the funds it believed to be held by Maître Jean-Paul CLÉMENT, Counsel for the appellants as well as an attachment on the accounts of the three companies at CRÉDIT DU NORD d'ANTIBES, while a judicial mortgage had been taken on Monsieur COLLORAFI's house by the company MC DONALD'S. Whereas it is the constant practice that when the First President of the Court of Appeal is seised of summary proceedings (*référé*) for suspension of provisional enforcement, the beneficiary of the judgment awaits the decision, the company MC DONALD'S issued a new order to the three companies and to Monsieur COLLORAFI on 4 June 1998, to clear out and to hand over the keys on 10 June 1998. The next day, 5 June, the appellants applied to the enforcement judge of the TGI of GRASSE for the first available hearing, that is Tuesday 9 June 1998 at 2 pm. The enforcement judge of the TGI of GRASSE gave her decision immediately, refusing the request to stay the proceedings on the ground that the First President of the Court of Appeal of PARIS was seised. From the next morning, 10 June at 8 am, Maître TOUBOUL, Avoué at the Court of AIX EN PROVENCE, lodged an appeal on behalf of the appellants and had the company MC DONALD'S summoned through the pursuing bailiff, Maître ZONINO, to obtain from the First President of the Court of Appeal of AIX EN PROVENCE a stay of execution. Despite this service made at 11 am on site in the MC DONALD'S restaurant of the shopping centre and a summons to Maître ZONINO, the pursuing bailiff, accompanied by the Police Commissioner, they vacate the premises and suspend the execution, in breach of article 31 of the decree of 31 July 1992 as amended. The company MC DONALD'S thus wished, by this action, to place the First President of the Court of Appeal of PARIS before a fait accompli. Thus the First President of the Court of Appeal of PARIS, in an order delivered on 3 July 1998, faced with the manifestly excessive consequences of the enforcement of the decision, suspended provisional enforcement as regards the monetary awards, being able only to refuse reinstatement, the physical enforcement and eviction having been carried out on 10 June 1998. This eviction, carried out in inadmissible conditions, aggravated the harm to Monsieur COLLORAFI and his three companies, depriving them of their working tool which now benefits entirely the company MC DONALD'S which recovers almost free of charge restaurants in the process of recovery, whether the fittings paid for by Monsieur COLORAFI, specially for the companies SEBOL and B et O, or the staff trained by him over the years. The recovery by the company MC DONALD'S of the working tool deprives Monsieur and Madame COLLORAFI from now on of all resources and also prevents them from setting up again, their assets being unduly held by the company MC DONALD'S. This is what the Court perfectly understood in ordering, by judgment delivered on 9 December 1998, an expert examination and in not accepting the simplistic reasoning of the company MC DONALD'S. "The delay in the payment of royalties (about six to eight months) leads to a formal notice which, if not complied with within the time limits, leads to automatic termination, and eviction". the appellants seek compensation for all of this harm. This is the subject of the present dispute. THE CONCLUSIONS OF THE EXPERTS The answers given by the Experts to the questions put by the Court fully corroborate the thesis that Monsieur Bernard COLLORAFI had maintained in his own name and in the name of his three companies SEBOL, B & 0 and LES PINS, namely in particular: - that even a significant reduction in his salary and dividends would not have made it possible to halt the catastrophe - that his management is not the cause of this catastrophe, the comparisons, both with the MC DONALD'S own restaurants and with franchisees, corroborating the numerous documents already submitted to the Court, showing that throughout the term of the contract, Monsieur COLLORAFI was congratulated by MC DONALD'S on his excellent management - that the losses generated and the impossibility of paying the royalties to the company MC DONALD'S are the consequence of the unilateral decisions of Mc DONALD'S to open restaurants at ANTIBES and at CANNES without a prior impact study Question 1: IMPACT OF A SALARY REDUCTION AND OF THE PAYMENT OF DIVIDENDS INTO THE CURRENT ACCOUNT ON THE PROFITABILITY OF THE COMPANIES SEBOL and B & 0 IN 1996 AND 1997 State whether, if Monsieur COLLORAFI had halved his salary in 1995 and 1996 and had left in the current account all or part of the dividends received in those years in the company SEBOL and if in the company B & O (the Court having no information on the salaries possibly received by Monsieur COLLORAFI and his wife from that company) he had made a contribution to the current account in 1997, this would not have enabled these two companies to reach the annual break-even point which is the turnover that balances the operation, in 1996 and 1997. 3-11 Conclusions of the Experts: Subject to what will be specified in paragraph 3-12, Monsieur COLORAFI and the company SEBOL ask the Court to take note that, as regards the company SEBOL, the Experts clearly stated that: "The measures studied (halving of Monsieur COLLORAFI's salary, reduction of 2,250,000 francs in the dividends paid in 1995 and 1996) would have slowed but not prevented the deterioration of SEBOL's profitability and their impact is not significant enough for the company SEBOL to reach the break-even point on 30 June 1997". The experts adding: "It should however be noted that the total of the restatements over the three years, that is 935,000 francs, is greater than SEBOL's loss at 30 June 1997 of 847,000 francs." However, as will be indicated in paragraph 3-12, the Experts forget to recall that the company B & 0 made losses of - 1,721,000 francs at 30 June 1997. it emerges from the table that the impact of a policy of contributions to the current account on the annual break-even point is not significant, given the small saving in financial costs to be compared with the losses recorded by B & 0 these A contribution to the current account would have the sole effect of reducing the level of losses in the situation of B & 0, but would not have enabled this company to reach the annual break-even point in 1996 and 1997." Likewise, the experts state, as regards the additional cash linked to the retention of part of the dividends (para. 4-] 4) thus obtained proves to merely offset the late payment as at 31 December 1997 by Monsieur COLLORAFI to MC DONALD'S (amount of the royalties unpaid at 31 December 1997 for the three companies = 3,905,000 francs). At the rate of the losses recorded by the SEBOL and B & 0 group over the first six months of 1997 (1,802,000 francs before restatement) this additional cash would not have enabled Monsieur COLLORAFI to cope with the subsequent losses". Subject to what is going to be indicated in para. 3-1 2, the conclusion of the experts on the first question raised by the Court may be noted: "The restatements carried out amount cumulatively over 2 1/2 years to 1,213,000 francs, that is to say substantially the same level as the losses recorded over the same period. However, the measures envisaged would only have delayed the deterioration of the profitability of the two restaurants. Substantially more than the measures mentioned would be needed for these two companies to durably regain their break-even point. Whereas B & 0 records a loss of 955,000 francs at 30 June the measures mentioned allow an improvement of only 180,000 francs (saving in financial costs) for 1997. It may also be noted that a total elimination of Monsieur COLLORAFI's salary in 1997 would not have enabled SEBOL to reach the break-even point at 30 June 1997. Moreover, in terms of cash, the fact for Monsieur COLLORAFI of reducing his dividends and halving his salary would have generated additional cash which appears nevertheless limited, given the losses recorded by the companies SEBOL and B & 0. " 3-12 - Observations of Monsieur COLLORAFI It should however be noted that the Experts answered strictly the questions put by the court as was their duty, and consequently it is necessary to add a certain number of observations Amount of the losses The amount of the losses recorded at 30 June 1997 by the two companies SEBOL and B a O cannot be isolated. They are at 30 June 1997 (date of the summons!): SEBOL ... B & O... 847,000 francs (page 27 of the report) - 1,721,000 francs (page 28 of the report) That is in total = 2,568,000 francs It should therefore have been specified on page 27 of the report that the total of the restatements over the three years (that is 935,000 francs) is very much lower than the cumulative losses of SEBOL and B & O at 30 June 1997, that is 2,568,000 francs. Personal operation by the lease-manager. Under the terms of the contract, the lease-manager, in this case Monsieur COLLORAFI, must operate the business personally and devote all his time and all his efforts to his business (article 4 of the contract: contract intuitu personnae). Likewise, article 11 provides: "during the term stipulated herein, the licensee may not directly or indirectly, without having obtained the prior written consent of the licensor, engage in an activity." In article 13 of the licence contract, DILIGENT MANAGEMENT, one can read: "the licensee shall personally devote all his working time and all efforts to the development and operation of the restaurant". one therefore does not see how, obliged to work full time in his restaurant open seven days a week and twenty hours a day, he could have found another resource. He needed his salary. Salary of the lease-managers Monsieur COLLORAFI's salary is equivalent to that which the Experts were able to observe in other MC DONAID'S restaurants or in the one mentioned in the judgment of the Commercial Court of VERSAILLES in the TOURIS case, and there was moreover no reason in 1995 to reduce Monsieur COLLORAFI's salary, since he was still making 1,000,000 francs of profits Distribution of dividends in 1995 It should first be recalled that the first dividends were distributed as follows: • year 1992: 400,000 francs decision of the General Meeting of 19 April 1993 • year 1993: 500,000 francs decision of the General Meeting of 25 March 1994 • year 1994: 1,850,000 francs (of which 950,000 francs balance of 1993) decision of the General Meeting, 10 April 1995 On that date (10 April 1995), neither Monsieur COLLORAFI, nor even MC DONALD'S could have foreseen that the opening of QUICK would cause such a significant fall in turnover (unless one imagines that MC DONALD'S, while foreseeing it, took good care not to share its doubts with Monsieur COLLORAFI). There was no valid reason in 1995 (on 10 April) to refrain from distributing the dividends, or from reducing salaries. It was therefore normal for Monsieur COLLORAFI to receive this dividend which represents part of the accumulation of the years 1993 and 1994, the first years in which Monsieur COLLORAFI at last saw a return on investment. He cannot be reproached "for not having waited" to see what the opening of the competing restaurant QUICK would cause. Moreover, it should be strongly stressed that the opening of the QUICK restaurant caused only a fall in turnover of about 3,000,000 francs (- 11%) and that the profit was still, for 1995, despite of a competitor, 1,000,000 francs. The impact of the QUICK opening is therefore incomparable with that which would be caused by the opening of ANTIBES NORD first, and of ANTIBES OUEST and VALLAURIS afterwards. Distribution of dividends in 1996 Consequently, the Court must consider in this perspective only the payment of the 1995 dividends in the amount of 1,000,000 francs and decided by the General Meeting of 29 April 1996. Yet on that date (29 April 1996) Monsieur COLLORAFI did not yet know that he would be led to open ANTIBES NORD (Company B & O) since this opening would follow the negotiations with MC DONALD'S which would be entered into in July and August 1996 for the opening on 9 October 1996. Furthermore, the sum of 1,000,000 francs of dividends, decided by the General Meeting of 29 April 1995, was immediately reinvested in & o in the amount of 800,000 francs (ANTIBES NORD) and subsequently in the company LES PINS, at the beginning of 1997 in the amount of 50,000 francs. It may finally be recalled that if he indeed no longer had liquidity to invest in the restaurant imposed on him (company LES PINS, ANTIBES OUEST) he had arranged to be able, in the last quarter of 1997, thanks to the sale of a real-estate asset on 18 October 1997, (exhibits 136 to 138 ) to be in a position to invest in his ANTIBES OUEST point of sale by converting the BFL contract into a STRAIGHT contract, thus keeping the commitments made on 30 April 1997, by exercising the option before 31 December 1997, as planned Only the formal notice to pay the royalties, on pain of termination, of 27 November 1997, prevented him from carrying out this operation. As the Experts also point out, salaries and dividends are subject to income tax. How could Monsieur COLLORAFI have become the purchaser of ANTIBES OUEST where he had to invest 800,000 francs, had he left his dividends in the company SEBOL? The STRAIGHT contract had been envisaged at the beginning of 1997 and it is because losses began to accumulate in the first quarter of 1997 that the BFL solution was finally proposed on 30 April 1997, it being understood that it was only a postponement of investment, Monsieur COLLORAFI having absolutely to find 800,000 francs (which he did by selling his real-estate asset). It may be stressed that the company MC DONALD'S is entirely in control of its siting decisions, planning them several years in advance, whereas the franchisee has to adapt to a situation imposed on him without notice: The company MC DONALD'S can at the same time impose on its franchisees the opening of two or three restaurants, and at the same time demand imperatively the payment of royalties. To conclude on this point, it should be specified that if in 1996 the company SEBOL still made 352,000 francs of profits, no dividend was paid in 1997 and for good reason: there was no cash left While one fully understands that the Court may have posed as a working hypothesis the question of the reduction or elimination of dividends accompanied by the reduction of the salary, the fact remains that one must place oneself back in the periods considered. (June 1995, when QUICK is not open) (June 1996: the decision to open ANTIBES NORD has not been taken), in order to understand Monsieur COLLORAFI's psychology. It is tempting to reconstruct the situation in 1999, but nothing could have allowed Monsieur COLLORAFI to decide: In 1995 to halve his salary and to reduce or eliminate the distribution of his dividends on 10 April 1995, when he had no knowledge of the opening of QUICK and that, had he had it, he could not have imagined that it would have a major impact prompting him to take this measure. In 1996, (29 April 1996) to continue to halve his salary and to eliminate the distribution of dividends, when ANTIBES NORD had not yet been offered to him. As soon as this restaurant was offered to him, he immediately allocated his dividends to the investment it being specified that the forecast operating account did not indicate to Monsieur COLLORAFI that an additional contribution to the current account of 750,000 francs was needed. On the inequality of the parties Monsieur COLLORAFI is reproached with having, at a time when he could not know the future, taken the fair return on investment to which he was entitled, by distributing dividends to himself, while the company MC DONALD'S makes considerably larger profits. profits come in particular from the nature of the returns on investments. franchisees and in particular Monsieur COLLORAFI invest in equipment and depreciation reduces its value, bringing it to zero after a few years. The return on investment is therefore found in the dividends that the franchisee recovers each year to ensure his development, whereas his salary obviously pays for the work he does every day to manage the restaurants and is not a return on investment. On the side of the company MC DONALD'S, it can be said that it invests in premises which are amortised, but do not depreciate, quite the contrary, with time, since they gain in value (see the report of the company SEPI, page 39) Thus, at ANTIBES, by amortising the entirety of its investments, that is 000 francs (SEPT report, appendix 1-1), the company MC DONALD'S benefits from a tax reduction of 38,363,000 francs x 36% (corporation tax which it will not pay) That is 13,810,680 francs. This tax saving, a financial profit, adds to its profits, and is added to the royalties (economic profit) which, by means of minimum royalties, collected, the franchised business, its turnover or its profitability. One may take as an example the ANTIBES 1 site (company SEBOL) where the company MC DONALD'S continues to collect a rent of 1,800,000 francs per year, although it has already amortised half of its investment (4,451,000 francs out of an investment of 8,902,000 francs, SEPI report, page 39), whereas during that time, Monsieur COLLORAFI is making considerable losses. Finally, it may be stressed that the company MC DONALD'S for its part borrows 100% for its own investments, whereas it requires from its franchisees 25% of equity. Creation of a holding company As regards the allusion made by the Experts at the bottom of page 30 to the possible creation of a holding company, it should be stressed that the company MC DONALD'S clearly states in its contracts that the franchisee must make a personal contribution made up of equity to invest in a new restaurant, and that this contribution may not consist of a loan (see contract letter of 30 April 1997 for LES PINS - exhibit 14), Pre-contractual information document (exhibit 110), BSL contract brochure (exhibit If the dividends had been put into a holding company, they could not have been used for the personal contributions of Monsieur COLLORAII, and he would not have been able to acquire ANTIBES NORD and ANTIBES OUEST, which would have put him in an even more catastrophic situation. Moreover, the company MC DONALD'S carried out two financial audits before each restaurant opening, and did not advise Monsieur COLLORAFI to create a holding company. Furthermore, the company MC DONALD'S advised against the creation of economic entities recognition of the economic and social unit, as had happened in LYON (see judgment of the Tribunal d'instance of LYON of 1st July 1993 (exhibit 231) Subject to these observations, the conclusions of the Experts must be approved. 