Hearing submissions — part 2

Pg: HEARING of 9 February 1998 at 2 p.m. before the President and Judges composing the 1st Chamber of the Commercial Court of PARIS SUBMISSIONS FOR: 1. the company SEBOL Public limited company with a capital of 250,000 francs, registered in the Trade Register of ANTIBES under number RCS B 340 945 062 (88 B 656) whose registered office is CENTRE COMMERCIAL CARREFOUR Chemin de Saint Claude, 06660 - ANTIBES represented by the Chairman of the Board of Directors, Monsieur Bernard COLLORAFI, domiciled at the registered office the company B et O private limited company with a capital of 56,000 francs, registered in the trade 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 COLORAFI domiciled at the registered office the company SARL LES PINS voluntary intervener 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 1915 [sic as in the OCR: "1915"] in SOUSSE, TUNISIA of French nationality, acting in his personal name and in his capacity as signatory of the lease-management agreements residing at 21 b, chemin de l'Estelle, 06116 - LE CANNET ROCHEVILLE Me Jean-Paul CLEMENT Member of the PARIS Bar 75, avenue Mozart, 75016 - PARIS Tel: 45 27 63 02 - FAX 01 45 27 67 13 PALAIS B 405 and: Me Michel SEVELLEC, SCP of lawyers 72, avenue Marceau, 75068 - PARIS Tel 01 47 20 92 40 - FAX 01 47 20 12 40 PALAIS W G9 Pg: AGAINST: The company MC DONALD'S FRANCE public limited company with a capital of 180,000,000 francs registered in the Trade Register of VERSAILLES under number B 722 003 936 whose registered office is 1, Ile Gustave Eiffel 78045 - GUYANCOURT CEDEX FRANCE represented by the Chairman of the Board of Directors having as lawyers Me Jean Marie LELOUP, Michèle LELOUP and Philippe MISSEREY Lawyers associated in the law firm LELOUP E1, rue Renaudot, 86000 - POITIERS and the SCP VINCENT MOLAS LEGER CUSIN Members of the PARIS Bar 87, boulevard Saint Michel, 75005 - PARIS PALAIS E :59 Pg: 6 MAY IT PLEASE THE COURT ON THE PROCEEDINGS Monsieur Bernard COLLORAFI It should be recalled that the companies SEBOL, B & O and issued a summons on 26 June 1997 to 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 and ordered consequently to compensate the claimants for the loss suffered, by paying: • to the company SEBOL the sum of 30 million francs, subject to increase increase • to the company B & O the sum of 5 million francs, subject to to Monsieur Bernard COLLORAFI the sum of 10,350,000 francs, subject to increase • as well as 50,000 francs to each under article 700 of the NCPC” The case was called three times before the Commercial Court (8 September, 6 October, and 3 November 1997) and the company MC DONALD's did not have to file reasoned submissions in response to the summons, and at the hearing of 3 November 1997, had the case postponed to 1998. It is the companies SEBOL and B & O as well as Monsieur Bernard COLLORAFI who, through their counsel acting as hearing representative, Me SEVELLEC, requested that this case be brought back before the Commercial Court, at the hearing of 9 February 1998. In the meantime, the company MC DONALD's saw fit to refer to the President of the Commercial Court of PARIS ruling in summary proceedings on 9 January 1998 for the hearing of 15 January 1998 in order to ask him: - to order the companies SEBOL, B & O and the EURL LES PINS “to stop operating the fast-food business belonging to the company MC DONALD'S FRANCE to order the eviction of the said companies from the premises located at the various addresses specified above, - to enjoin the said companies to hand over to the owner of the business - the keys of the restaurant Pg: - 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 - The accounts of the operation up to the day of the abandonment of this operation by the said companies. - to rule that these three companies and Monsieur Bernard COLLORAFI, manager of these companies, must comply in full with the above provisions, on pain of a penalty payment - to appoint Me ZONINO to carry out the inventory - to take note that the company MC DONALD's reserves the right to assert all rights against the said companies - to order the said companies to pay each the sum of 10,000 francs under article 700 of the NCPC. By order made on 15 January 1998, the President of the Commercial Court of PARIS ruled that there was no ground for summary proceedings and dismissed the company MC DONALD's from its claim. Since that hearing, the company MC