Written submissions in reply

HEARING of 16 March 1998 at 9.45 Mr President VASSEUR to the President and Judges making up the 1st Chamber of the Commercial Court of PARIS SUBMISSIONS IN REPLY FOR: the company SEBOL Public limited company with capital of 250,000 francs, registered with the Trade and Companies Register of ANTIBES under number RCS 3 340 945 062 188 B 656) whose registered office is CENTRE COMMERCIAL CARREFOUR Chemin de Saint Claade, 06600 - ANTTBES represented by the Chairman of the Board of Directors, Mr Bernard COLLORAFI, domiciled at the registered office The company B et O limited liability company with capital of 50,000 francs, registered with the Trade and Companies Register of ANTIBNS under number RC B 408 592 236 (96 B 38) whose registered office is rond-point We iseller route de Grasse, 06600 - ANTIBES represented by its manager, Mr Bernard . COLLORAFI domiciled at the registered office the company SARL LES PINS voluntary intervening party whose registered office is 32, avenue de Cannes 06160 - JUAN LES PINS represented by its manager, Mr Bernard COLLORAFI domiciled at the registered office Mr Bernard COLLORAFI born on 1 December 1945 in SOUSSE, TUNISIA of French nationality, acting in his personal name and in his capacity as signatory of the lease-management agreements (*location-gérance*) residing at 21 b, chemin de l'Estelle, 06110 - LE CANNET ROCHEVILE Me Jean-Paul CLEMENT Lawyer of the PARIS Bar 78, avenue Mozart, 75016 - PARIS T° 01 45 27 63 02 - FAX 01 45 27 67 13 PALAIS B 405 and Me Michel SEVELLEC, SCE of lawyers 12, avenue Marceau, 75008 - PARIS Tº 01 47 20 92 40 - FAX 01 47 20 12 10 PALAIS W 09 AGAINST: The company MC DONALD'S FRANCE public limited company with capital of 180,000,000 francs irmatriculée in the Trade and Companies Register of VERSAILLES under number # 722 003 936 whose registered office is 1, rue Gustave Fiffel 78045 - GUYANCOURD CEDEX FRANCH represented by the Chairman of the Board of Directors having as lawyers Me Jean-Marie LELOUP, Michèle LELOUP c= Philippe MISSEREY Associate lawyers of the law firm LªLOUI 61, rue Renaudo:, 86000 - POITTERS and the SCP VINCENT MOLAS LEGER CUSIN Lawyers of the PARIS Bar 87, boulevard Saint Michel, 75005 - PARIS PALAIS P 159 MAY IT PLEASE THE COURT More than a month after having received the claimants' submissions, the company MC DONALD'S has its Counsel send by fax submissions in reply, on Tuesday 10 March, whereas the deliberation is scheduled before President VASSEUR for 16 March and the claimants' file has been lodged since Friday 6 March. Once again, one can only deplore the attitude of the company MO DONALD'S which, for the second time, attempts quite disloyally a coup of force - the first time, the company MO DONALD'S summoned in summary proceedings five days before the hearing leaving the claimants and their Counsel only cina samada mate dimanched nout répondres It was not Mr COLLORAFI who could know the amount of the investments of MC DONALD'S. Moreover, the document supplied to the company SEBOL in 1987 is signed by Mr Brian GIBSON, at the time a manager at head office. This is so true that the submissions of the company MC DONALD'S refer only to the document handed over before the company SEBOL, mention those handed over before the opening of the company R and 0 and of the company LES PINS. It therefore implicitly admits that it is the author of them. Its "intellectual" signature is patent. Thus, it appears that: - for the company SEBC it was provided: a concessionaire's salary of 480,000 francs • a net income from the 3rd year of 1,233,810 francs • that is a total of 1,700,000 francs rounded, and this for each year. - for the company B and 0, it was provided a cash flow after financing of 891,000 francs per year with a ten-year forecast of 8,913,000 francs. - for the company LES FINS, the average cash flow over ten years is 957,000 francs, calculated over ten years at 9,567,000 francs. One is therefore extremely far from the mark, since the total of gross salaries (from which 20% of social charges should be deducted) is: • 5,740,000 - 20% = 4,500,000 francs, • profit after tax = 1,400,000 francs . that is a total of 5,900,000 francs over more than ten years, to be compared with the 42,000,000 francs of fees received by the company MC DONALD'S) ON THE SO-CALLED MISSION REPORT OF MR ALAIN HUSSON DUMOUTIER In an attempt