2nd question: AMENDMENT TO THE LEASE-MANAGEMENT AGREEMENT OF THE COMPANY B & O of 10 JUNE 1997 State whether the amendment to the contract of the aforementioned company B & O was made at the right time or too late and was sufficient if he in fact received any from that company reduced his salary in the company B & conclusion of the Experts The conclusion of the Experts is eloquent: "Despite the amendment made retrospectively with effect from 1 January 1997, the company B & O records a loss at 30 June of 955,000 francs". taking into account that part of Monsieur COLLORAFI's salary is ultimately re-invoiced to the company B & 0, the half-yearly amount 220,000 francs and "the saving generated by the halving of the salary in B & O therefore comes out at 30 June 1997 at 110,000 francs, that is at a level lower than the loss of 955,000 francs. Despite the impact of the salary reduction, the amendment appears insufficient, given the losses made by B & 0 from 1 January to 30 June 1997 (that is independently of the losses that may be attributed to the opening of the ANTIBES OUEST and VALLAURIS restaurants on 1 July 1997)." Observations of Monsieur COLLORAFI one may add on reading the table appearing on page 42 of the Experts' report that, if the rate of rents applied for the two restaurants had been 12% and after halving Monsieur COLLORAFI's salary, the saving made is 608,000 francs and that there still results a loss of - 930,538 francs (line F 36 of the table) In order to achieve profitability, there would therefore have had to be a rent of: 2,091,154 francs (line F 4) - 1,538,310 francs (line F 32) = 553,044 for six months, that is 1,106,088 francs per year. According to the report of the consultant Robert GANDUR supplied to the Court, (page 30, last line) the amount of the rents to obtain a result profit) had to be reduced to 252,000 francs + 794,000 francs = 1,046,000 francs, this assessment thus being confirmed by the Experts. Moreover, the analysis of the accounts of other lease-managers handed confidentially to the Experts shows the discrimination of which the company MC DONALD'S was guilty with regard to Monsieur COLLORAFI. In the 3rd paragraph of page 54 of the expert report, one can read: "the MALL-type restaurant compared with the CARREFOUR shopping centre bore royalties high, but given the financial difficulties, MC DONALD'S reduced this royalty rate by 50 }." It could therefore have done so for Monsieur COLLORAFI. Quite the contrary, from the opening of the two restaurants (ANTIBES NORD and ANTIBES OUEST) Monsieur COLLORAFI had to pay a minimum annual royalty of 5,940,000 francs (reduced merely by 562,000 francs) at the annual royalty of 3,720,000 francs (31,000,000 francs x 12) had he had a single restaurant. The mere opening of the two restaurants enables MC DONALD'S to collect a sum of 2,220,000 francs of additional royalties. There are therefore double standards in the MC DONALD'S network. Moreover, as regards the rent of ANTIBES NORD, the fictitious discount of 562,000 francs is offset by the taking on by Monsieur COLLORAFI of a new invoice for works, in the amount of 111,652.09 francs incl. VAT (exhibit not provided for in the pre-contractual information document (submission no. 3, page 4) The rent was calculated on the basis of investments by the company MC DONALD'S of 20,342,000 francs, whereas the SEPT report indicates (page 37) that this amount is only 17,636,000 francs. enabled the company MC DONALD'S to take an additional margin of 9,000,000 francs of rent for the remaining term of the contract (submission no. 3, page 4). if MC DONALD'S "in a great gesture of apparent generosity" reduces the rent by 562,000 francs for a single year, it hastens to increase it by 10,000 francs from 1998, which would have enabled it to collect over 19 years the sum of: 228 x 10,000 = 2,280,000 francs. 3rd question: ANALYSIS OF A TRANSFER OF FIXED COSTS FROM SEBOL TO B & O State whether the opening of the ANTIBES NORD restaurant made it possible to partially transfer fixed costs from the company SEBOL to the company B & 0, as Monsieur GANDUR asserts in his annual report drawn up at the request of Monsieur COLLORAFI (see page 24) Conclusions of the Experts It should be recalled that Monsieur Robert GANDUR, court-appointed Expert who had been asked for an amicable expert report, had, quite objectively, calculated the saving in fixed costs achieved in 1996 and 1997 by the company SÉBOL as a result of the opening of the company B & O The experts, like him, conclude that: "The opening of the ANTIBES NORD restaurant (B & O) made it possible to transfer fixed costs from the company SEBOL to the company B & O in the amount of about 2,000,000 francs on an annual basis. As a result, the marginal cost of opening a restaurant is relatively low." Observations of Monsieur COLLORAFI it can therefore be concluded that if Monsieur COLLORAFI had not opened, through the company B & 0 (ANTIBES NORD) the catastrophe would have been even worse, since the opening of ANTIBES NORD made it possible to transfer costs. However, although this operation reduced the cost of the second restaurant, it was largely insufficient, given the other incompressible costs generated by the opening of a new restaurant, in particular as regards the amount of the rents. 4th question: SUMMARY OF THE OPERATION OF THE COMPANIES SEBOI AND B & O CONSIDERED AS AN ECONOMIC UNIT That finally, the said court-appointed experts will be invited to present a summary of the operation of the companies SEBOL and B & O, considered as an economic unit owing to the common interest of the parties in seeing them operate as such for the period concerned. Conclusions of the Experts The conclusions of the experts are eloquent- "The restatements made on Monsieur COLLORAFI's salary and on the financial costs (see Question 1) would only reduce the losses of the SEBOL - B & 0 group, which would remain loss-making. The study of the operation of the companies SEBOL and B & O indicates that the consolidated level of activity observed in 1997, although equivalent to that of 1995 for SEBOL, is not sufficient to offset the additional fixed costs inherent in the operation of two restaurants. The problem lies in the collapse of SEBOL's activity, which fell from 12,800,000 francs at 30 June 1995 to 9,500,000 francs at 30 June 1996, which is linked to the opening of the competing restaurant, QUICK. Thus a first communicating-vessels effect occurs at the expense of SEBOL as a result of this competition. By deciding to open a second restaurant, Mc DONALD'S carried out an effective counter-attack which enabled it to return in 1997 (30 June) to a level of activity for the two MC DONALD'S restaurants equivalent to that of 1995 (12,500,000 francs). Nevertheless the opening of this second restaurant ANTIBES NORD produced a second communicating-vessels effect, further reducing the level of activity of the restaurant CENTRE COMMERCIAL CARREFOUR (SEBOL) to 5,600,000 francs. In these conditions, even if, as we studied in response to question 3, the opening of a second restaurant has a lower cost (owing to the transfer of fixed costs it entails), it always occasions an additional amount of fixed costs which explains the significant losses (1,500,000 francs) recorded by the SEBOL - B & O group at 30 June 1997. in a way, Monsieur COLLORAFI. bore the brunt of this situation of economic warfare." These conclusions are eloquent, and must be adopted. Observations of Monsieur COLLORAFI It should however be added that the operation of the companies SEBOL and B & O considered as an economic unit would have been far better had the company MC DONALD'S adapted the minimum royalty to the situation of "economic warfare" It is not uninteresting to recall that for the company MC DONALD'S, the minimum royalty is directly linked to the cost of its investment (see the expert meeting minutes of 11 May 1999, page 4). The company MC DONALD'S first commits the real-estate investment, as well as the works and a few weeks before the opening of the site, when it begins to know the total amount of its investments, it determines the amount of the monthly rent to be paid by simply applying the rate of 1% + 15% margin (calculation identical for all sites). It then determines the turnover to be achieved to pay this rent, which is obviously taking things the wrong way round, but which reveals its aim. A return on investment is needed for the company MC DONALD'S, and the franchisee must manage to achieve the turnover that makes it possible to pay the royalty! The company MC DONALD'S thus gives the franchisee in the Pre-contractual information document a forecast operating account which enables him to commit on the strength of a sincere and truthful document (article 1 of the law of 31 December 1989) and which is therefore a contractual document. These documents which bear different names (exhibits 25, 26 and 12) are contractual. it was indeed Monsieur Brian GIBSON, at the time an executive at head office and who became a franchisee, who was Monsieur COLLORAFI's contact. On the opening of ANTIBES NORD, the company MC DONALD'S immediately knew the results, both of the company SEBOL whose turnover fell, and of the company ANTIBES NORD which did not reach, and by the turnover forecast in the forecast operating account and which is the basis of the minimum royalty. It should have immediately carried out a new market study to ensure the validity of the opening of ANTIBES OUEST and of VALLAURIS, and if it had carried out this study, it would certainly, barring fresh bad faith on its part, have decided to cancel or at the very least to postpone the opening of these two new restaurants. This opening only led to a further fall in turnover, of both the company SEBOL and the company B & 0. Thus, none of the restaurants concerned (CARREFOUR centre, ANTIBES NORD, ANTIBES OUEST and VALLAURIS) exceeded 50 to 60% of the forecast objectives. Incompetence or bad faith? The Court will choose. In any event, for MC DONALD'S, its investment must be repaid by the rent, irrespective of the franchisee achieving the turnover. If the turnover calculated to repay this rent is achieved, there is no problem. On the other hand, if the turnover is not achieved, the lease- manager encounters difficulties of profitability and cash flow The company MC DONALD'S thus favoured its own interest, wishing at all costs to pursue its development policy, in disregard of the interest of its franchisee and then to make its investments profitable, to the detriment of the profitability of the franchised companies. It is interesting to refer to submission no. 3 of the company MC DONALD'S (exhibit 3, page 1) where it calculates the turnover necessary to reach the break-even point of the ANTIBES restaurants, whose management by Monsieur COLLORAFI has always been monitored and approved, which is confirmed by the Experts. ANTIBES 1 (in francs) ANTIBES NORD (in francs) Break-even point … Turnover achieved in 1997 .. achieved in 1998 Forecast for 1999 11,498,727 (- 20%) 11,243,602 (- 22%) 11,168,000 (- 21%) 13,288,401 (- 18%) 13,536,823 (- 17%) 13,806,000 (- 15 3) it is the turnover achieved that is in question, and with the small increases (2 % per year for the two sites) it will take several years to reach the break-even points. Yet, on reaching the break-even point, Monsieur COLLORAFI would not yet have a return on investment whereas the company MC DONALD'S told the Experts at the meeting of 11 May 1999 (see minutes), that the return on investment of the lease-manager must be of the order of 35 to 40%. it may finally be stressed that from the opening of the competitor QUICK, Monsieur COLLORAFI undertook a series of economic measures intended to reduce costs. • reduction of staff by transfer, departure or reassignment • spreading of administrative costs • spreading of the costs of staff employed across several restaurants • spreading of joint advertising and promotions Moreover, Monsieur COLLORAFI carried out a very costly anti-competition plan in consultation with his regional adviser representing the company MC DONALD'S, to the detriment of profitability (exhibit 235) All this policy made it possible to reduce the impact of these openings and in particular of that of QUICK, since the year 1995 for the company SEBOL was still profitable to the extent of 1,000,000 francs and for 1996 to the extent of 358,000 francs and the cash position was plentiful, as the company MC DONALD'S stresses in its submissions of 15 January 1998, until the opening of ANTIBES NORD (cash of 1,300,000 francs in August 1996, that is just before the opening of ANTIBES NORD) - It may be concluded on this point that the company MC DONALD'S preferred to leave Monsieur COLLORAFI to react alone to this economic warfare (opening of QUICK) aggravated by the marginalisation of the first restaurant located in the CARREFOUR shopping centre, whereas the company MC DONALD'S gives its restaurants under lease-management for twenty years. 5th question: 3-5 ANALYSIS OF THE VIABILITY OF THE ANTIBES OUEST RESTAURANT AND OF THE POSSIBLE SYNERGIES OF AN ANTIBES OUEST - VALLAURIS GROUP State whether the new ANTIBES OUEST restaurant was viable in itself, or whether, since the company MC DONALD'S opened it at the same time as that of VALLAURIS, which is no coincidence, but shows that it had envisaged a synergy between these two restaurants, its profitability had not been assessed a priori within an ANTIBES OUEST - VALLAURIS group of which the company MC DONALD'S, contrary to what seems to have been its forecasts, entrusted the lease-management to two different persons - the ANTIBES OUEST restaurant being merely the complement of the "locomotive" VALLAURIS. Conclusion of the Experts On the viability of ANTIBES OUEST, the experts conclude: "As a result, the ANTIBES OUEST restaurant appears viable, if not in itself, at least within the group made up of the two other restaurants, CENTRE COMMERCIAL CARREFOUR and ANTIBES NORD, in any case without VALLAURIS". These conclusions must be adopted and confirm that Monsieur COLLORAFI particularly correspondence exchanged 1996 and early 1997) the award of the restaurant ANTIBES OUEST, naturally insofar as the decision to open the ANTIBES OUEST restaurant had been definitively and unilaterally taken by the company MC DONALD'S. Obviously, the wise course would have been for MC DONALD'S .. and above all for Monsieur COLLORAFI, to open neither ANTIBES OUEST nor VALLAURIS and to postpone to later this disastrous operation, (which remains so also for Monsieur COLLORAFI but also for the company MC DONALD'S which will continue to make losses in these two restaurants (directly or indirectly). However, on possible synergies between ANTIBES OUEST and VALLAURIS, the experts' conclusions cannot be fully endorsed. Indeed, when the experts say that ANTIBES OUEST and VALLAURIS are located more than 5 kilometres from each other and are not in the same catchment area, they make an error, all the more so as VALLAURIS is closer in kilometres and in time to ANTIBES OUEST than to CANNES managed by Monsieur GILARSKI to whom VALLAURIS was also entrusted. The synergy between the ANTIBES OUEST and VALLAURIS restaurants cannot be limited to the transfer of costs resulting from the operation of several restaurants. It is obvious that even if VALLAURIS is more loss-making, joint management within the COLLORAFI group would certainly have made it possible to improve overall management, which Monsieur GILARSKI, it seems, was unable to do. the Experts rightly note that VALLAURIS (opened on 28 April 1997, 10 for a figure same day as the ANTIBES OUEST restaurant and not in May 1997 for one and April 1997 for the other), had a result of - 1,476,123 francs for a turnover of 1,690,018 francs, (that is 33% loss) while ANTIBES OUEST had a less bad net result of - 429,415 francs for a turnover of 6,330,979 francs (that is 6 8). Neither ANTIBES OUEST nor VALLAURIS will be profitable in themselves for years and they should not have been opened, except to occupy the ground and counter the competition, which may be in the interest of the company MC DONALD'S which takes no risk and has its franchisees take them and who, for their part, have no interest in being associated, against their will, with this policy. Insofar as MC DONALD'S wanted at all costs (paid by Monsieur COLLORAFI!) to open these two restaurants, they should have been awarded to him, notably insofar as the opening of these two restaurants considerably impacted the ANTIBES I and ANTIBES NORD restaurants. 