DONALD'S has, on the one hand, obtained leave from the President of the Commercial Court of PARIS to summon the company EURL LES PINS to the same ends, asking for the joinder of this case with the case opposing the company MC DONALD'S FRANCE to Monsieur COLLORAFI and to the companies SEBOL and B & O. The appellants should be granted formal note of their agreement to the joinder of the two cases. It may also be noted that, very curiously, submissions on the merits before the Commercial Court of PARIS were communicated by fax on 10 January 1998 in the context of the summary proceedings although they had not been duly served at the hearings of procedure, the submissions having been officially sent by the hearing representatives on 12 January 1998, after the summary proceedings hearing. ON THE FACTS summons summary proceedings that in its submissions on the merits and in its summons at short notice against the company EURL LES PINS, the company MC DONALD'S passes over in silence the essential elements of the contractual relations existing between the company MC DONALD'S FRANCE and Monsieur Bernard COLLORAFI, acting both in his personal name and in his capacity as Chairman of the Board of Directors of the company SEBOL and manager of the company B & O and of the EURL LES PINS, and it communicates only its own “forgetting” the detailed letters sent by Monsieur COLLORAFI. Pg: 8 It should be recalled that Monsieur Bernard COLLORAFI signed a lease-management agreement to open a MC DONALD'S restaurant in the CARREFOUR shopping gallery in ANTIBES and this, on 3 August 1987, having resigned from his duties as branch manager in a bank in MOULINS and completed an unpaid training placement at his own expense, in MC DONALD's restaurants for nine months, thus making a considerable investment, in time and money. He was thus the 18th franchisee of the MC DONALD'S network (and the 45th MC DONALD's restaurant in FRANCE) and trusted the MC DONALD's network at a time when the network, although very well known in the United States and in certain countries of the world, was still very largely unknown in FRANCE. the agreement provided for a management fee of 12% with a monthly minimum of francs, services fees of participation in national advertising of 4.5%. merits of the franchise, and of a personalised document entitled “STATEMENT OF LOSSES AND PROFITS” that he signed the agreement. This last document provided for net sales of 12,500,000 francs in the first year and of 19,000,000 francs in the third year, with a negative net income for the first year of 433,750 francs, but a profit of 1,233,810 francs for the third year. Thanks to the hard work of Monsieur COLLORAFI, the turnover of 19 francs was practically reached in the third year (18,329,000 francs in 1989) and increased regularly until 1993 (27,973,000 francs). In parallel, while the first two financial years were loss-making. francs) the profits began to come in 1989 (1,311,000 francs) to be 1,453,000 francs in 1993. -2,430,000 for The year 1994 saw a stagnation of turnover (27,372,000 francs) and of net result (1,330,000 francs), while the year 1995 was the start of a decline (24,754,000 francs) and 1,010,000 francs of net results, due essentially to the opening of a QUICK restaurant a few hundred metres from the restaurant operated by the company SEBOL. it was in this context, which was beginning to become difficult, that Monsieur COLLORAFI learned that MC DONALD's intended, to counter its competitor QUICK, to set up a second restaurant a few hundred metres from the CARREFOUR shopping centre where the first restaurant managed by the company SEBOL was established, within its primary catchment area. To prevent another franchisee from setting up there and thus taking a part of his clientele, Monsieur Bernard COLLORAFI had no other solution than to make the investment and work effort to open, in October 1996, against his will, a second restaurant located in the primary catchment area, the management of which he entrusted to a SARL B & O, Pg:9 of which he became the manager, by making a personal contribution to this company of his positive current account in the company SEBOL... entrusted to a company B & O for an opening on 9 October 1996, while immediately expressing his fears about the impact of this opening on his first restaurant. The financial conditions were even harsher, since there were provided 20% of management fees + 5% of service fees