to counter the report requested from Mr Robert GANDUR, court-appointed expert approved by the Court of Cassation, the company MC DONALD'S turned to Mr Alain HUSSON DUMOUTIER who states that he is - Ecole Supérieure de Commerce - Institut d'Etudes Politiques de PARIS - Member of the Chambre Nationale des Conseils et Experts Financiers - Arbitrator and expert at the International Chamber of Commerce - Former franchise director at CRÉDIT LYONNAIS - Former court-appointed expert in finance and management To simplify, the submitting parties will retain only his title as former court-appointed expert in finance and management. The submitting parties, having been unable to absorb in a few days such a voluminous report and having been unable to consult validly with their Counsel located in request the President to authorise them to produce a more precise note after the deliberation when they have been able to analyse precisely the report of Mr Alain HUSSON DUMOUTIER. This report (the opposite of that of Robert GANDUR, court-appointed expert) is totally subjective since in particular in its second and third it relies on documents emanating from the company MC DONALD'S and adopts as its own, without objectivity, the thesis of the company MC DONALD'S. The Court will appreciate at its true value the implausible conclusion of the former court-appointed expert who asserts with a straight face that the fee bearable by the three companies of Mr COLORAFI is practically equal to the minimum fee demanded by the company MC DONALD'S. Now, the payment of this minimum fee up to 5,940,000 generates a loss which for fifteen months and the three companies is 200,000 francs The former court-appointed expert takes care not to allude to the losses of the company MC DONALD'S in submissions prefers to insist on the drawings of Mr COLORAFI during the good years, completely erasing what has happened since October 1996. A minimum of objectivity should have led the former court-appointed expert to calculations in 1997 for which the company MC DONALD'S regularly receives and in any case each month key figures. isolate a period considered is eleven years and five months, whereas the period - emphasise the financial years 1995 and 1996 - omit to recall that barely balanced the first five financial years were loss-making . omit to say that in eleven years, only four financial years enabled Mr COLORAt: to remunerate his capital unworthy and demonstrates the partiality of the former court-appointed expert. Spokesman of the company MC DONALD'S and not a genuine expert, Mr Alain HUSSON DUMOUTIER asserts with a straight face that MC DONALD'S is a franchise founded on partnership (page 33) that franchisees in difficulty can benefit from fee adjustments (page 40) whereas the entire file shows that the company MC DONALD'S had in view only its own interest by opening restaurants at all costs, in disregard of the interest of Mr COLLORAFI and that the only « gigantic aid » that was provided is a reduction of the enormous fee of the B and o restaurant from 20% to 17% for a single year, that is a very minimal difference of a little more than 10%.. To claim finally that the restaurants impacted by the anarchic openings of the company MC DONALD'S regain their profitability after two years is a petitio principii of which not even a beginning of proof is provided. While it is possible and even desirable that restaurants run by Mr COLLORAFI regain profitability, the fact remains that an irreversible harm has already been caused to Mr COLLORAFI and to his companies, without the company MC DONALD'S itself being affected, since through the minimum fee, it receives its return on investments whatever happens. The former court-appointed expert makes himself the apostle of a totally unequal partnership. Finally, this mission report contains numerous untruths taken up by the company MC DONALD'S in its submissions, in conspicuous bad faith since it knew perfectly well their falsity, and in particular signing of the agreement, whereas the company LES PINS did not summon even companies SEBOI and B and 0 which moreover had the writ of summons served almost two months after the opening of the restaurant of the company LES PINS; - that Mr COLLORAFI drew 1,000,000 francs of dividends in 1996 whereas if he distributed 000 francs of dividends there were 650,000, of which 600,000 