6th question: 3-6 ANALYSIS OF THE AWARD OF ANTIBES OUEST TO MONSIEUR COLLORAFI State whether, given the financial situation of the CARREFOUR - ANTIBES NORD group and the fact that Monsieur COLLORAFI claimed he could not finance the STRAIGHT LICENCE contract for ANTIBES OUEST, the company MC DONALD'S gave Monsieur COLLORAFI a poisoned gift, as he seems to claim, or whether on the contrary it wished to give him an additional chance to pull through. Conclusions of the Experts The experts rightly note that: "the opening of ANTIBES OUEST and of VALLAURIS was planned by MC DONALD'S independently of Monsieur COLLORAFI's situation and forms part of MC DONALD'S development policy (which was not contested by Monsieur COLLORAFI)" ... which is not entirely accurate. It should be noted that MC DONALD'S had undertaken to entrust the operation of these two restaurants to another of its franchisees (Monsieur GILLARSKI who had moreover been president of the company MC DONALD'S). In the face of Monsieur COLLORAFI's insistence, MC DONALD'S had agreed to award him one of the two restaurants. The opening of these two restaurants was of definite interest to franchisees. As we have seen, it is of interest to a franchisee to own several restaurants, insofar as the marginal cost of a new restaurant is low compared with that of a first restaurant. It would therefore have been natural for the opening of these two restaurants, without being competitors, but located in a nearby area, to be entrusted to Monsieur COLLORAFI. However, Mc DONALD'S justified this situation by invoking Monsieur COLLORAFI's difficult financial situation. Conclusion: in these conditions, this opening is neither a poisoned gift, nor an additional chance to pull through." Observations of Monsieur COLLORAFI These conclusions must on the whole be approved. One can first only refer to the appellants' earlier explanations, confirmed by the Experts. It is obvious that the two restaurants of ANTIBES OUEST and VALLAURIS should never have been opened so hastily and without a serious market study, but that insofar as they were opened, they should have been entrusted to Monsieur COLLORAFI, the experts specifying: "It would have been natural for the opening of these two restaurants, without being competitors but located in a nearby area, to be entrusted to Monsieur COLLORAFI". The future proved that Monsieur COLLORAFI managed his ANTIBES OUEST restaurant better than Monsieur GILARSKI his VALLAURIS restaurant and it is very likely that joint management of the two restaurants (and even of the four restaurants) would have improved the overall situation. Moreover, figures show that both the turnover of ANTIBES 1 and that of VALLAURIS comes at the expense of and by nibbling away at the restaurants of ANTIBES 1 and ANTIBES OUEST. On the other hand, the Experts merely state that: "MC DONALD'S justified this situation by invoking Monsieur COLLORAFI's difficult financial situation." It should be recalled that Monsieur COLLORAFI, at the beginning of 199%, faced with the irrevocable decision of the company MC DONALD'S to open ANTIBES OUEST and VALLAURIS, had planned to invest in these restaurants. Unfortunately, the STRAIGHT contract had to be converted into a BFL contract insofar as Monsieur COLLORAFI did not have the necessary sums, since from October 1996 he had begun to make losses as a result of the opening of ANTIBES NORD. Thus, the company MC DONALD'S on 30 April 1997 awarded the ANTIBES OUEST restaurant to Monsieur COLLORAFT on condition that he made the investment before the end of 1997, which was done by the sale of a real-estate asset (moreover sold below its price). It may be noted that the company MC DONALD'S granted to the VALLAURIS restaurant managed by Monsieur GILARSKI aid of 1,600,000 francs (that is 25% of its turnover - see balance sheet and income statements supplied by the company MC DONALD'S and our submission no. 3, page 6) could have been awarded to Monsieur COLLORAFI. it is true that he had never been vice-president of MC DONALD'S! In any event, the award of VALLAURIS to Monsieur COLLORAFI, even without a contribution of 1,600,000 francs from the company MC DONALD'S as specified above, would have enabled him to make a saving of more than 750 francs on the management of the four restaurants and would thus have helped to reduce the losses. the financial difficulties invoked by the company MC DONALD'S are only insidious excuses to justify its refusal to see Monsieur COLLORAI'I pull through. After having plunged Monsieur COLLORAFI into a difficult situation, the company MC DONALD'S should have, in the spirit of the partnership that it advocates elsewhere, helped Monsieur by every means, assuming its responsibilities, by helping him substantially as it did for other franchisees. 7th question: ANALYSIS OF THE CONSISTENCY OF THE OVERALL FINANCIAL MANAGEMENT OF MONSIEUR COLLORAFI IN THE 3 COMPANIES UNTIL 1 JANUARY 1998 considering that the experts must give their opinion on the consistency of the overall financial management of Monsieur COLLORAFI in the three companies until 1 January 1998. Conclusions of the Experts "The previous analyses seem first of all to show that the collapse of SEBOL's result is more linked to the fall in activity than to the remuneration policy of Monsieur COLORAF! (dividends and salaries). The situation of B & o seems to be due to the competitive context that characterises it (a competing QUICK restaurant is located opposite ANTIBES NORD) • above all, it should be noted that in the second half of 1997 (management by Monsieur COLLORAFI) ANTIBES NORD shows a positive net operating result of 222,000 francs (higher than that achieved in the second half of 1998 (management by Mc DONALD'S ANTIBES restaurant which is negative - 318,000 francs) The evolution of the situation of the company LES PINS indicates a recovery since the company makes a profit in the second half of 1998 of 130,000 francs. concerning Monsieur COLLORAFI's distribution policy, it appears that it has a limited impact on the profitability of the restaurants that he operates insofar as financial costs are not high (57,000 francs in 1996, 200,000 francs in 1997), relative to the losses recorded by the companies (414,000 francs 695,000 francs in 1997). A more consistent distribution policy would only have slowed the collapse of the profitability of the restaurants (by avoiding recourse to debt and thus reducing financial costs)." one may however be surprised by Monsieur COLLORAFI's decision to distribute so many dividends, notably in 1996, at a time when the financial situation of Monsieur COLLORAPI's restaurants was beginning to deteriorate. Concerning Monsieur COLLORAFI's management, the comparison with the management of other lease-managers does not allow a conclusion of poor management on his part. It appears that the economic context and the structure of Monsieur COLLORAFI's restaurants contribute more to explaining the difficult financial situation. Likewise, the comparison between the management of the three restaurants of Monsieur COLLORAFI and that of MAR does not allow any to be drawn Consequently, the overall financial management of Monsieur COLLORAFI in the three companies until 1 January 1998, does not seem to explain the poor results of these companies." observations of Monsieur COLLORAFI The following should be retained from these conclusions: - that Monsieur COLLORAFI's overall financial management is irreproachable and cannot explain the poor results of his companies. - that it is as good as that of the average lease-manager - that it is better than that of the company MC DONALD'S in its restaurants and in particular by the company MAR, a subsidiary of MC DONALD'S which manages the former restaurants of Monsieur COLLORAF - that finally, Monsieur COLLORAFI's distribution policy has a limited impact on the profitability of the restaurants. however, the experts' "surprise" cannot be accepted as to the policy of distribution of dividends by Monsieur COLLORAFI, a reply has been given above on this point. At the time of these decisions, in 1995, Monsieur COLLORAFI was not aware of the opening of the QUICK restaurant and at the very least, could not suspect the impact. In 1996, he knew that this impact was ultimately limited, and it was therefore that he decided to distribute dividends, moment the opening of B & O not yet being definitively scheduled. As regards management, the Experts confirm the documents that had been submitted to the Court, in which one could note the contradictory sentences written by the company MC DONALD'S before and after the eviction of Monsieur COLLORAFI. Before 10 June 1998, "Bravo for your professionalism. It is pleasing to see that years of hard work will be rewarded the ANTIBES teams show great professionalism. I send you my congratulations on the outstanding store award. Congratulations for your diligence in matters of cleanliness and results obtained. The level of cleanliness during operation is excellent the work done by Patricia (relations officer) is exceptional The seriousness brought to the work of the hostesses should be commended The good spirit prevailing in the management team is to be noted The management ratios reach honourable levels The results obtained are close to the average, with a turnover You have been able to transpose in a concrete manner your experience of managing MC DONALD'S restaurants The management team is well structured and sufficient in number" etc. After the eviction, on 10 June 1998: "Monsieur COLLORAFI did not behave as a responsible business owner. The financial of Monsieur COLLORAFI are essentially to be sought in his levels of management He is markedly less efficient than the other lease-managers The management team is too heavy." The expert report perfectly confirms Monsieur COLLORAFI's good management and in particular the correspondence sent, the visit reports, the maximum scores awarded to Monsieur COLLORAFI's restaurants, which underlines the bad faith of the company MC DONALD'S subsequently contradicting its repeated expressions of satisfaction, for the needs of its argument in the proceedings. On the comparison of management with the other lease-managers The experts conclude that Monsieur COLLORAFI's management is equivalent to that of the other lease-managers, despite an average turnover of 11,500,000 francs against 14,500,000 francs nationally. contrary to what the company MC DONALD'S maintains, the Experts find that Monsieur COLLORAFI had management costs identical to those of the other operations, and in particular a salary corresponding to the situation of the other franchisees (pages 53 and 54) It is interesting to refer to the minutes of the FINANCE committee of the company MC DONALD'S dated 9 September 1999 (exhibit no. 230) The rent rates applied in 1998 are compared (page 8) all restaurants combined, the overall rate must be 13.4% for a turnover of 14,300 000 francs, that is for an average turnover of 11.5 million, (Monsieur COLIORAFI's restaurants), the average rent rate should have been about 10 %. Yet, the actual rent rates at ANTIBES are: SEBOL ... B & 0 .. LES PINS ... 15.88 14.96 18.28 22.80 In these conditions, it is obvious that the businesses managed by Monsieur COLLORAFI were burdened with these abusive rates and could not be profitable. The turnovers achieved were largely insufficient to bear such rent charges and fixed costs in order to make them operate. On the comparison of the management of Monsieur COLLORAFI with the management of the company MC DONALD'S The experts conclude that Monsieur COLLORAFI's management is as good as the management of MC DONALD'S, even better (2nd paragraph of the expert report, page 57). it may be specified that the average of all restaurants managed directly by the company MC DONALD'S is 17.7 million francs, that is 23.70% more than the franchisee average which is 14,300,000 francs. one can read in paragraph 3-1 of the minutes of the FINANCE committee of 9 September 1999 the following sentence: MC DONALD'S, the result is just break-even"-(exhibit 230) It is thus noted that with restaurants which are close to 17,000,000 francs, the company MC DONALD'S does not make money, whereas it wants to make it believed that at ANTIBES it was possible to make restaurants profitable with an average of 11,500,000 francs. All this is confirmed by the figures taken from the accounts filed with the Commercial Court by the subsidiary MC DONALD'S France RESTAURANTS which has direct management of 45 units in the Paris region (exhibit no. 236) It is noted indeed in 1998 that with a turnover of 791,000,000 francs (that is 23 times that achieved by Monsieur COLTORAFI) and 45 restaurants with an average of 17,700,000 francs (COLLORAFI: 11,500,000 francs) it loses 30,300,000 francs, that is six times the loss of the ANTIBES restaurants in twenty months. (October 1996-June 1998) The company MC DONALD'S is itself incapable of managing restaurants with turnovers 50% higher than those of Monsieur COLLORAFI, finds itself more at ease in its business-leasing company where it has achieved in three years more than 500,000,000 francs of To do so, it suffices for it to open points of sale and to take from the franchisees' accounts the rents, irrespective of the turnover turnover achieved. It is sure of making its investments profitable and of making a profit, whatever the consequences for the franchisees. Thus, the latter finds himself in a situation of economic dependence. This explains why the company MC DONALD'S, when it took over the restaurants of Monsieur COLLORAFI and had them managed by the company MAR, found itself faced with the same difficulties: insufficient turnover and weak growth. It moreover acknowledged in its brief no. 4 page 3 that the restaurants whose figures were given confidentially at the last expert appointment were in reality difficult to compare, one of the groups of restaurants managed by a franchisee generating significant losses and the company MAR, subsidiary of MC DONALD' managing the former restaurants of Monsieur COLLORAFI, generating more than 2,000,000 francs of losses per year, since one must add to the results the administrative costs of 517,000 francs monthly per restaurant, according to the company MC DONALD'S. In summary, the company MC DONALD'S did not do its duty as franchisor, being interested solely in its own development, to the detriment of the business of Monsieur COLLORAFI and wants to make him bear responsibility for the poor results of the ANTIBES restaurants. The projections of turnover intended to pay rents were never reached, which calls into question the professionalism of the company MC DONALD'S. one cannot ask an operator to reinvest his dividends to pay ensure the return on investments of the company MC DONALD'S, if one puts forward the excuse of these financial difficulties for its own investments. In this case, Monsieur COLLORAFI took his dividends to ensure his own investments and he reinvested. The argument according to which Monsieur COLLORAFI should have left his dividends in the company SEBOL to support the financial difficulties due to the shortfall in turnover is contrary to the spirit of sound management. These measures would have had only a limited effect by using the own funds to the detriment of the investments. This proves even truer now that the results years of operation, are still loss-making million per year and for a few years). (more two 8th question: ANALYSIS OF THE ACCOUNTS OF SEBOL, B & O and LES PINS FROM 1 JANUARY 1998 TO 10 JUNE 1998 Considering that the experts will give their opinion on the accounts of the companies SEBOL, B & O and LES PINS, between 1 January 1998 and 10 June 1998, the date of their eviction. 3B8 Conclusions of the Experts After drawing up tables, the Experts first state: "In view of these results, notably the levels of profits after controllable expenses, and of administrative costs, Monsieur COLLORAFI's management does not appear inconsistent"• The experts' conclusion is again eloquent: "The analysis of the companies' accounts at 30 June 1998 does not show management by Monsieur COLLORAFI different from that of the previous half-year, and the results obtained by MAR in the second half of 1998 do not indicate a significant improvement in management levels. Moreover, as was mentioned, the accounts for the 1st half of 1998 include for the month of June 1998 only the operation of MAR (20 days), thus making the comparison less relevant. It is nevertheless interesting to note that for the companies, the 2nd half of 1998 corresponds to a clear increase in activity and a reduction in losses. This observation points towards an improvement in the financial situation of the companies over time, although apart from the ANTIBES OUEST restaurant (LES PINS) the operation of the two other restaurants remains loss-making. that the overall net result of the restaurants amounts in 1997 to _ 2,700,000 francs, it is - 1,400,000 francs in 1998. Consequently, this analysis highlights the fact that in a context of improving profitability of the restaurants, efforts on the part of the parties (adjustment of royalties and financial advice from MC DONALD'S to better control fixed costs, awaiting an improvement in the situation of these restaurants, accepting a temporary loss of remuneration on the part of Monsieur COLLORAFI) could have enabled the companies to get through the difficult patch caused by the opening of a QUICK restaurant in July and by the strategic reply of MC DONALD'S (opening of ANTIBES NORD in October 1996). The analysis of the situations of the three companies concerned, closed by the firm PRICE WATERHOUSE COOPERS on 1 March 1999 leads to the following findings: The equity of SEBOL, B & O and LES PINS is negative for a total amount of 4,073,258 francs. Monsieur COLLORAFI withdrew almost all of the current accounts in these companies. recognition of all the consequences of the decisions of the Commercial Court of PARIS of 18 May 1998 would have led to situations showing cumulative negative equity of 13 9/1 $62 francs, analysed as follows: • cumulative equity ... • tangible fixed assets still shown on the balance sheet ... • occupation indemnities net of royalties .. - 4,073,258 francs - 4,528,333 francs - 5,369,961 francs. Observations of Monsieur COLLORAFI The Experts thus confirm what Monsieur COLLORAFI has always asserted: his management, approved and praised by the company MC DONALD'S, continued until the end to be excellent • that the operation by the company MC DONALD'S remains loss-making, even if with time it improves yet, the Experts recall that in a submission no. 2 dated 12 April 1999, Monsieur COLLORAFI specified that the second half of 1998 (management by MAR) had a reduction in the cost of food, in energy expenses, better staff performance, indicating restatements made to render management levels comparable, all the more so since traditionally the second half of the year is a period strong in turnover. it may also be noted that the Experts stress that part of the parties (adjustment of royalties and financial advice from the company MC DONALD'S) to better control fixed costs, awaiting an improvement in the situation of the restaurants, by accepting a temporary loss of remuneration on the part of Monsieur COLLORAFI should have made it possible for the companies to get through the difficult period caused by the opening of a QUICK restaurant in July 1995 and by the strategic reply of MC DONALD'S (opening of ANTIBES NORD in a reply has been given on the effort made by Monsieur COLLORAFI who reinvests his dividends and it should be retained that, according to the Experts MC DONALD'S should have adjusted the royalties and given financial advice to better control fixed costs. it may be recalled that the report of the financial review at the end of 1997 by MC DONALD'S indicates excellent levels of service quality and cleanliness (even exceptional for the three restaurants) which clearly demonstrates the management efforts made by Monsieur COLLORAFI. As regards the accounting audit, it should be specified that Monsieur COLLORAFI hastened to have his chartered accountants draw up, in less than fifteen days, the statements of the two most critical restaurants (SEBOL and B & O) The company MC DONALD'S, under the futile pretext that the statement of the company LES PINS, which had just opened, was missing (and of which MC DONALD'S moreover held the operating account every month) postponed this audit in order to create an incident, because it wanted at all costs to terminate the contracts. 