and 4.5% of participation in advertising, with a minimum fee of 15,000 francs - 245,000 excl. VAT monthly, a figure which was brought down by an amendment to the agreement on 10 June 1997 to 180,000 francs excl. VAT monthly and 17% of fees, and this only for the year 1997. the fears proved justified since the turnover of SEBOL for 1996 fell by 33% (18,300,000 francs) and for 1997 by more than 50% (barely 11,500,000 francs). If the net result after tax fell in 1996 by 300% (350,000 francs), this result will be negative for 1997 by more than 2,000,000 francs for the company SEBOL alone. At the end of learned that the company MC DONALD's was pursuing its policy of establishment interests of the franchisees, providing for restaurants at ANTIBES OUEST and VALLAURIS, which it intended to entrust to the franchisee of CANNES, Monsieur Patrick GILARSKI (formerly Vice-President of MC DONALD'S FRANCE) and to form with him a joint venture, the building permits requested by the company MC DONALD's having been obtained and the constructions being under way. seeing other franchisees set up in his catchment area, he asked, again against his will, the company MC DONALD's for these two restaurants to be allocated to him, which would make it possible to achieve savings in After having met with a first refusal, he returned to the charge, and finally obtained permission to open a third restaurant at ANTIBES OUEST, while another franchisee, Monsieur GILARSKI, opened at the same time (April) a restaurant at VALLAURIS, located in the catchment area of the first restaurant of Monsieur COLLORAFI and much closer to his restaurant than to the one opened in CANNES by Monsieur GILARSKI. this agreement was made on harsher conditions than the first, since the proportional fee was 15% 100,000 francs excl. VAT and a services fee of 5% and a participation in advertising of 4.5%. Throughout the year 1997, Monsieur COLLORAFI never ceased to alert the company MC DONALD'S to the considerable impact caused by these openings in all directions, asking for compensation. The comparison of the turnover for 1996 and 1997 for the company SEBOL shows an overall impact of 50%, that is to say an amputation of turnover of 50%. Pg: 10 As regards the second restaurant operated by the company B & O, the impact of the opening of the two new restaurants on MC DONALD'S was immediate from the month of May 1997 (minus 19% compared with MC DONALD'S forecasts) and continued throughout the year (-30% on the forecasts). Ultimately, the turnover of the three restaurants in 1997 slightly exceeded the turnover achieved by the company SEBOL in 1994 (27,000,000 francs) since it is 31,000,000 francs, but it represents only 60% of the forecasts made by the company MC DONALD'S (52,000,000 francs). Despite the pressing requests of Monsieur COLLORAFI, MC DONALD's refused any concession and any financial aid and it is under these conditions that Monsieur Bernard COLLORAFI and the companies SEBOL were placed under the obligation to issue a summons in June 1997 against the franchisor before the Commercial Court of PARIS in order to have the loss suffered assessed owing to the senseless policy of the company MC DONALD's. ON THE ECONOMICS OF THE AGREEMENT It is appropriate to stress the perverse consequences of the lease-management agreement, notably when it is performed in bad faith by the franchisor, of which the franchisee cannot be aware when he signs the agreement. The franchisee is in reality a false franchisee, since he is a lessee-manager for a duration of twenty years and at the end of the agreement, he has capitalised nothing since he does not own the business (fonds de commerce), whereas he invested for the fitting-out and the equipment, as in this case where Monsieur COLLORAFI invested 10,000,100 francs, of which a sum of 3,135,707 francs remains owed to the banks. The system therefore rests on the making of profits which, added to the normal remuneration of the franchisee, allows him to draw a return which must be equivalent to that which a franchisee who owns his business would obtain. this supposes that obviously not the case the agreement is performed in good faith, which It should also be noted that although the spirit of partnership is praised in all the documents emanating from MC DONALD's, in this case it is a one-way partnership. If the franchisee's turnover increases, the franchisor profits from it by means of the fee of 7% for the