were paid into B and o (personal contributions) - the remainder, that is 350,000 francs appearing in current account in the balance sheet at 31 December 1996 and having been subsequently paid back into the company B and O to complete Mr COLLORAFI's contribution - that Mr COLLORAFI remained passive in December 1996 when he received the formal notice of 27 November, whereas he reacted immediately by writing on 4 December (document 99) as well as on 26 December. It is therefore appropriate to return to the essential point. the strategic decision of the company MC DONALD'S to build and open without prior market study, - a restaurant in ANTIBES NORD in the primary area of the company SEBOL - a LES PINS restaurant (decision taken before the opening of QUICK) - a restaurant in VALLAURIS is a decision which harms the interests of the company SEBOL and of Mr COLLORAFI. It is contrary to the spirit of partnership displayed by MC DONALD'S, recalled by the former court-appointed expert and proclaimed in the CODE OF ETHICS of the FRENCH FRANCHISE FEDERATION (*FÉDÉRATION FRANÇAISE DE LA FRANCHISE*) to which the company MC DONALD'S prides itself on belonging. If Mr COLLORAFI had let another franchisee or the company MO DONALD'S open the ANTIBES NORD restaurant, and then the ANTIBES OUEST restaurant, his total turnover would have fallen from 27,000,000 francs to 11,500,000 francs, thus driving him with certainty to file for insolvency. He was thus compelled to take this decision to reduce the risks. This does not mean that he ratifies the strategic decision of the company MC DONALD'S but simply that he is trying to preserve the essential, while making (throughout the whole of 1997) every reservation about the adventurous policy of the company MC DONALD'S. unilaterally by MC DONALD'S which is at the origin of the losses suffered for fifteen months currently), and of the impossibility for Mr COLORAFI and his three continues companies to pay the minimum fees imposed by the company MC DONALD'S. It is important to stress that at no point in the submissions of the company MC DONALD'S the report of the former court-appointed expert, is any management fault of Mr COLLORAFI invoked. That would moreover be in contradiction with all the congratulations that he on the part of MC DONALD'S, the very opportune complaint of a frustrated consumer (see opposing document 81) proving a contrario that in eleven years, Mr COLLORAFI managed perfectly and followed scrupulously the prescriptions of the company MC DONALD'S, in particular on Quality, Service and Cleanliness (QSC STANDARDS) his salary remuneration was normal and of the same order of magnitude as that of his colleagues. His drawings by way of dividends were made only during the good years. The dividends distributed in 1996 were so in June, that is before the opening of the second restaurant (which took place in October). to inflate the figures artificially, the company MC DONALD'S does not hesitate to speak of gross remuneration from which social charges should be deducted and of gross dividends from which approximately 2,000,000 francs of tax should be deducted. Finally, contrary to what is asserted with aplomb, Mr Bernard COLLORAFT put back into his companies 1,050,000 francs of the dividends distributed by the company SEBOL. Consequently, the decision of the company MC DONALD'S is equivalent to performance of the agreement in bad faith in accordance with Article 1134 paragraph 3 of the CIVIL CODE. The sole argument of the company MC DONALD'S is to say - you were to pay me the fees - you did not pay me the fees - consequently, the agreement is terminated by operation of law is not in conformity with section 5 of chapter 3 of the CIVIL CODE (on the interpretation of agreements). Must it be recalled that Article 1156 states that: « in agreements one must seek what was the common intention of the contracting parties, rather than stopping at the literal meaning of the terms. » Article 1160 : « one must supply in the contract the clauses which are customary in it, although they are not expressed in it » This attitude also constitutes an abusive exploitation of a state of economic dependence, as decided by the Commercial Court of in a decision of 3 February 1997 (11th Chamber) company ELF ANTAR FRANCE v. spouses NOWACZYK. Abuse of economic dependence may be compared with abuse of rights, as