9th question: INCREASE IN CUMULATIVE ROYALTIES, COMPARED WITH A REDUCTION IN ADMINISTRATIVE COSTS The Court's question was as follows: considering that, on the other hand, the experts must give their opinion on another assertion contained in the document: Objective no. 3: make the restaurants profitable With the spreading of administrative costs over several restaurants we will reduce administrative costs. That in other words, the experts must state whether the increase in the cumulative royalties of the three restaurants can be offset by the reduction in their administrative costs. Conclusions of the Experts Here again, the experts' conclusion is extremely clear: "the increase in the cumulative royalties of the three restaurants could not be offset by the reduction in their administrative costs. profitability. As a result, PINS which generates a level of profitability higher than the spreading of fixed costs benefits from 5 15. and B & O. SEBOL suffers from successive reorganisations caused by the collapse of its level of activity. B & O, which was opened to counter the opening of a restaurant under the competing sign QUICK, suffers from this competitive context and does not generate a sufficient level of activity to be profitable. Comparing the increase in the cumulative royalties with the reduction in administrative costs linked to the opening of a new restaurant also leads to comparing the franchisee's returns on investment with those of MC DONALD'S. In a submission dated 31 August 1999, Maître CLÉMENT indicates, by calculating the return on investment (R O I) of each of the three restaurants concerned and of MC DONALD'S, that the franchisee is much more penalised by a difficult economic context than MC DONAID'S. insofar as the franchisee's R O I depends on the result of his restaurant, in a context of loss, the is far from reaching his R O I objectives (between 30 and 40%). Insofar as the return on investment of the company MC DONALD'S depends on the royalties it receives from its franchisees and on the fact that a minimum royalty is established, disconnected from the activity of the restaurants, MC DONALD'S bears the difficult situations of its franchisees less harshly. As a result, the appellants consider that there is no equitable sharing of financial difficulties between MC DONALD'S and the franchisees. However, as was seen in the analysis of the income statements of a franchisee's restaurant, (see Question 7 on the comparison COLLORAFI AVERAGE LEASE-MANAGER) and as was noted for the ANTIBES NORD restaurant (see Question 2) it happens that MC DONALD'S offers an adjustment of royalties when a franchisee encounters financial difficulties linked to a difficult economic context. Nevertheless, it is recalled that both MC DONALD'S and a franchisee are independent entrepreneurs who must manage the economic risk linked to the operation of their restaurant. Maître CLEMENT indicates in a submission of 4 October 1999 (given the date of this submission, after the date set for filing this report, it could not give rise to a reply submission from Maître LELOUP) that MC DONALD'S looked into the case of town-centre restaurants (store) which showed levels of profitability lower than those of the average of in-store restaurants. As indicated in the minutes (see appendix to this submission) of the MC DONALD'S financial committee dated 15 September 1999, MC DONALD'S set up a sliding-scale system which takes into account the operating conditions, negatively affecting the profitability of the town-centre restaurants concerned, so that the latter never generate negative cash flow. 3-92 Observations of Monsieur COLLORAFI It may thus be retained that: the increase in the cumulative royalties of the three restaurants cannot offset the reduction in costs, the turnover being insufficient. SEBOL suffers from the successive reorganisations caused by the collapse of its level of activity. MC DONALD'S returns on investment are guaranteed, since linked to the investments, whereas the franchisee's return on investment is not guaranteed since it is linked to turnover • that the company MC DONALD'S accepts adjustments of royalties when a franchisee encounters difficulties (1,600, 000 francs for Monsieur GILARSKI at VALLAURIS) whereas practically nothing is granted to Monsieur COLLORAFI. Moreover, it is interesting to look at the document entitled "minutes of the RENTS Committee of 16 September 1997" which seems to be a reaction to the litigation action of Monsieur COLLORAFI. (exhibit 234) • annualisation of the BASE RENT (page 1) The rent is brought down to the percentage of annual turnover and does not take account of the base rent (with retroactive effect from 1 January Thus, in 1997, had this text been applied, the company SEBOL would have had to pay a rent of 12% on 11, 654,000 francs of turnover, that is 1,398,481 francs instead of 1,800,000 francs. with the calculation on the • minimum base royalty, that is a saving of 400,000 francs sliding scale (page 1-2) This measure, complex in its application, allows the many restaurants that do not achieve the forecast turnovers to get by, by having a rent adapted to their turnover. one can read (page 5; paragraph 3-3) that the operator must not dip into his own pocket to repay the loans (rents, for their part, must be paid first) "the sliding scale avoids the franchisee having to intervene again with own funds to meet bank repayments. It should be recalled that unless there is a personal guarantee (which Mc DONALD'S strongly advises against) the debts are those of the operating company and not those of the franchisee". Whereas the Company MC DONALD'S wanted Monsieur COLLORAFI to put back all the dividends he had received to pay the rents or repay the bank loans, instead of investing in the new sites opened in his catchment area, and to fulfil his role as a responsible business owner, in this document the company MC DONALD'S anticipates and strongly recommends to the franchisee not to give his personal guarantee to the banks. In the event of bad business, as is the case for Monsieur COLLORAFI or Monsieur de TOURIS, the investments fall into the lap of the company MC DONALD'S and the banks holding claims of 3 to 4,000,000 francs find themselves facing moribund companies and ruined franchisees who have not given their guarantee. One also discovers the clever mechanism devised by the company MC DONALD'S. In 1998, the assets of the company MC DONALD'S amount in France to the sum of 5,352,000,000 francs. (exhibit 1, thus enabling it to achieve a tax saving of 5,352,000,000 francs x 36 (corporation tax) = 1,926,720,000 francs (that is 2 billion rounded) While the company MC DONALD'S opens restaurants, increases its assets, Monsieur COLLORAFI should, according to it, • leave the dividends in the companies to pay the rents • reduce or even eliminate his salary • reduce his wife's salary below the SMIC • sell all his assets to reinvest them in his restaurants • take on heavy debt in order to be tied to the system so that, in a state of complete economic dependence, he ends up completely ruined and indebted, the company MC DONALD'S collecting Monsieur COLLORAFI's assets. Procedure for new sites one learns again in this document that henceforth franchisees will give their opinion on the opening of new restaurants on their market, contrary to what happened until the end of 1997 and to what happened in the present case where the company MC DONALD'S decided unilaterally 10th question: EFFECT OF THE AWARD OF ANTIBES OUEST ON THE MINIMUM BREAK-EVEN THRESHOLDS Considering finally that in this application document of the companies SEBOI and B & 0 Monsieur COLLORAFI announced as one of his four objectives: objective no. 2: increase in turnover Our current concern is to increase turnover very quickly to reach the minimum break-even thresholds; that consequently, the company MC DONALD'S must explain according to what precise calculations it thought that by awarding the ANTIBES OUEST restaurant to Monsieur COLLORAFI, it would enable him to reach his objective no. 2 Conclusions of the Experts The experts note that: "MC DONALD'S answers this question (see Submission of Maître LELOUP dated 5 July 1999) by providing the elements for estimating the turnover of a restaurant that is about to open. "Turnover depends in particular on the "capture rate", that is the number of potential transactions of the site, which depends on various elements (characteristics of the population, restaurant, competition, etc.). estimate is then analysed. moreover, as indicated in the submission, the estimate in value of turnover is linked to the take-away sales rate which benefits from a VAT rate of 5.5% (against 20.5% for on-site consumers). the submission thus explains the method used to estimate the turnover potential of a restaurant, it does not indicate in detail the precise calculations that were applied to the ANTIBES OUEST restaurant to estimate the number of potential transactions and the take-away sales rate. Mc DONALD'S invokes, to justify its refusal, reasons of confidentiality." Observations of Monsieur COLLORAFI muted and chosen words, the Messieurs Experts state that the company MC DONALD'S "fudged the issue" and did not answer the precise question put to it by the Court. Indeed, the Court wanted to know very precisely what real and adapted calculations for the sites the company MC DONALD'S had made in awarding the ANTIBES OUEST restaurant to Monsieur COLLORAFI, that is whether it had elements enabling it to say • on the one hand that the restaurant is profitable • on the other hand that this would improve Monsieur COLLORAFI's situation (objective no. 2: increase in turnover . to reach the minimum break-even thresholds) It may therefore be noted that the company MC DONALD'S showed a remarkable levity, • by deciding unilaterally on the opening of ANTIBES OUEST, as of VALLAURIS • without studying the impacts on the ANTIBES 1 and ANTIBES NORD restaurants • without calculating the profitability for the operators (whether Monsieur COLLORAFI or Monsieur GILARSKI) or else, its only thought was to have Monsieur COLLORAFI bear the teething troubles, to pick the ripe fruit a few months later, since it was impossible for Monsieur COLLORAFI to pull through on his own. 11th question: 3-11 The Court asked Monsieur COLLORAFI to conclude on the following point: why, although he signed the lease-management agreement of the ANTIBES OUEST restaurant on 18 June 1997, he summoned the company MC DONALD'S for payment of damages and interest on 26 June following It should first be answered to the court that the contract, although it was dated 18 June 1997 by the company MC DONALD'S, was in reality concluded on 30 April 1997, two days after the opening of the ANTIBES OUEST restaurant by the company LES PINS. Indeed, in the contract letter of 30 April 1997 by which are decided (a posteriori two days after the opening) the conditions of the opening of ANTIBES OUEST, it is stated: "We have therefore concluded together this day a lease- management agreement concerning the restaurant business operated at 32, avenue de Cannes." This is moreover admitted by the company MC DONALD'S which in its submissions before the Commercial Court of PARIS dated 15 January 1998, writes on page 5: "The lease contract granted by MC DONALD'S France to Monsieur COLLORAFI for a third business was therefore signed on 30 April 1997 for the ANTIBES OUEST restaurant." There was therefore on that date agreement on the thing and on the price, on the nature of the contract and the reciprocal obligations of the parties. However, the contract could not be dated 30 April, since the company MC DONALD'S had to obtain the order authorising it to derogate from the time limit provided for by article 4 of the law of 20 March 1956 on lease- management. That order having been signed on 18 June 1997, the contract could only be dated the same day or a later date (exhibit 227) Monsieur COLLORAFI had taken responsibilities, and there was no question of going back on the terms of the contract he had signed on 30 April 1997, and which he moreover no longer had in his possession. To explain to the Court why Monsieur COLLORAFI and the companies SEBOL, B & O (to the exclusion of the company LES PINS) summoned the company MC DONALD'S on 18 June 1997 for compensation and not for termination, it suffices obviously to refer to all of the explanations that have just been given. One may however recall the correspondence exchanged from the end of 1996 until June 1997, both between the parties Counsel for Monsieur COLLORAFI, Maître Jean-Paul CLÉMENT on two occasions, and the company MC DONALD'S- In June 1997, that is a few weeks after the opening of ANTIBES OUEST and of VALLAURIS, • the fall in the turnover of the companies SEBOL and B •& O became more pronounced seriously - - the company LES PINS for its part is very far from having the forecast monthly average (it will be in one year only 660,000 francs per month instead of the 1,100,000 francs forecast in the business plan) However, it is obvious that the summons aims to obtain compensation for the harm to the company SEBOL as a result of the successive opening of ANTIBES NORD, ANTIBES OUEST and VALLAURIS the harm suffered by the company B & 0 as a result of the opening of the restaurants of ANTIBES OUEST and VALLAURIS. If the harm to the company LES PINS is foreseeable, there is obviously no hindsight that could have allowed the company LES PINS to join immediately in the summons. It is no less obvious that Monsieur COLLORAFI hoped for a return to the company MC DONALD'S and that from 18 June 1997 to 27 November 1997, he never stopped following up the company MC DONALD'S to obtain a better assessment of the situation by the latter, compensation enabling him to get over this difficult hurdle (which the company did for Monsieur GILARSKI franchisees). obviously on receipt of the registered letters of 27 November 1997 giving the three companies formal notice to pay the royalties and on receipt of the three letters of 2 January 1998 terminating the contract, as well as the summons in summary proceedings of 6 January 1998, that Monsieur COLLORAFI definitively realised that MC DONALD'S had no intention of helping its franchisee, in accordance with the spirit of partnership of franchising, but in reality wanted to oust him from his restaurants. This is so true that after having obtained an extremely favourable judgment from the Commercial Court of PARIS, it, notwithstanding the practice whereby one does not enforce when summary proceedings have been brought before the First President of the Court of Appeal, enforced the judgment with the utmost vigour (attachment and actual enforcement on 10 June 1998). 