company SEBOL, 20% for the company B & O, 15% for the company LES PINS (added to the services fee of 5%) with a flat-rate minimum. If the franchisee's turnover falls, his profitability diminishes 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 for a flat-rate minimum fee Pg: 11 - of 150,000 francs excl. VAT for the company SEBOL - of 215,000 francs excl. VAT, for the company B & O - of 100,000 francs excl. VAT, for the company LES PINS, i.e. a total monthly fee of 495,000 francs excl. VAT, i.e. 5,940,000 francs annually excl. VAT. Thus, all the risks are on the franchisee who, if he is below the threshold, always pays the minimum whatever the turnover, which may be declining, as was the case here. That is to say that on reaching a certain threshold, the franchisee can no longer pay the fee, and this is what happened here. to maintain, as the company MC DONALD's does in its submissions before the Commercial Court, that Monsieur COLLORAFI 31 million, the turnover previous, is absurd since, if he achieved this turnover with a single restaurant, he would have paid an annual fee of: 31,000,000 × 12% = 3,726,000 francs excl. VAT whereas he must pay a minimum annual fee of 5,940,000 francs excl. VAT, i.e. a difference of 2,220,600 francs excl. VAT per year, except for the year 1997, a difference of 1,440,000 francs excl. VAT.. to say that in this “partnership”, which is particularly unequal, the company MC DONALD's has an interest in opening the maximum number of restaurants in order to collect the maximum of fees by means of the minimum fee, which moreover allows it to eliminate external competition, which it moreover boasts of in its submissions (elimination of BURGER KING). The strategy of the company MC DONALD's is moreover obvious, since - on the one hand, the franchisees, and notably those of the South-East region in turnover regularly decrease (the average turnover went from • 17,000,000 francs in 1993 • to 18,000,000 francs in 1994, • to 18,800,000 francs in 1995 • to 15,600,000 francs in 1996 • to 14,800,000 francs in 1997), on the other hand, of MC DONALD's in own operation as in lease-management, went from 5.4 billion in 1994 to 8.4 billion in 1997 (i.e. an increase of 55%) This increase is due to the increase in the number of restaurants which went from 354 to 630 (plus 98%) and not to the increase in the turnover of the franchised restaurants (which, on the contrary, decrease). Pg: 12 it therefore appears that the strategy of the company MC DONALD's is to cap the turnover of the franchisees by refusing to let them open new restaurants or doing so with reluctance (which would allow these franchisees to amortise their costs) while the company MC DONALD'S itself continues to improve its turnover (+ 55%) and in terms of the profits obtained notably by means of the minimum fee. The risks are therefore for the franchisees and the profit always franchisor, whatever the hypothesis. for everyone WHERE IS THE MUCH-VAUNTED PARTNERSHIP? Indeed, in the event of a new opening of a restaurant, even one affecting the area of the first restaurant, the profits of the company MC DONALD's are as follows - the new flat-rate fee which is added to the first - the proportional fees which will be paid subsequently in the event of the minimum being 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. This is the reason why Monsieur COLLORAFI proposed to Monsieur DAUFES, MC DONALD's franchisee in GRASSE who was a seller, to take over his restaurants, subject to the agreement of the company MC DONALD's to which a copy of his letter was sent. “enabling him to bear all the overheads” (opponent's document 74) This is what happened to Bernard COLLORAFI who, as the company MC DONALD'S points out, went from a net result of 1,400,000 francs to a net result of 552,000 francs in 1996 and to a loss which will be 3,200,000 francs for the three companies together in 1996 and 1997. It should be borne in mind that if Monsieur COLLORAFI had let another franchisee open in his place the restaurant of the company B & O and that of the company LES PINS, he would not have recovered the turnover of his restaurants and would thus have seen his total turnover for his restaurant go from 27,000,000 francs, then from 24,000,000 francs to 11,500,000 francs (turnover achieved by the company SEBOL in 1997), which would certainly have led to the bankruptcy filing ON THE DEVELOPMENT POLICY OF THE COMPANY MC DONALD's It