Compensation for reputational damage to the franchisor

The District Court of Amsterdam ruled on 3 October 2018, ECLI:NL:RBAMS:2018:7830, on the question of whether reputational damage should be compensated to a franchisor if a third party damages the reputation of the franchise system, for which franchisees complain to the franchisor .

A developer of a digital platform for a franchisor had provided a platform that any third party could access. The franchisor claims that it has suffered reputational damage because business information of the franchisor has literally become public, as a result of which it has come to be seen in an unprofessional light in relation to, among others, its franchisees. Franchisees are also said to have complained to the franchisor that the proposed quality improvement was not achieved. The franchisor is claiming compensation of € 25,000 from the developer of the platform for reputational damage.

This concerns a claim within the meaning of Article 6:106 paragraph 1 sub b of the Dutch Civil Code: “For a disadvantage that does not consist of financial loss, the injured party is entitled to compensation to be determined in fairness if the injured party (…) in his honor or reputation has been damaged (…)”. The court that awards compensation on the basis of Article 6:106 of the Dutch Civil Code has a discretionary power with regard to determining the amount of that compensation. The court may take all circumstances of the case into account when estimating the damage and it has the authority, if it considers there are grounds to do so, not to award compensation (cf. Supreme Court 27 April 2001, ECLI:NL:HR :2001:AB1337, NJ 2002/91).

In the opinion of the court, too little has been argued for the existence of reputational damage, or at least: what has been asserted does not carry enough weight to – if true – be regarded as damage eligible for compensation within the meaning of the law. Even if it were to be ruled that the allegation does weigh heavily enough to consider compensation to be awarded in principle, that compensation would in the present case be set at zero on grounds of fairness, because according to the court the intentions of the developer were good and that it had no intent or gross negligence for the reputational damage.

Reputation and goodwill are of great importance to the franchisor and their formula. It appears once again that preventing damage is very important, because recovering reputational damage can be difficult.

mr. AW Dolphijn – franchise lawyer

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