4 DISCUSSION PRELIMINARY REMARKS The court declared inadmissible the claims seeking the roqualitiolim •s of the disputed lease-management montrats as commercial leases everlailoment supplemented by a trademark licence agreement as a sign, ma: qre the claims seeking a declaration of nullity of these contrat: pr application of the law of 20 March 1956 or for fraud, errour on **: o the Court states clearly in its judgment that all the other claims remain admissible, and in particular: declare that the company MC DONALD'S wrongfully terminated ! the disputed lease-management contracts, - the non-payment partir! ets royalties being due to its own fault and dismiss it purely ir simply of its claim for termination suspend the effects of the termination clause ct lour decordi two years to settle their debts on the basis of a reasonable royalty redevan reasonable, fix if need be as damages and interre, dans in detail is rapporte plus haut, or appoint an expert to enable the court to rule on the fixing of a reasonable royalty rule that the faults committed by the company MC DONALD'S are tortious, and order the latter to pay, in reprii d harm suffered by them pay various sums including gr! set out above. ". Before referring the matter to the expert examination, the Court specified: the claim for termination based on article 194 of the ra. r! at the fault of the company MO DONALD'S France and the claim tenter vil declared without effect the automatic termination of the comiat disputed, by reason of the bad-faith implementation of the tio resolutoirese" on the issues consequent upon these claims the Court puts the problem correctly by stating: "Considering that the acceptance of either of these as well as the formal notices (non paire ! royalties in 1997) as the basis of the termination of 2g !: are ineffective by reason of the faulty non-performance by the mis NC DONALD'S France of its obligations as franchisor and ige! ! it is criticised for having opened in the catchment area of the pr restaurant three other establishments, and for not having mon do the latter to bear the subsequent losses". Loi i'var ajoute On the obligations of the company MC DONALD'S France: * Considering that according to the appellants, this termination is wrongful, the company MC DONALD'S was able to rely on the termination clause provided for by the lease-management contracts only in bad faith .. that indeed, they maintain that it is the company MC DONALD'S France itself which is at the origin of their default in paying the royalties, Strategic and unilateral decision to open restaurants in the primary catchment area of the company SÉBOL ..... " ".. that consequently according to the appellants, the principle must apply according to which a party cannot seek the termination of a contract whose non-performance, the debtor's obligation, is the consequence of its own fault". The Court also notes that the service fee " necessarily has as its object, at least partially but certainly, to remunerate, in addition to the advisory service relating to the restaurant technique proper, the financial control services and aid to the decisions to be taken by the franchisee for the proper running of his restaurant business." Finally, the Court recalls that: "as regards the three contracts at issue, the company MC DONALD'S France supplied a study forecasting the profitability of each restaurant over ten years; that the parties disagree on the characterisation of this document: pre-contractual according to the appellants, mere information according to the company MC DONALD'S France, a point which the Court will assess in the judgment to be delivered after reopening of the The Court put ten questions to the Experts who answered as indicated above, fully confirming the thesis of the appellants, as well as an 11th question to Monsieur COLLORAFI who answered above. SUMMARY OF THE EXPERT REPORT 1. It is not Monsieur COLLORAFI's management that led to the fall in turnover, and the losses. 2. It is the decision to open ANTIBES NROD then ANTIBES OUEST and VALLAURIS, without any prior study, that caused it. 3. Opening by the company MC DONALD'S, one of its subsidiaries or a franchisee would have been an even worse solution since Monsieur COLLORAFI would not have benefited from the cost savings generated by the opening of new restaurants and the turnover of the company SEBOL (which would have been his sole restaurant) would have fallen in any event, from nearly 28,000,000 francs in 1993, 27,000,000 francs in 1994 and still 24,000,000 francs in 1995 despite the opening of QUICK, to 11,500,000 francs in 1997 and to 11,000,000 francs in 1998, as a consequence of the opening of ANTIBES NORD, ANTIBES OUEST and VALLAURIS. The decision to let MC DONALD'S open directly would have led very quickly to insolvency filing entailing termination of the contract and thus the loss of the asset (article XI.21 of the contract) 4. The reduction of 50% (and even of 100%) of the salary and of the dividends would not have sufficed to bring the companies a profitability that would even have brought them to break-even. The losses would have persisted and Monsieur COLLORAFI would have worked without any motivation or hope of pulling through. The losses for the three restaurants, which can be estimated at about 8,000,000 francs at the end of 1999, would have accumulated at the rate of 2,000,000 francs per year 5. The royalty reduction measure for the company B & 0 taken by the company MC DONALD'S by amendment, limited to one year, is a very largely insufficient measure. It was moreover offset by the payment of unforeseen invoices, by the increase of 10,000 francs per month for nineteen years of the minimum royalties paid by the company B & O. 6. The company MC DONALD'S did not assume its responsibilities, whereas it is its unilateral decisions that caused the situation, by helping Monsieur COLLORAFI as it does for other franchisees (for example Monsieur GILARSKI, to the extent of 1,600,000 francs) if one follows directly the position of the Court, set out in its judgment of 9 December 1998, according to which the decision to open ANTIBES NORD by MC DONALD'S was justified in order to respond to the competitive aggression it remains no less the case that the company MC DONALD'S had to, since it imposed this solution, give the means to resist this competition and to ensure its profitability in this new point of sale of ANTIBES NORD. 7. The opening of the ANTIBES OUEST and VALLAURIS restaurants had no economic justification, drawn in particular from competition, and is merely the result of the imperialism of the company MC DONALD'S opening in all directions to cover the ground and prevent competitors from setting up. This decision should at the very least have been postponed in view of the catastrophic impact on the company SEBOL of the opening of ANTIBES NORD, which was also disastrous in itself for the company B & 0, all data being precisely known by the Company MC DONALD'S on 30 April 1997. 8. No forecast turnover, no profitability forecast promised by the documents given before the openings was achieved by the three restaurants, with the exception of the company SEBOI which did indeed achieve the forecast results from 1990 to 1995, before plunging again. 9. By not proposing a solution By remaining deaf to Monsieur COLLORAFI's requests By giving formal notice to Monsieur COLLORAFI and his three companies to pay the royalties that it knew perfectly well were impossible to pay, and by wrongfully terminating the contract, the company MC DONALD'S: did not honour its commitments performed its commitments in bad faith committed a contractual fault. ON THE CONTRACTUAL LIABILITY OF THE COMPANY MC DONALD'S The spirit of the contract and customs The company MC DONALD'S, in order to escape its liability, maintains that it did not give territorial exclusivity to the three franchised companies and this argument was taken up by the Commercial Court of PARIS. It should be stressed first of all that the spirit of the contract was violated by the actions of the company MC DONALD'S set out above. The spirit of the contracts signed Both in its contractual provisions and in its documents handed over (and most recently in the report that it had drawn up by the former court-appointed expert, Alain HUSSON DUMOUTIERS) it refers to partnership, a spirit that the company MC DONALD'S violated in this case. It is obvious that the absence of an exclusivity clause does not authorise just any practice and that the spirit of partnership that inspires the franchise agreement excludes any organisation of internal or external competition constituting bad faith and abuse of economic dependence, as will be indicated below. As indicated above, the local market studies contained in the pre-contractual information documents formally provide for attraction areas, and one therefore cannot, without bad faith, open restaurants for its sole profit in these attraction areas, notably the primary area. The Code of Ethics of the FRENCH FRANCHISE FEDERATION The practices of the company MC DONALD'S in the present case are in formal contradiction with one of the principles laid down in the CODE OF ETHICS of the FRENCH FRANCHISE FEDERATION to which the company MC DONALD'S boasts of belonging: "Article 3 of the CODE OF ETHICS OF THE FFF: The franchisor must conduct the development of its network of franchised points of sale so as not to harm the own chances of each of them, and refrain from any practice contrary to this objective such as an unlimited and/or uncontrolled pyramid distribution system". It appears that the unilateral decision of the franchisor, taken despite the strong reluctance of the franchisee _ to open a second restaurant in the primary catchment area of the restaurant of the company SEBOL - to open a third restaurant in the primary catchment area of the first two restaurants - to award a new restaurant in VALLAURIS to another franchisee who was located further away in time and in space, is a contractual fault which engages the liability of the franchisor, the company MC DONALD'S. It appears that the "scorched earth" strategy of opening "indiscriminately" that the company MC DONALD'S has been developing for some years is not in keeping with the spirit of the contract and is moreover in contradiction not only with the contract, but with the forecast documents that it gives to each of its franchisees, after a market study. Performance of the contracts in bad faith by the company MC DONALD'S at the very least, the company MC DONALD'S performed its contract in bad faith, in contradiction with article 1134 paragraph 3 of the CIVIL CODE. The Court of Cassation, in plenary assembly, had occasion in its of 1 December to recall, in connection with the problem of indeterminacy of the price, the very great importance of article 1134 and of its paragraph 3. it appears that the company MC DONALD'S FRANCE, contrary to what the Court asserts, which did not answer the arguments raised by the appellants, acted towards one of its first franchisees, with remarkable bad faith. In vain will it take refuge behind the absence of an exclusivity clause. it is obvious that the absence of an exclusivity clause does not authorise just any practice, and that the franchisor cannot, on the pretext of being master of its siting policy, unreasonably and unilaterally narrow the catchment area. the company MC DONALD'S has the right to expand in FRANCE and abroad, it is obvious that this objective must not be in contradiction with the principle of good faith which must govern contractual relations and cause harm to the franchisee. If one pushed the reasoning of the company MC DONALD'S to its conclusion, which maintains more or less explicitly that it can open anywhere, anyhow and anytime, one would accept that this company could open one or more restaurants opposite and in the immediate proximity of its franchisees, leading thus to a self-destruction of the network, is not extensible to infinity. Even if the franchisor is in charge of development, it must do so without that development harming the legitimate interests of the members. It should be recalled that article 1 of the law of 31 December 1989 known as the DOUBIN LAW to which franchise agreements and in particular that of MC DONALD'S are subject, (which is acknowledged by this company) is a contract concluded in the common interest of the parties. The common interest of the parties is in this case to develop a market together, but without one of the parties making a disproportionate profit compared with that of the other party, yet - by having in view merely its personal objective of developing its own turnover, to the detriment of that of its franchisees which keeps falling, - by opening restaurants in all directions to prevent competitors from doing so, and this without avoiding harming the franchisees, the company MC DONALD'S acts with the greatest bad faith. It should be recalled the report of Monsieur Robert GANDUR, court-appointed Expert approved by the Court of Cassation to whom the appellants submitted the problem amicably, (communicated at first instance and on appeal by the appellants) which demonstrates the implacable mechanism of the strategy of MC DONALD'S based on limiting the opening of points of sale by the former franchisees, on limiting their turnovers, while at the same time the turnover of the company MC DONALD'S increases steadily and powerfully (+ 54% in three years), but this by opening new restaurants. OI: Monsieur Robert GANDUR demonstrates the economic impossibility in which the companies SEBOL, B et O and LES PINS found themselves of paying their royalties. His conclusions are eloquent, since if - the company SEBOL paid 736,000 francs per year instead of 1,800,000 francs excl. VAT of minimum royalty - the company B 2,940,000 francs excl. VAT and 0 paid the sum of 1,172,000 francs per year instead of - and the company LES PINS paid the sum of 1,034,000 francs excl. VAT instead of 1,200,000 francs excl. VAT that is a total sum of 2,982,000 francs excl. VAT for the three restaurants instead of 5,940,000 francs excl. VAT annually, the said companies "would not achieve a positive accounting result, the results of the said companies being respectively losses of 484,000 francs, 240,000 francs and 100,000 francs, that is 824,000 francs in total." it can therefore be said that the reasonable royalty that the company MC DONALD'S should have proposed to its franchisee, had it been acting in good faith (as it had done in principle by letter of 12 February 1997 never followed through) should have been: 2,982,000 francs - 824,000 francs that is 2,158,000 francs, namely: - for the company SEBOL (the hardest hit) ... - for the company B et 0 ... - for the company LES PINS 252,000 F. excl. VAT 932,000 F. excl. VAT 934,000 F. excl. VAT Thus, the unilateral decisions of the company MC DONALD'S restaurants in the primary catchment area of the company SEBOL, then in that of the company B et 0, constitute a performance in bad faith on the part of the company MC DONALD'S of the contracts signed with these two companies. At no time, since its decision to open restaurants in Monsieur COLLORAFI's catchment area, did the company MC DONALD'S show good faith. The Court must therefore find this bad faith and draw the consequences by compensating the appellants for their harm. ON THE CONSEQUENCES OF THE COURT'S FINDING OF PARTIAL NON-PERFORMANCE OF THE AGREEMENTS BY THE COMPANY MC DONALD'S OR OF THEIR PERFORMANCE IN BAD FAITH The case law of the Court of Cassation should be recalled through its judgments delivered on indeterminacy of the price. The Court of Cassation recalls that abuse in the determination of the price may constitute a violation of article 1134 paragraph 3 of the CIVIL CODE and does not constitute grounds for nullity, but gives rise to a right to an action for compensation or for termination. in so doing, in solemn hearing, the Court of Cassation recalls a general principle and the topicality of article 1134, notably paragraph 3 which applies to other contractual situations. The appellant companies and Monsieur COLLORAFI deliberately chose since 26 June 1997 to seek compensation for their harm and not judicial termination of the contract. Moreover, it should be recalled the terms of article 1184 of the CIVIL CODE, under which "the termination condition is always implied in reciprocal contracts, in the event that one of the parties fails to satisfy its undertaking. In that case, the contract is not terminated automatically. The party towards whom the undertaking has not been performed may force the other to perform the agreement where possible, or seek its termination with damages and interest. termination must be sought in court and the defendant may be granted a time limit according to the circumstances". According to the Court of Cassation: "it is for the courts to examine, in the event of partial performance, and according to the factual circumstances, whether this non-performance is of sufficient importance for termination to have to be immediately pronounced made good by an award of damages and interest". Accordingly, the appellant companies and Monsieur COLLORAFI retain the option provided for by article 1184 paragraph 2 between termination of the contract and its performance, assumed still possible, as long as they have not waived one or the other (Civ, 6 January 1932, DH 1932 114, COMMERCIAL, 21 October 1953, DALLOZ 1954, 201 note HM) The creditor of an obligation has the choice, in the event of non-performance, between of article 1184 of the CIVIL CODE and the action under articles 1142, 1144 and 1147 of the same CODE, and retains this choice even if he first relied on the termination clause. Finally, the combination of article 1134 and article 1142 under which "every obligation to do or not to do resolves itself into damages and interest, in the event of non-performance on the part of the debtor" allows the Court to consider that the faulty non-performance by the company MC DONALD'S of its obligations or its performance in bad faith resolves itself into damages and interest. The appellants still intend to seek compensation for their harm but are compelled to seek judicial termination of the contract with damages and interest since, having been evicted, it appears difficult to "force the other party to perform the agreement" the company MC DONALD'S having created the irreversible ON THE ABUSIVE EXPLOITATION OF A STATE OF ECONOMIC DEPENDENCE It should