should be stressed that the company MC DONALD'S controls the whole operation and is the sole decision-maker as to the choice of the location of the site. Fax received from : 01 45 27 67 13 Py: 13 It is generally the owner of the land It is always the owner of the buildings It is always the owner of the business (fonds de commerce). In practice, the franchisees are warned only a few weeks before the opening and the company MC DONALD's chooses “sovereignly the lucky one” who is going to be authorised to open. It is by an abuse of language that the company MC DONALD'S was able to write in its unofficial submissions that “Monsieur COLLORAFI wished to take this restaurant on lease-management, satisfaction having been given to him by MC DONALD'S FRANCE ... Monsieur COLLORAFI then wished to continue to take part in the network of MC DONALD's by requesting manager, of a business planned in ANTIBES 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, had the company MC DONALD'S respected the rules of partnership and good faith that it advocates, should have been a appreciable reduction of the fees which it had promised in its letter of 12 February Despite the repeated requests of Monsieur COLLORAFI, nothing of the kind was done. if it is the agreement does not provide for territorial exclusivity, it nonetheless remains that the company MC DONALD'S is bound to leave each restaurant a catchment area enabling it to achieve the forecast turnover established by MC DONALD's before each opening. The opening of a new restaurant in this catchment area, a fortiori in the primary catchment area, is a serious breach of the agreement (see case law: judgment of the Commercial Court of PARIS, 30 September 1993, upheld by PARIS 5th Chamber C, 3 February 1994). ON THE PROFIT OF MONSIEUR COLLORAFI the tables commented on in the submissions on the merits of the company MC DONALD's are eloquent, even though they take good care not to refer to the year 1997, a catastrophic year for the restaurants of Monsieur COLLORAFI. They show that over eleven years of activity, only the years 1991 to produced a significant net result corresponding to the promises contained in the documents supplied before the signing of the agreement by MC DONALD's. The results of the first two years were very largely negative (minus 2,500,000 francs), the two following years very slightly positive as was the year 1996; 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, just as the year 1998 will be. Pg: 14 Company SEBOL 1997 Company B & O 1996 Company B & O 1997 company LES PINS 1997 - 1,000,000 francs - 1,200,002 TOTAL - 3,200,000 francs That is to say that it is not the management of Monsieur Bernard COLLORAFI that can be called into question, On the contrary, it will be shown that from the last quarter of 1996, when he opens a drive-through restaurant through the company B & O, he achieves a drastic saving of costs on the company SEBOL. It should be recalled that: - for ten years there has never been any unfavourable observation on his management, the accounting documents being examined every month by the company MC DONALD's - that all the expenditure on the restaurants was incurred in the interest of the - that he has always been congratulated by the executives of the company MC DONALD'S - that all the audits carried out gave him the maximum coefficients of Quality, Service, cleanliness (ratings A or B, i.e. exceptional or excellent, most recently, November 1997, for the last restaurant opened in April 1997. It is to be noted that the audits for the two restaurants were carried out in November and December 1997 and that orally the ratings were obtained, as confirmed by the staff of the companies SEBOL and B & O). Moreover, Monsieur Denis HENNEQUIN, CEO of MC DONALD's, in a letter of 13 January 1997 addressed to all franchisees of the network, describes restaurants DONALD's professionalism, team recruited, led and managed by Bernard COLLORAFI for more than ten years That is to say that the fall in turnover and profitability does not come from management faults or from a non-application of the methods of MC DONALD'S, but comes solely from the disastrous decisions taken by MC DONALD's in disregard of the ethics of franchising, to open restaurants in all directions, in disregard of the most elementary interests of As for the table entitled: “gross remuneration, benefits in kind declared included”, (document communicated by the company