Duty of care franchisor in the pre-contractual phase

By mr. Th.R. LudwigPublished On: 19-04-2018Categories: Forecasting issues, Franchise Agreements, Statements & current affairsTags: franchise agreement, franchisee, label3, preliminary agreement, Prognosis, revenue forecast, tag2

The District Court of Limburg ruled on 6 April 2017, ECLI:NL:RBLIM:2016:2843, that the franchisor has a duty of care towards the prospective franchisee in the pre-contractual phase. This means that the franchisor is also obliged in the pre-contractual phase to provide assistance and advice to a prospective franchisee. The Court of Appeal of ‘s-Hertogenbosch upheld the judgment on 17 April 2018, ECLI:NL:GHSHE:2018:1607.

The prospective franchisee had entered into a confidentiality agreement with a franchisor. This includes, among other things, that the aspiring franchisee will keep all information that comes to his knowledge in this context confidential from third parties and that the information provided will not be used in such a way that the interests of other parties involved will be harmed.

Subsequently, the prospective franchisee was provided with an operating forecast showing that the gross margins in the first 3 years amounted to between 27% and 29%. Inquiries with the Franchise Council show that the average margins of other franchisees over the previous 3 years are between 23.3% and 26.9%.

The aspiring franchisee breaks off negotiations at the last minute to enter into a franchise agreement and then contracts with a competing franchisor organization. This abort took place as a result of the fact that the gross margins of other franchisees of this franchisor turned out to be lower than had initially been predicted by the franchisor to the prospective franchisee.

In the judgment, the court had first stated that the franchisor has a duty of care to provide assistance and advice in view of the dependent position in which the franchisee will find himself. According to the court, this duty of care also applies in the pre-contractual phase, certainly in cases such as the present one, where the franchisor is a professional party and the prospective franchisee is a starting entrepreneur who is orienting himself for the first time on entrepreneurship or franchiseeship.

According to the Court of Appeal, the backgrounds of the parties also play a (limited) role and the franchisor’s vision is also not followed in the position that the prospective franchisee should not have broken off the negotiations. Although the parties had jointly found a suitable building to exploit the franchise company, the prospective franchisee did not act unlawfully by going into business with a competing franchisor organization after the negotiations had broken off.

This ruling shows that, particularly in situations where a prospective franchisee will find himself in a dependent position, the franchisor must ensure that it provides the necessary assistance and advice. With the conclusion of a letter of intent or preliminary agreement, other than just a non-disclosure agreement, the duty of care can be regulated in the negotiation process, which is recommended.

mr. AW Dolphijn – franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Go to dolphijn@ludwigvandam.nl .