be recalled that under article 8 of the ordinance of 1 December 1986, "the abusive exploitation by an undertaking or a group of undertakings is prohibited under the same conditions 1) of a dominant position on the domestic market or a substantial part of it 2) of the state of economic dependence in which a customer or supplier undertaking finds itself in relation to it and which has no equivalent solution. These abuses may in particular consist of refusal to sell, tying sales or discriminatory sales conditions, as well as the breaking off of established commercial relations, solely on the ground that the partner refuses to submit to unjustified commercial conditions." it appears obvious that article 8 of the ordinance of 1 December 1986 is applicable in this case, since: - there is a dominant position of the company MC DONALD'S on the market, which represents more than 70% of hamburger specialist restaurants -there exists a state of economic dependence between the company MC DONALD'S and the franchised companies - the said companies, having signed lease-management contracts, do not have equivalent solutions, all the more so since the contract prohibits them from any possibility of operating the business in any way other than in accordance with the MC DONALD'S standards. It is no less obvious that the breaking off of the established commercial relations which has just occurred through the termination of the contract, is an abuse within the meaning of article 8, Monsieur COLLORAFI and his companies refusing to submit to unjustified commercial conditions conditions commercial made to the companies managed by Monsieur Bernard COLLORAFI are particularly unjustified, notably those that were made to the second company, the company B et 0, and to the third company, the company LES PINS which did not have, given the context above, the possibility of discussing them and which saw draconian conditions imposed on them. +Indeed, Monsieur Bernard COLLORAFI, owing to the strategy initiated by the company MC DONALD'S of opening in all directions, notwithstanding the interest of the franchisee in place, had no other solution than to submit (in restaurants) (by remaining with his sole restaurant) with a fall in turnover from 27,000,000 francs to 11,500,000 francs. Contrary to what is asserted by the company MC DONALD'S and by the Court, the contracts signed by the company MC DONALD'S as applied, prevent, restrict and distort competition. This is moreover what the Court of Cassation has just decided in a judgment of 16 December 1997 rejecting the appeal lodged by the company PRODIM (group PROMODES) against a judgment delivered on 5 October 1995 by the Court of Appeal of ROUEN in favour of the DUVAL family- The Court of Cassation confirms that article 8 of the ordinance of 1 December 1986 is indeed applicable to relations between franchisor and franchisee, notably when the franchise agreement is accompanied by a lease-management agreement. The Court of Cassation does not make the condition provided for in article 7 "distorting competition" a condition of application of article 8. Under article 9 of the ordinance of 1 December 1996, contracts concluded in breach of articles 7 and 8 are null. ON THE WRONGFUL TERMINATION OF THE CONTRACTS BY THE COMPANY MC DONALD'S Under the pretext that the companies SEBOL, B et O and the EURL LES PINS had not paid all the royalties for 1997, but only partially (about eight months), the company MC DONALD'S thought it necessary to give them formal notice, and then to terminate the contracts by invoking the clause of automatic termination provided for in them. It should be stressed that if the Court finds either a ground of nullity, or the disqualification of the lease-management agreements as commercial leases or commercial leases with a trademark licence as a sign, it will hold the termination of the contracts served by the company MC DONALD'S to be unfounded. In the alternative, as a very subsidiary argument, it should be recalled that it is obvious that the company MC DONALD'S cannot invoke its own turpitude, whereas it is the one at the origin of the situation, owing to its unilateral decision to open in the primary catchment area of the company SEBOL, and that it is the one that caused the collapse of the turnover and profitability of the company SEBOL, then subsequently of the company B et o. oI, in this case, it was impossible within the one-month period granted by the automatic termination clause to pay 3,500,000 francs of royalties, DONALD'S knew perfectly well since it received each month the companies' accounts, that it could see that these companies had accumulated in fifteen months more than 3,200,000 francs of losses, owing to the setting up of three new restaurants (ANTIBES NORD, ANTIBES OUEST and VALLAURIS) which is the very fault of the company MC DONALD'S. The latter is therefore entirely responsible for the partial non-payment of the royalties and cannot invoke this ground to terminate the contract. Indeed, a party cannot seek termination of a contract if the non-performance of the debtor's obligation is the consequence of its own The faulty non-performance of its obligations by the company MC DONALD'S and the performance of the contract in bad faith therefore deprives it of the possibility of seeking automatic termination of the contract. Indeed, the Court of Cassation has decided "also justifies its decision, the Court of Appeal which rejects the request for application of the termination clause of a lease, noting the absolute impossibility for the tenant to carry out within the time limit set by the order, having regard to their scale, the restoration works mentioned in that order." (civil 3rd, 16 December 1987, JCP 89-2-211 84 note BOCCARA) The company MC DONALD'S will therefore be dismissed from its claim seeking a declaration of the automatic termination of the contracts. 4..5 ON TORTIOUS LIABILITY In the alternative, in the event the Court does not uphold the contractual liability of the company MC DONALD'S towards each of the companies and Monsieur COLLORAFI, the appellants ask the Court to uphold the tortious liability of the company MC DONALD'S. It may indeed be considered that by setting up a second restaurant in the primary attraction area of the company SEBOL at ANTIBES NORD and then a third and fourth restaurant in its attraction area of ANTIBES OUEST and at VALLAURIS, the company MC DONALD'S committed a tortious fault. Likewise, by opening in the attraction area of the company B & o a third restaurant at ANTIBES OUEST and a fourth restaurant at VALLAURIS, the company MC DONALD'S committed a tortious fault. The Court may indeed consider that these untimely openings create contractual relations between the company MC DONALD'S and the company B & 0 on the one hand, the company LES PINS on the second hand and the company managing the restaurant of VALLAURIS on the third hand, and that these contracts are foreign to each of the companies which are third parties. On the other hand, this contractual situation generates a situation causing serious harm to the company SEBOL on the one hand, and the company B & 0 on the other, which are third parties in relation to these contracts. L6 IN THE ALTERNATIVE, AS A VERY SUBSIDIARY ARGUMENT, ON TERMINATION AT THE FAULT OF THE COMPANY MC DONALD'S Should the Court consider that the automatic termination clause can apply, it would nonetheless hold that this termination must be pronounced at the fault and expense of the company MC DONALD'S which is at the origin of the non- payment of the royalties through its ill-considered strategic decisions. In this case the Court should, in any event, state that the companies SEBOL, B & O and LES PINS were entitled to raise the exception non adimpleti contractu and not to pay all or part of the royalties, since the obligations undertaken by the company MC DONALD'S were not performed or were performed in bad faith by it. In any event, the Court should order the company MC DONALD'S to make good the harm suffered by the companies SEBOL, B * O and LES PINS as well as by Monsieur Bernard COLLORAFI. ON THE HARM PRELIMINARY REMARK It should be stressed that Monsieur Bernard COLLORAFI • lost all his investments to the amount of.. 11,000,000 francs • must repay the bank loan of 3,000,000 francs • would have to pay the company MC DONALD'S the sum of ... • must bear the losses for the overall sum of ... • lost his salary of . 12,500,000 francs s 210,000 francs 480,000 francs + the charges over the 19 remaining years of the contracts..11,610,000 francs • his wife also lost her salary, that is 250,000 francs including charges 4,500,000 francs • lost his return on investment for SEBOL ... 9,576,354 francs for B & O 22,198,563 francs for LES PINS . 13,244,734 francs • saw his life shattered and lost any chance of professional success, • whereas during the same time, the company MC DONALD'S, which made in France a profit of 500,000 000 francs, recovered Monsieur COLLORAFI's assets, after having taken from the latter's accounts 43,000,000 francs of royalties, very largely amortising its own investments. It should be recalled that Monsieur COLLORAFI was placed under the obligation, as were his companies, to summon the company MC DONALD's on 26 June 1997, that is two months after the opening of the restaurant managed by the company EURL LES PINS at ANTIBES NORD and the subject of a contract signed on 30 April 1997 but dated 18 June 1997, as well as after the opening of the restaurant opened the same day and managed by Monsieur GILARSKI at VALLAURIS. This summons followed the failure of the negotiations that COLLORAFI had tried to open during the last months of 1996 and the first half of 1997. At that time, Monsieur Bernard COLLORAFI did not know the scale of the catastrophe and had assessed his harm subject to increase or reduction. As indicated above, Monsieur Bernard COLLORAFI consulted orally at the end of 1997 and then by letter of 8 January 1998 Monsieur Robert GANDUR, Expert approved by the Court of Cassation, on the following points: "- assess as at 1 January 1998 the impact of the opening of the MC DONALD's ANTIBES NORD and OUEST and VALLAURIS restaurants on the turnovers and results of the company SEBOl operating the ANTIBES restaurant, CARREFOUR shopping centre; - assess as at 1 January 1998 the impact of the opening of the ANTIBES OUEST and VALLAURIS restaurants on the turnover and results of the company B & 0 operating the ANTIBES NORD restaurant - determine the rents and royalties paid to MC DONALD'S that are bearable by the companies SEBOL, B & O and LES PINS - quantify the elements of the harm suffered by the companies SEBOL, B & O and LES PINS as a result of the termination of the contracts, made on 2 January 1998 by the company MC DONALD'S by capitalising the loss of gross self-financing margin (MBA) for the remaining term of the contracts." Monsieur Robert GANDUR, after visiting the site, examined the documents supplied to him by the three companies and he makes the following observations: 5-1 RECALL (pages 2 to 4) After recalling the flat-rate base royalties provided for in the three contracts, as well as the turnover forecasts, he notes - that for 1997, the first full year of operation, the company B & 0 achieved a turnover of 13,500,000 francs), only a third lower than forecasts and will have to record a net loss of 1,200,000 francs - that the first financial year of the company LES PINS covers only eight months, because the ANTIBES OUEST restaurant was opened on 29 April 1997. Its turnover is 6,400,000 francs, that is an annual trend of 9, 300,000 (instead of the 13,000,000 francs forecast, while the loss suffered over the eight months should reach 440,000 francs. He then specifies, "Noting the collapse of SEBOL's turnover, (from 24,700,000 francs in 1995 to 18,300,000 francs in 1996 and to 11,700,000 francs in 1991), the large gaps between the operating forecasts of ANTIBES NORD and OUEST and reality, the lack of profitability of the restaurants managed difficulties that ensued, Monsieur Bernard COLLORAFI asked himself about the origin of these difficulties and the remedies to be applied to them." and recalls that: "the company MC DONALD'S FRANCE has just terminated on 2 January 1998 the three contracts, because the companies of Monsieur COLORAFI were unable to honour in full the contractual royalties". CHARACTERISTICS OF THE ACTIVITY (pages 5 to 9) The consultant then notes that: the market is dominated by the two brands, MC DONALD'S and QUICK; develops more through the extension of the number of points of sale than through the increase in the unit turnover of the existing restaurants, whose maturity is reached after one year of operation. If MC DONALD'S saw its French turnover in own operation, as in lease-management, go from 5.4 billion in 1994 to 8.4 billion in 1997 (+ 55%), it is thanks to the increase in the number of restaurants which grew from 354 to 630 (+ 78 %), while the turnover of the restaurants operated throughout the period rose only by 1.24% in 1995 and fell by 8.35% in 1996 and 1.43% in 1997). That is to say that MC DONALD'S's development strategy in FRANCE - and therefore its turnover, coming in particular from the rents and royalties paid by the lease-managers - rests on the increase in the number of restaurants and not on that of the turnover of the existing restaurants, the new restaurants being located either on sites hitherto unexplored, or on markets where the existing restaurants have reached the turnover estimated optimal by the lessor." In a very precise table, Monsieur Robert GANDUR shows: * that in the ALPES MARITIMES and the VAR, the number of restaurants went from sixteen in 1993 to twenty-eight in 1997 * that total turnover went from 270,000,000 francs to 415,000,000 francs, that is an increase of 14.81% in 1994, of 9.68% in 1995, of 5.58% in 1996 and of 15.60% in 1997 while average turnover per restaurant went from 16,875,000 francs in 1993 to 18,235,000 francs in 1994. to peak at 18,889,000 francs in 1995 and fall back to 15,609,000 francs in 1996 14,821,000 francs (fourteen million eight hundred and twenty-one thousand francs) in 1997. He concludes from this that "The evolution of the turnover of the restaurants known as "comparable" according to the chain's definition and this, whatever the scope adopted, national, regional or local, is marked by near stagnation in 1994, a rise of 1 to 5% in 1995, a sharp fall in 1996 due to the mad cow crisis (8 to 9%) and renewed stagnation in 1997 (0 to 1%), which moreover explains why the forecasts of MC DONALD'S FRANCE on the new openings show stabilised figures after one year." Accordingly, the Consultant specifies that to analyse the restaurants operated by Monsieur COLLORAFI, he will consider that the evolution of turnover should have followed, barring a change in the local market, that of the comparable restaurants of the brand in the ALPES MARITIMES and the VAR. EVALUATION OF THE IMPACT OF THE OPENING OF THE MC DONALD'S NORD AND OUEST AND VALLAURIS RESTAURANTS ON THE COMPANY (pages 10 to 25) After having recalled in a table the turnover month by month and year by year, 27,488,009 francs 26,965,840 francs 24,638,839 francs 18,305,795 francs 11,654,693 francs he represents by an extremely telling graph occurring from October 1996. "the catastrophe" Very objectively, Monsieur Robert GANDUR assesses the impact of the opening of QUICK at a loss of turnover of 3,702,239 francs. He assesses SEBOL's loss of turnover due to the opening of the restaurant of the company B & 0 in October 1996 at 1,803,610 francs, and that due to the openings of ANTIBES NORD (B & O) and OUEST (LES PINS) and of VALLAURIS (franchisee Patrick GILARSKI) at 7,619,056 francs (page 21)• As regards profitability, he specifies: "until 1996, even after the opening of QUICK, the break-even point was lower than turnover, that is to say the company remained profitable. In 1997 - despite the cost savings to.. SEBOL to lower the threshold and thus limit the losses - turnover became lower than the break-even point, making losses inevitable." (page 22) Thus, it results from Monsieur Robert GANDUR's calculations that the company lost 1,803,610 francs of turnover in 1996 (one million eight hundred and three thousand six hundred and ten francs) and (seven million six hundred and nineteen thousand and fifty-six francs) owing to the opening of ANTIBES NORD (in October 1996) and of ANTIBES OUEST VALLAURIS (in April 1997). SEBOL's turnovers should have been (the incidence of the opening of QUICK being taken into account) of - 20,109,405 francs in 1996 - 19,273,749 francs in 1997 The loss of gross margin linked to the openings of ANTIBES NORD, ANTIBES OUEST, and VALLAURIS was: francs in 1996 - 3,077,314 francs EVALUATION OF THE IMPACT OF THE OPENING OF THE RESTAURANTS OF ANTIBES OUEST and VALLAURIS ON THE COMPANY B & O OPERATING THE ANTIBES NORD RESTAURANT Using the same calculation for the company B & 0, Monsieur Robert GANDUR estimates that the loss of turnover suffered by B & O owing to the opening of ANTIBES OUEST and VALLAURIS is 15.52%, that is 1,350,000 francs The impact on the result may be estimated at 315,000 francs DETERMINATION OF THE RENTS AND ROYALTIES PAID TO MC DONALD'S THAT ARE BEARABLE BY THE COMPANIES SEBOL, B & O AND LES PINS The consultant specifies "The level of base rents and royalties presumed bearable is that which would make it possible to reach, after repayment of the annual loan instalments of principal, a zero gross self-financing margin, that is without worsening the financial situation. These bearable base rents and royalties are: 736,000 francs for SEBOI (against a current minimum royalty of 1,800,000 francs) - 1,172,000 francs for B * O (against a current minimum royalty of 2,240,000 francs - 1,034,000 francs for LES