MC DONALD'S), it is in line with the remuneration of all the MC DONALD's managers having restaurants with similar turnover. Pg: 15 the remuneration of Monsieur COLLORAFI is even lower than that provided by MC DONALD's in its documents It is therefore scandalous to distort the reasoning by stopping at the year 1996, since it is precisely from October 1996 that the situation is going to change. Indeed, if one draws up the balance of the net results over ten years taking account of the losses of 1996 and 1997, here by including the losses of B & O and of the company LES PINS, it is not 4,587,280 francs of results over eleven years, but 4,587,280 francs - 3,200,000 francs = 1,400,000 francs rounded. As regards the remuneration of Monsieur Bernard COLLORAFI, the social charges must obviously be deducted, i.e. 5,740,000 francs x 20% = 1,000,000 francs rounded, i.e. a net remuneration before tax of 4,740,000 francs over eleven years, i.e. 430,000 francs net before tax, a remuneration lower than the average remuneration of the high-performing franchisees of the MC DONALD'S network. Moreover, out of these sums received by Monsieur COLLORAFI, he paid back 1,500,000 francs into his three companies. where is the personal enrichment of Monsieur COLLORAFI to the detriment of his companies? had reduced his annual remuneration (for example from 100,000 francs to 200,000 francs) this would have allowed him to fees to the amount of 5,600,000 francs per year ... is DISCUSSION It should be recalled that after having vainly tried for more than six months to convince the company MC DONALD's of the need to find an amicable solution to make good the loss suffered owing to the various openings of restaurants, Monsieur Bernard COLLORAFI found himself under the obligation to summon his franchisor to have the Court set the amount of his loss. No attempt at reconciliation was made by the company MC DONALD'S during the summer, and at the three hearings the company MC DONALD's did not deign to file its submissions and had the case sent back to the list. As soon as Monsieur Bernard COLLORAFI received the three letters of formal notice at the end of November 1997, he immediately took steps at the registry of the Commercial Court, but through his hearing representative, Me Michel SEVELLEC, to have the case brought on as quickly as possible, and it is he who obtained the date of 9 February 1998. Pg: 1 It should be stressed strongly that if the three companies managed by Monsieur Bernard COLLORAFI paid the fees due incompletely (no fee is due for previous periods), this is a consequence of the performance in bad faith by the company MC DONALD'S It is this company which is at the origin of the difficulties of the three companies, making full payment of the fees impossible. NEMO AUDITUR PROPRIAM TURPITUDINEM ALLEGANS! It should be stressed: - that the company LES PINS, recently created, paid its fees for the months of April, May, June, July, August, September 1997 and January 1998 and remains owing only the fees of October, November and December 1997 - that the company B & O paid the fees for January, February, July, August, September, and for the months of March, April, June, October, November 1997 and January 1998 - that DONALD's, paid only remaining owing ten monthly instalments. the months of August, September 1997 and January 1998, That is to say that Monsieur COLLORAFI in his capacity as manager of these companies, acted with the most complete good faith, since he accepted the withdrawals each time, rejecting the inability to pay. He made payments when he had the cash position to settle the payments only when he was in Moreover, the sum of 3,500,000 francs of fees due is lower than the loss already suffered by the companies SEBOL, Monsieur COLLORAFI incommensurably lower than that which continues to be generated each day. ON THE FAULTS COMMITTED BY THE COMPANY MC DONALD's Absence of good faith in the performance of the agreement It should be recalled that under the terms of the third paragraph of article 1134 of the CIVIL CODE AGREEMENTS “must be performed in good faith” The Court of Cassation had occasion in its famous judgments of 1 December 1995 to recall, in connection with the problem of the 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 acted towards one of the first franchisees with remarkable bad faith. vainly, it will take refuge behind the absence of an exclusivity clause. TOTAL PAGE(S) 01