defined by the case law of the Court of Cassation in its famous judgments of the Plenary Assembly of 1 December 1995. Contrary to what is asserted by the company MC DONALD'S, indeed nullity may be invoked, it is quite possible to request, compensation in the alternative termination at the franchisor's fault. article 1162 : « in case of doubt, the agreement is interpreted against the person who stipulated and in favour of the person who contracted the obligation ». the Court must therefore interpret the agreement, in light of the common intention of the parties which is (and this is again recalled by the company MC DONALD'S) to establish a genuine partnership between the parties, in which the stronger party helps the weaker party in the event of difficulty, and in light of the code of ethics of the FRENCH FRANCHISE FEDERATION (*FÉDÉRATION FRANÇAISE DE LA FRANCHISE*) to which the company MC DONALD'S belongs, as well as in light of the forecasts of turnover and of profitability of the investments announced by the company MC DONALD'S in its pre-contractual documents. the delay in the payment of the fees (which does not constitute non-payment of fees) - it being recalled that Mr COLLORAFI partially paid the January 1998 instalment and that he blocked the February 1998 instalment and part of the March 1998 instalment in a special account - is the direct consequence of the unilateral decision of MC DONALD'S to open three restaurants (ANTIBES OUEST, ANTIBES NORD and VALLAURIS) in the catchment area of the company SEBOI, after the openings of MANDELIEU (April 1998), GRASSE (December 1997), CAGNES (July 1994), CANNES (November 1995). In vain would the company MC DONALD'S cling to the notion of "territorial absence" since obviously the principle of good faith makes the agreements binding such that a franchisor may not take back with one hand what it has given with the franchisor is bound, under the terms of custom, of the Code of Ethics of own writings, to give each of its franchisees a catchment area investments. which enables it The opening of the three restaurants prevents the company SEBOL from reaching such profitability, and much more, causes losses. The same applies to the later openings for the company B and 0, and to the opening of VALLAURIS for the company LAS PINS. a single fault (in the absence of any breach of the agreements committed by Mr COLLORAFI companies) cannot justify the of the agreement, the company MC DONALD'S being unable to invoke « its own turpitude ». IT SHOULD BE RECALLED THAT MR BERNARD COLORAFI DOES NOT WISH TO LEAVE THE NETWORK, DOES NOT REQUEST TERMINATION OF THE AGREEMENT AS A PRINCIPAL CLAIM AT THE FAULT OF THE FRANCHISOR, BUT COMPENSATION FOR HIS HARM. It is therefore appropriate to suspend the termination clause provided for in the agreement, by interpreting the common intention of the parties and thus giving a period of twenty-four months to the three companies to pay the arrears on adjusted rents, and this, if need be, by way of damages and interest. However, already the three companies and Mr COLLORAFI are suffering harm by the very fact of the losses which were generated by the fault of MC DONALD'S and in that event, to order the company MC DONALD'S to compensate this harm which is equal at the very least to the difference between the minimum fee demanded and the bearable fee. that is - 2,000,000 francs for the company SEBOL - 2,500,000 francs for the company B and O - 2,500,000 francs for the company LES PINS - as well as 500,000 francs for Mr COLLORAFI on account of the non-material harm personally caused to him. In the alternative, and without this being in any way in contradiction with the main argument, the submitting parties maintain that the fault committed by the company MC DONALD'S must entail (not the judicial termination of the agreement, under Article 1184 of the CIVIL CODE.. The attitude of the company MC DONALD'S is analogous to that which led to the company BUT being severely sanctioned by the Commercial Court of PARIS, confirmed by the Paris Court of Appeal on two occasions and by the Court of Cassation. It must be sanctioned in accordance with this case law of the Court of PARIS, ratified by the Court of Cassation, as well as the case law on the abusive exploitation of a state of economic dependence (ROUEN, 6 October 1995, PROMODÈS v. DUVAL) confirmed by the Court of