PINS (against a current royalty of 1,200,000 francs)" He adds "I STRESS THAT THESE BEARABLE BASE RENTS AND ROYALTIES DO NOT MAKE IT POSSIBLE TO REACH A POSITIVE ACCOUNTING RESULT: IF THE BASE ROYALTIES WERE BROUGHT DOWN TO THESE AMOUNTS, THE RESULTS OF SEBOL, B & O AND LES PINS WOULD BE LOSSES OF 484,000 FRANCS (SEBOL), 240,000 FRANCS (B & O) AND 100,000 FRANCS (LES PINS). TO OBTAIN A ZERO ACCOUNTING RESULT, THE RENTS AND ROYALTIES WOULD HAVE TO BE BROUGHT DOWN RESPECTIVELY TO 252,000, 794,000 AND 934,000 FRANCS" CAPITALISATION OF THE LOSSES OF GROSS SELF-FINANCING MARGINS OVER THE TERM OF THE CONTRACTS NORMALLY REMAINING TO RUN To carry out these calculations, the consultant took into account the following losses of gross self-financing margin: * FOR SEBOL the loss of margin on variable cost, after deduction of the fixed-cost savings (estimated for 1997 at 1,313,000 francs) (one million three hundred and thirteen thousand francs) resulting from the openings of ANTIBES NORD and OUEST and of VALLAURIS. To this is added the loss of margin on additional variable costs that SEBOL should suffer from January to April 1998, the turnover from January to April 1997 not having been affected by the openings at the end of April 1997 of ANTIBES OVEST of VALLAURIS This loss of margin is assessed at 102,000 francs (one hundred and two thousand francs) for a loss of turnover of 342,000 francs (three (turnover from January to 1997 x 9.02%) with a margin rate on variable cost of 30% - For B & O and LES PINS the difference between the margin shown in the forecast document given by MC DONALD'S to Monsieur COLLORAFI on the signing of the lease-management agreements, and the forecast gross self-financing margins for such as calculated in the preceding paragraph Owing to the presumed definitive modification of the catchment areas of Monsieur COLLORAFI's companies, I considered that these losses of margin were recurrent until the normal term of the lease-management agreements. For the discounting period, I used the number of years (or fractions of years) remaining to run until the normal term of the lease-management agreements. For LES PINS, a contract whose normal term is 28 April 2000 and which may be extended at the sole initiative of the lease-manager until 28 April 2017, I used the number of years (or fractions of years) remaining to that latter date. To discount these losses, I adopted a discount rate of 8% corresponding to the current rate of long-term (more than ten years) government loans, that is 5.80% increased by a risk premium of 2.20% there results the capitalisation of the losses of self-financing of the contracts remaining to run, shown in the table SEBOL B & 0 LES PINS - Loss of margin on variable costs (net of savings on fixed costs ... - Forecast MEA MC DONALD'S - Forecast MBA 1998 - Gap in gross self-financing margin (1,348,000) (361,000) - Number of years remaining until the end of the lease-management agreement ... 9.58 18.75 19.33 - Capitalisation coefficient (discount rate 8.00%) - Capitalised loss or gap in margin ... 6.97570077 9.97521722 10.20365779 it can therefore be considered that the loss suffered by each of the companies, as a result of the wrongful termination of the agreements by the company MC DONALD'S on 2 January 1998, is equal to the capitalisation of the losses of gross self-financing margin over the duration of the agreements that would normally have remained to run, namely: - Company SEBOL ... 9,576,354 F. - Company B & 0 22,198,563 F. - Company LES PINS ... 13,244,734 F- It should be recalled that in the documents given to Monsieur COLLORAFI before the signing of the agreements - the net income before tax francs per year, i.e. for 9.58 forecast for the company SEBOL was 1,233,810 years the sum of 11,812,000 francs (document - the cash Ilow forecast for the company B et O was 891,000 franes per year, i.e. for 18.75 years, the sum of 16,706,000 Irancs (document 26) - the cash flow forecast for the company LES PINS was 967,000 francs, i.e. for 19.33 years, the sum of 18,692,000 francs (document 12) These figures corroborate and confirm the moderate valuation of the Consultant, Monsieur Robert GANDUR. Moreover, they can be compared with the amount of the fees paid over eleven years by all three companies (13,000,000 francs). i.e., respectively: Company SEBOL ... Company B & 0 Company LES PINS ... 868 francs + 350,000 francs (carry back) 2,743,103 francs francs ON THE ADDITIONAL LOSS SUFFERED BY THE THREE COMPANIES AS A RESULT OF ENFORCEMENT The company MC DONALD'S took the risk of enforcing the judgment by having the three companies evicted from the restaurants they were managing, the company SEBOL for eleven years, the company B et o for twenty months, and the company LES PINS for fourteen months. Yet the company MC DONALD'S was perfectly aware not only. of the appeal lodged, but of the summary proceedings (référé) brought by the appellants to obtain the suspension of the provisional enforcement. It carried out this eviction in totally unlawful conditions and caused very serious harm, both to the three companies and to Monsieur Bernard COLLORAFT. Consequently, the company MC DONALD'S should be ordered under these heads to pay -- to the company SEBOL the sum of 2,000,000 francs - to the company B et o the sum of 2,000,000 francs - to the company LES PINS the sum of 7,000,000 francs - to Monsieur Bernard COLIORAFI the sum of 2,000,000 franes ON THE LOSS PERSONALLY SUFFERED BY MONSIEUR COLLORAFI Monsieur COLLORAFI is one of the pioneer franchisees of the MC DONALD'S network, since he is the 18th franchisee and opened the 45th restaurant. Throughout his professional life in the service of the MC DONALD'S network, he received nothing but praise, nothing but good QUALITY, SERVICE, CLEANLINESS ratings. No reproach was made to him for ten years (which is confirmed by the fact that the company MC DONALD'S blows out of proportion a minor peccadillo compared with the mountain of compliments received throughout the agreement. Suddenly, an attempt is made to remove him from the network a first time by forbidding him to attend the MARRAKECH convention on 27 June 1997 Then, while he was urgently asking for a solution to his problem to be found, the company MC DONALD'S brutally gave him formal notice to pay fees that it knows perfectly well cannot be paid by him. leave him the respite of the “Christmas truce”, the company MC DONALD'S terminates the agreement one month and three working days after the formal notice. The company MC DONALD'S does not hesitate, although it has not filed submissions before the Court, and has not yet requested termination of the agreement from the competent Judge, to sign with one of its subsidiaries a lease-management agreement and to publish it in a legal notices newspaper, together with the notice of the termination which has not yet been pronounced by the Court! To complete the strategy of ousting and denigrating Monsieur COLLORAFI, he is pointed at before the whole network by a circular dated 14 January 1998, whereas the next day, the summary proceedings judge refuses to endorse the • show of force by MC DONALD'S and very legitimately refers the matter to the trial judge. cannot treat in this way an independent trader who has punctually paid for ten years his fees up to 42,276,000 francs. • The material loss of Bernard COLLORAFI corresponds to the amount of the salaries he would have received had the agreements run to their term, i.e. 430,000 francs net after tax over a period of 18 years = 7,740,000 francs • The non-material loss of Bernard COLLORAFI is immense, and can only be compensated by the award of a sum of 2,000,000 francs (two million francs) by way of damages. ON ARTICLE 700 It would be inequitable to leave to the companies SEBOL, B ct 0, ct LES PINS, as well as to Monsieur COLLORAFI the irrecoverable costs which the present proceedings cause them. Consequently, the company MC DONALD'S should be ordered to pay the sum of 100,000 francs to each of the companies as well as to Monsieur Bernard COLLORAFI. 6. REPLY TO THE RESPONSE SUBMISSIONS OF THE COMPANY MC DONALD'S served on: 36 novembre 1900 6- The course of the proceedings Contrary to what the company MC DONALD'S asserts with aplomb, Monsieur COLLORAFI is in a hurry to see this matter brought to an end, insofar as, since 9 October 1096, he has lost everything he possessed and everything he had been able to earn in the preceding years. It is rich to reproach Monsieur COLLORAFI for having issued the summons too early and to maintain now that he is not in a hurry, when it was he who brought the case to a hearing of the Commercial Court very quickly - who lodged an appeal for a fixed date yu'itavait that he always filed submissions on time and filed his statements with the Experts in good time, unlike the company MC DONALISS. Yes, Monsieur Bernard COLLORAFI is in a hurry to see justice done! The company MC DONALD'S and the conclusions of the Experts In its response submissions, the company MC DONALD'S superbly ignores the issue of the expert report, and the overwhelming conclusions of the report. If the Court of Appeal had considered, as the Court did in a classic fashion, that Monsieur COLLORAFI, by not paying his fees, had put himself in breach of the agreement and could in no way be relieved of it by establishing the fault of the company MO DONALD'S, the Court would not have referred the matter to expert examination by putting relevant questions to the Experts. The substance of the argument of the company MC DONALD'S can be summarised as follows: al) The franchise agreement provides for payment of the fees on time. Bernard COLLORAH and his companies did not pay the fees; They were given formal notice and did not pay within the time limit. Consequently, the agreement must be terminated Moreover, Bernard COLLORAFI drew too much in salaries rather than dividends. Ia cu a poor management. In doing so, the company MC: DONALD'S does not explain the extraordinary coincidence whereby Monsieur Bernard COLLORAFIa, after three years and for five years made profits and received the congratulations of his franchisor, the MO DONALD'S group and suddenly, in 1996, began to make losses Init a no explanation other than the successive and anarchic opening of restaurants by the company MC DONALD'S. The Experts confirmed what had been maintained by Monsieur COLLORAH since the outset. namely: that the halving of his salaries and the non-distribution of dividends would have changed nothing in the situation, barely allowing part of the fees to be paid That if the amendment reducing the fees of the company B & On was made at roughly the right time, it was very largely insufficient to stem the disaster That the management of Bernard COLLORAT from 1985 to 10 June JO was exemplary, as the company MC DONALD'S acknowledged on several occasions, and was as good - indeed better - as that of his colleagues in an equivalent situation. and that of the company MC DONALD'S when it took over the restaurants of Bemard COLLORAFI. THERE IS THEREFORE NO OTHER REASON FOR THE CATASTROPHE THAT OCCURRED THAN THE INCONSIDERATE OPENING OF THE RESTAURANTS. The company MC DONALD'S presented the results of its operation after the eviction of Monsieur COLLORAFI, i.e. from June 1998 to 30 June 1499. i.e. one year. One reads on page 13: of document E3 (35 pages): cumulative results: - overall result (2üh half of 1998) - overall result (1" half of 1909) total: - 414421 franes - 49X) 077 Irancs - 904.448 francs - administrative costs (Zin half of 1998) - drus administrauls (|" semicstre 1994) total: 282,834 francs 164,113 trancs 446,947 franes We recall here that the company MC DONALD'S accounts for only a part of its administrative costs. the remainder being borne by the group as a whole (page 57 of the report) The Experts moreover noted that Monsıcur COLLORARI had the same administrative costs as the other lessee-managers, that is 3,500,000 francs (page 53 of the report) In reality, the results of the three restaurants for the period operated by the company MC DONALD'S over one year, had they been managed by a franchisee, would have been: Consolidated results ... - 904498 francs Administrative costs.. - 3,500,000 trancs Administrative costs already accounted for by MC DONALD'S 446947 francs TOTAL LOSSES … -2957.551 francs Contrary to what the company MC DONALD'S asserts, one cannot speak of an improvement in the situation. the figures being there to demonstrate the opposite, and Monsieur COLLORAFI was quite right to issue the summons on 30 jun JET, since he had been making losses since October 1906 and these losses continue under the management of the company MC DONALD'S in 1909. (3 the policy of the company MO DONALD'S and its damaging consequences One can only repeat that neither does the company MO DONALD'S have the right to open the restaurants it wants, desda the condition that this is not done to the detriment of “its partner”. It is obvious that, even supposing the opening of the various restaurants justified, еноore would it have been necessary for the company MC DONALD'S to provide substantial assistance to Bemard COLLORAF, and to take measures to compensate for the inevitable harm caused to Monsicur COLLORAFI as a result of the decisions that the company MC DONALD'S took and which benefit only itself. It is moreover interesting to point out that the company MO DONALD'S calls (see table on page 9 of its response submissions): “that Monscur Bernard COLLORAFI was the first to establish the MC DONALD'S brand in the CANNES region (3 August 1987) that even before the opening of ANTIBES NORD, the company MC DONALD'S had narrowed the catchment area of the company SEBOL., by opening: ü MANDELIEU on 24 April 1990 at GRASSE on 15 December 1993 ¡ CAGNES on 11 July 1994 at CANNES on 14 November 1905. Thus, the pioneering efforts of Monsicur Bernard COLLORAFI, if they benefited him until al 144343, then benefited Messrs Bernard ROCHER (MANDELIEL), Eric DAUFEL (GRASSE), Jean Prene ANDREIS (CAGNES) and Patrick GILARSKI (CANNES)... And naturally the company MC DONALD'S, which receives from its four franchisees substantial roderances . The Court knows that from the opening of ANTIBES NORD (9 October 1996) the situation was to worsen further. by the opening of CAGNES PLACE on 30 October 1996 (lean-Pierre ANDREIS) by the opening of ANTIBES OUEST (Bernard COLLORAFI) and of VALLAURIS (Patrick GILARSKI) on 29 April 1997 by the opening of MOUGINS (Patrick GILARSKI) on 28 May 1997. Thus, as document 239 shows, Monsieur COLLORAFI, pioneer of the MC DONALD'S franchise, is surrounded: to the north, by CAGNES and CAGNES PLAGE, to the north-west by GRASSE, to the west by MANDELIEU, CANNES, VALLAURIS and MOUGINS, (not forgetting ANTIBES-NORD and ANTIBES-QUEST). Fortunately. blocked at the seaside, he has no competition to the east and to the south ... it is the Mediterranean sea! It may be noted that Patrick GILARSKI, former Vice-President of MC DONALD'S, is perfectly protected since he has control of the town of CANNES and of two large neighbouring communes, MOUGINS and VALLAURIS, i.e. territorial protection of nearly ten kilometres to the north, to the east, and to the west. Contrary to the repeated assertion of the company MC DONALD'S (paragraph 14, page 12) that: “the primary catchment area has no significance at MC DONALDS.” one can only recall that this notion appears, under the name “ZONE D'ATTRACTION” (attraction zone), notably in the document entitled: “DATA FOR THE ESTABLISHMENT OF A MC DONALD'S RESTAURANT IN ANTIBES STUDY REPORT OF MARCH 1995 (document 110 bis) It is moreover interesting to note that on page 17 of this document, it is stated: “the two notable competitors are, with the exception of the Me DONALD'S in the CARREFOUR shopping centre, the FLUNCH cafeteria located at the same address, and the CASINO cafeteria in the town centre” At the bottom of the page, the MC DONALD'S restaurant in the CARREFOUR shopping centre (managed by the company SEBOL.) is indicated in “attraction zone no. 2”. Besides common sense and commercial good faith as well as the internal rules of the group MC DONALD'S as has just been indicated, it may be pointed out that the company MC DONALD'S is also subject to the practices laid down by the FÉDÉRATION FRANÇAISE DELA FRANCHISE which provides in its article 3: “The franchisor must conduct the development of its network of franchised points of sale so as not to undermine the own chances of each of them, and must refrain from any practice contrary to this objective, such as a pyramid system of unlimited and uncontrolled distribution”. It is curious that the company MC DONALD'S now claims, for the first time, whereas the CODE OF ETHICS of the FEDERATION FRANÇAISE DELA FRANCHISE was already communicated at first instance, that this code of ethics was abandoned in 1991 in favour of a EUROPEAN CODE OF FRANCHISING. One wonders how the EUROPEAN CODE OF ETHICS of 1991 could apply to the contractual relations between Monsicur COLLORAFI and the company SEBOL on the one hand, and the company MO DONALD'S on the other, since the parties have been bound by a lease-management and franchise agreement since 1985. This code was notably published in the 3rd FRANCHISE DIRECTORY of 1985, the year the agreement was signed (document 240). In the FRANCHISE DIRECTORY of 1991, the FÉDÉRATION FRANÇAISE DE LA FRANCHISE ran an advertisement for its members proclaiming “they have signed”; one may notice in the middle of the page the name of the company MC DONALD'S. (Document no. 241) It is moreover interesting to look through the advertisement placed in the same directory by the company MC DONALD'S: yur search for new partners, and a request to send a file “our partnership is made to your measure” and with the slogan: “being the boss of a MO DONALD'S means finding a meaning for the word partner” The least that can be said when examining this file is that the partnership was one-way and benefited only MC DONALD'S which, after having received nearly 43,000,000 francs in fees, recovered for nothing the three restaurants managed by Monsicur COLLORAFI and his companies. Thus, the company MC DONALD'S committed contractual faults by not performing the agreement in good faith, and by abusively exploiting the state of economic dependence in which the franchisees find themselves, given the system organised by the company MO DONALD'S, as it will be recalled in paragraph 6-5 below. The so-called abuse of withdrawals by Monsicur COLLORAFI As regards the “abuse of withdrawals” allegedly committed by Monsieur COLLORAFI, a recurring theme of the company MC DONALD'S, it is once again necessary to return to the real figures and not to the truncated figures. on the one hand, it should be recalled that a salary is the fair remuneration for work, and that the modest salary of Madame COLLORAFI (around 15,000 francs per month) need not be taken into account -on the other hand, as regards the salary of Monsicur COLLORAFI, it is, as was demonstrated in the previous submissions, equivalent to and even lower than most of the salaries received by the lessee-managers of MC DONALD'S. It is moreover very much lower than the salaries of the executives of the company MC DONALD'S, so substantial that this information remains confidential, despite the legal obligations to file it with the Registry of the Commercial Court (document 242, page 27) (1) It is perfectly understandable that the Court of Appeal sought to understand the reasons for the catastrophe which could conveniently have been found in an “abuse of salary withdrawals”, a hypothesis which was totally refuted by the expert report. Indeed, this hypothesis can only be set aside, given the conclusions of the Experts, who stress that even a 50% reduction in the salaries of Monsicur COLLORAFI would not even have made it possible to stem the losses appreciably. Moreover, the sum of 5,744 (XX) francs mentioned on page 13 of the response submissions of the company MC DONALD'S must be reduced by 20 1% of social charges, i.e. approximately 1,300 (XX) francs; the net salary before tax of Monsicur COLLORAFI was therefore for ten years about 4,500,000 francs, i.e. 450 (XX) francs per year. i.e. less than 40,000 francs per month. -Lastly, to inflate the figures and attempt to deceive the Court, which will not be misled, the impressive table on page 13 adds to the salaries of Monsicur COLLORAT those of Madame COLLORAFI, which is totally irrelevant. as well as the dividends. Naturally, this sum of 4,150,000 francs of dividends for ten years must be offset against the losses, i.e. 5,210,000 francs, which means that at the time of his eviction, on 10 June 1998, Monsieur Bernard COLLORAFI had worked for his salary alone, while losing 840,000 francs. This sum is obviously to be compared with the withdrawals by the company MC DONALD'S amounting to 43,540,000 francs. - Moreover, it is false to claim that Monsieur COLLORAM invested nothing. The report of the SEPT (appendix T-T), complacently drawn up at the request of the company MC: DONALD'S. was obliged to acknowledge that Monsieur COLLORAFI invested 10,761,000 franes which, naturally, are to be added to the profits of the company MO DONALD'S which recovered for nothing the working tool of Monsicur COLLORAM. Lastly, it is indecent to refer to the tax returns of Monsieur COLLORAFI, which moreover turns to the confusion of the company MC DONALD'S which deliberately commits the error of stating that in 1995 the taxable base is made up of gains less allowances. Yet, the taxable amount obviously includes 50% of dividends in addition, which constitute the tax credit, and which are not received. Yet, the taxable amount obviously includes 50% of dividends in addition, which constitute the tax credit, and which are not received. Thus, on 1,850,000 francs of dividends, the return is increased by 425,000 francs which were not received by Monsieur COLLORAFI, but which bear tax. (21 crier la même qui ont délourné le retour sur investissements de Monsieur C'OLLORAF Moreover, it is obvious that Monsicur COLLORAFI could possibly have chosen the holding company system from the end of 190% but this would only have been applicable for 1007. It would still have been necessary for him to be encouraged to do so by the company MC DONALD'S. Yet the latter formally advises against any structure other than GIEs and in particular the holding company (see the document entitled “DRH - ADVICE TO FRANCHISEES” (document 247) (2) The production of two accommodating attestations from former colleagues of Monsicur COLLORAFI is obviously irrelevant. Out of 250 franchisees, how many chose, on the advice of the company MC DONALD'S, to create a holding company? B-5 The economics of the MC DONALD'S system As was set out in the previous summary submissions (pages Ié et seq.), the MC DONALD'S system in France is characterised by the signing of a lease-management agreement, the consequence of which is that the pseudo-franchisee at the end of twenty years has capitalised nothing, since he does not own the business (fonds de commerce), whereas he has invested in the fitting-out and the equipment (in this case nearly 11,000,000 francs) the system necessarily implies the making of profits by the lessee-manager who, added to the normal remuneration for work, allows him to draw a return which must be equivalent to that which a franchisee who owns his business would obtain. It is therefore indeed on the basis of the documents given to him (pre-contractual information document, from the DOUBIN law of 31 December 1989, and information given under the duty of advice, sanctioned by case law) that the franchisee makes up his mind " in commissance de conse ". The documents given to him prior to the signing of the agreements (documents 12, 25 and 26) are obviously contractual documents. It is inconceivable that a “franchised lessee-manager” candidate would commit for twenty years without knowing: the envisaged turnover the forecast profitability The candidate, even a banker, has no means of verifying the reality of these forecasts, whereas the company MC DONALD'S must draw its forecasts from its prior experience ... as the world's first franchisor (3) the instruction is clear: (page 16): “escape the Economic and Social Unit (Unité Économique et Sociale)”, by avoiding merging the commercial entities Moreover, it is obvious that Monsieur COLLORAFI could possibly have chosen the holding company system from the end of 1990, but this would only have been applicable for 1997. It would still have been necessary for him to be encouraged to do so by the company MC DONALD'S. Yet the latter formally advises against any structure other than GHEs and in particular the holding company (see the document entitled “DRH - ADVICE TO FRANCHISEES” (document 242) (2) The production of two accommodating attestations from former colleagues of Monsieur COLLORARI is obviously irrelevant. Out of 250 franchisees, how many chose, on the advice of the company MC DONALD'S, to create a holding company? The economics of the MC DONALD'S system As was set out in the previous summary submissions (pages 16 and seq.), the MC DONALD'S system in France is characterised by the signing of a lease-management agreement, the consequence of which is that the pseudo-franchisee at the end of twenty years has capitalised nothing, since he does not own the business (fonds de commerce), whereas he has in ested in the fitting-out and the equipment (in this case nearly 11,000 0X) francs) the system necessarily implies the making of profits by the lessee-manager who, added to the normal remuneration for work, allows him to draw a return which must be equivalent to that which a franchisee who owns his business would obtain. It is therefore indeed on the basis of the duments given to him (pre-contractual information document, from the DOUBIN law of 31 December 1989, and information given under the duty of advice, sanctioned by case law) that the franchisee makes up his mind « ens connaissance de conse ». The documents given to him prior to the signing of the agreements (documents 12, 25 and 26) are obviously contractual documents. It is inconceivable that a “franchised lessee-manager” candidate would commit for twenty years without knowing: the envisaged turnover the forecast profitability. The candidate, even a banker, has no means of verifying the reality of these forecasts, whereas the company MC DONALD'S must draw its forecasts from its prior experience ... as the world's first franchisor 13) the instruction is clear: (page 16): " escape the Economic and Social Unit (Unité Économique et Sociale)”, by avoiding merging the commercial entities It is not credible to think that a company which has more than twenty thousand restaurants in the world has acquired irreplaceable experience and does not make mistakes. In this case, this is all the more true as the documents given before the opening of ANTIBES NORD and ANTIBES OUEST cannot obviously have ignored the local competitive situation into which these restaurants were to be plunged. Case law has on numerous occasions penalised significant discrepancies between the figures supplied by the franchisor and reality. Yet, in this case, if the figure of 20,000 (X) francs for the first ANTIBES restaurant was reached, the untimely openings brought it down to 11,000,00X) francs - as for the figure of 20(XX) 000 francs for the company B & O, it is lower by at least one third than the forecasts, just as the figure of 13,000 (KX) francs forecast for ANTIBES OUEST. lower by more than one third. …The three restaurants reached in 1990 a sum of about 34,000,000 francs, instead of 52,000(00 francs, i.e. a little over 60%. As for the signature of Monsieur GIBSON, which the company MC DONALD'S seems to deny for the first time, a graphological analysis shows that it is indeed that of Monsieur GIBSON (document 244) Yet, Monsieur GIBSON held important positions at the company MC DONALD'S, and it is puerile to suggest that he would have acted “in a private capacity”. It is certain that this signature is very embarrassing for the company MC DONALD'S. (1-6) The dilemma of Monsieur Bernard COLLORAFI On several occasions, the company MC DONALD'S in its submissions feigns surprise at the apparent contradiction between the repeated requests by Monsieur COLLORAFI to open ANTIBES NORD, ANTIBES OUEST and even VALLAURIS, and the fact that he now complains of these openings. The Court has perfectly understood that Monsieur COLLORAFI, as a shrewd company head, reacted to the unilateral decisions of the company MO DONALD'S by choosing what was - and what proved in the end to be - the least bad solution. Letting MC DONALD'S or another franchisee open ANTIBES NORD and ANTIBES OUEST would have led the company SEBOL. inevitably to file for bankruptcy during 1997, since its turnover fell from 27,000,000 francs to 11,50) 000 francs within two years. The allegation of inconsistency is therefore particularly derisory and odious. On the characterisation of the faults The appellants rely on their earlier explanations in the first summary submissions (pages 60 et seq.), the opposing submissions providing no new element for reflection. 6% On the loss As has been indicated on numerous occasions, when Monsieur COLLORAFI and the companies SEBOL and B & O issued the summons on 3 June 197, owing to the absence of any reply to the letters sent both by Monsieur COLLORAFI and by his lawyer, they knew that they had suffered substantial loss, but obviously did not know its extent or its precise justification. (“It is moreover the reason why they asked a court-appointed expert, Monsieur Robert GANDUR, to assist them and why he managed to set the loss at the sums of: • company SEBOL... 9,576,354 francs - company B & O... 22,198,563 francs - company LES PINS . 13,244,734 francs To these sums is obviously added the additional loss suffered by the three companies as a result of the enforcement of the judgment on 10 June 1998, well after the conclusions of Robert GANDUR who could not imagine such a show of force. One can only stress with force how odious this assault was, since it deprived Monsieur COLLORAH of the fruit of his work of more than eleven years, and prevented the First President of the Court of Appeal of PARIS from suspending the provisional enforcement of that part of the judgment which would be enforced. The Court will compare the so-called assault (voie de fait) committed by Monsieur COLLORAFI who, whereas he owed 3,500(XХ) francs in fees, i.e. about eight monthly instalments, “remained in his restaurants” considering, as the Court will not fail to confirm, that the sum due was incommensurably lower than the loss he had already suffered and which could only grow as a result of his eviction In violation of article 31 of the decree of 31 July 1992 as amended, which made mandatory the suspension of enforcement until the First President of the Court of Appeal of AIX EN PROVENCE had ruled, this scandalous conduct must be penalised by additional damages. As regards Monsieur Bernard COLLORAFI, who worked eleven years in these restaurants, it is obvious that he suffered a distinct material loss, and obviously a non-material loss owing to the fact that he was driven out of these restaurants in odious conditions, a notion which is in no way “foreign to business relations”. Moreover, it is quite correct that the sum of 4,528,333 francs representing the fixed assets taken over and used by the company MC DONALD'S since 10 June 1998 must be included. 6-4) On the counterclaim The company MC DONALD'S must be dismissed from all its claims, purposes and submissions, and in particular that for payment of the late fees, and this, possibly by way of additional damages. The same applies to the alleged daily occupation indemnities which, moreover, constitute manifestly excessive penalty clauses and which must be reduced to 1 franc. FOR THESE REASONS Receive the companies SEBOL, B & O and LES PINS as well as Monsieur Bernard COLLORAFI in their appeal, and declare it well founded Set aside in its entirety the judgment delivered by the Commercial Court of PARIS on 18 May 1908, except insofar as it ordered the joinder of proceedings 97/062406 and 97/0100823 and dismissed the company MC DONALD'S's claim for damages for abusive proceedings Ruling anew, in the light of the report filed by Messieurs Alain MARTIN and Jean-La DUMONT, Experts, 1 Declare and rule that the company MO DONALD'S did not perform its contractual obligations and did not perform in good faith the obligations arising from the agreements signed with the companies SEBOL, B & O and LES PINS Declare and rule that the companies SEBOL, B & O and LES PINS were entitled to raise the exceptio non adimpleti contractus, the agreements not having been performed in good faith by the company MC DONALD'S Declare and rule that the company MO DONALD'S is entirely responsible for the partial non-payment of the fees in 19y7 and cannot invoke this ground to terminate the agreements automatically Declare and rule that the company MC DONALD'S wrongfully terminated the lease-management agreements, the partial non-payment of the fees being due to its own fault Dismiss it outright from its claim for termination. In the alternative, declare and rule that the faults committed by the company MC DONALD'S are of a tortious nature Consequently, and whatever the liability regime adopted, order the company MO DONALD'S to make good the loss suffered by ordering it to pay to the company SEBOL the sum of 9,600,000 francs as well as that of 1,540,868 francs, the amount of its losses (including carry back) •to the company B & O the sum of 22,200,000 francs as well as that of 2,743,103 francs, in respect of its losses to the company LES PINS the sum of 13,250,000 francs as well as that of 567,568 francs for its losses with statutory interest from 2 January 1998, the date of termination Order in any event the company MC DONALD'S to pay the fixed assets at their book value, to each of the companies, i.e. 4,528,333 francs in total, as the company MC DONALD'S acknowledged in the two sets of submissions constituting a judicial agreement (contrat judiciaire). Order in any event the company MC DONALD'S to pay, by way of additional loss suffered as a result of the enforcement carried out by the company MC DONALD'S at its own risk and peril 2,000,000 francs to the company SEBOL 2,000 (KX) francs to the company B & O 2,000 (XX) francs to the company LES PINS 2 (0O (XX) francs to Monsieur Bernard COLLORAFI Order the company MC DONALD'S in any event and whatever the solution given to the dispute, to pay to Monsieur COLLORAFI by way of damages for the material loss caused the sum of 7,740 IN francs and the sum of 2,000 O0O francs by way of damages for the non-material loss caused In the very alternative, should the Court consider that an expert report is necessary to determine the loss, order the company MC DONALD'S to pay to the company SEBOL the sum of 5,000 (XX) francs by way of interim payment . to the company B & O the sum of 10,000,000 francs by way of interim payment , to the company LES PINS the sum of 7,000,000 francs by way of interim payment to Monsieur Bernard COLLORAFI the sum of 5,000 MO francs by way of interim payment Order the company MC DONALD'S to pay to each of the companies and to Monsieur Bernard COLLORAFI the sum of 100 (KX francs under article 700 of the NCPC Order the Company MAC DONALD'S to pay the entire costs of first instance and appeal, the recovery of which shall be effected directly by Me PAMART Avoué, under the conditions of article 699 of the NCPC. WITHOUT PREJUDICE TO ALL RIGHTS.