Cassation on 16 December 1997 and this in an analogous case since it concerned a lease-management agreement (*location-gérance*). ON THE HARM Whatever the calculation made, it is obvious that the harm is considerable. It should be stressed that, unlike a usual lease-management (*location-gérance*) agreement, the lessee-manager invested very largely in the fittings, as moreover recalled by the former court-appointed expert who assesses the investments of the lessee-manager at: 6,474,000 francs for the company SEBOL * 909,000 francs for the company B and 0 378,000 francs for the company LES PINS, that is 10,161,000 francs in total Furthermore, it should be recalled that the company MC DONALD'S from the three companies managed by Mr COLORAFI by way of fees, a total sum of 12,276,000 francs (to be compared with the net profit of Mr COLLORAFI over eleven years, that is 1,400,000 francs) which naturally takes into account, unlike the objective assessments of Mr the former court-appointed expert, the losses suffered since October 1996 and which persist. note that all of the investments of MC DONALD'S assessed by the former court-appointed expert at 42,481,000 francs are entirely covered by the fees paid. The claimant companies and Mr Bernard COLLORAFI therefore maintain their claims, adding that in the event of judicial termination, it is appropriate to order the company MC DONALD'S to refund the sum of 42,276,000 francs paid by way of fees. ON PROVISIONAL ENFORCEMENT It is appropriate to order provisional enforcement of the judgment and to state that Mr COLLORAFI and his companies may continue to operate the business as long as their harm has not been settled by the company MC One can indeed reason by analogy with the case of a trader expelled by a landlord (the company MC DONALD'S moreover speaks of expulsion) and this all the more so as the claimants are the owners of the investments and equitable that they leave compensated for what belongs to them. ON THE COUNTERCLAIM Obviously, the counterclaim cannot succeed and it is appropriate to dismiss the company MC DONALD'S claims, submissions and in particular its request for a finding of termination by operation of law of the three agreements at the fault of the three claimant companies. Indeed, as has just been indicated, the partial non-payment of the fees is due to a fault of the company MC DONALD'S which cannot in any way invoke this fault to obtain termination by operation of law. In the alternative, if the Court admitted the termination or the agreements, would not dismiss the company MC DONARD'S of all its claims since the company MC DONALD'S cannot request compensation for harm which it caused to itself by its untimely strategic decision. it would be inequitable to leave to the charge of the companies SEBOI, B and o and LES PINS as well as Mr COLLORAFI the irrecoverable costs which the present proceedings cause them. The company MC DONALD'S must therefore be ordered to pay Mr COLLORAFI and each of the three companies the sum of 100,000 francs under the provisions of Article 700 of the NCPC. FOR THESE REASONS Award the submitting parties the benefit of their previous pleadings Suspend the termination clause and grant Mr COLLORAFT and his companies a period of twenty-four months to pay the arrears on : rents adjusted and this, if need be, by way of damages and interest Order in that case the company MC DONALD'S to pay: - 2,000,000 francs to the company SEBOL - 2,500,000 francs to the company B and o - 2,500,000 francs to the company LES PINS 500,000 francs to Mr COLLORAFI to make good the harm suffered as at 1 January 1998 Fix the bearable fee at: - 252,000 francs for the company SEBOL - 794,000 francs for the company B and 0 - 934,000 francs for the company LES PINS Add thereto, in the very alternative, Pronounce the judicial termination of the agreement at the fault of the company MC DONALD'S and order it to pay: - to the company SEBOL the sum of 9,600,000 francs - to the company B and O the sum of 22,200,000 francs - to the company LES PINS the sum of 13,250,000 francs - to Mr COLLORAFI the sum of 2,000,000 francs. Order provisional enforcement of the judgment to be given, and in particular on the payment of the amount of the harm, Mr COLLORAFI and the claimant companies being authorised to leave the premises only when they have been compensated for their harm;