How far does the bank’s duty of care extend?

Some time ago the question was raised in case law what the position of the bank is in the triangular relationship franchisor – bank – franchisee. In a judgment discussed earlier, it was concluded that under certain circumstances the responsibility of the bank is comparable to that of a franchisor. The judiciary has now again expressed itself on this question, albeit in a completely different situation.

The practical situation was as follows: a franchisee joined a franchise organization and concluded a credit agreement in that context on the basis of the financing arrangement that the franchisor had with the same bank. However, the franchisor turned out to be in financial trouble. The question arose whether the bank should not have warned the franchisee in the pre-contractual phase about the poor financial situation of the franchisor banking with them.

After entering into the franchise agreement with the franchisor and the credit agreement with the bank, the franchisee has not fulfilled the obligations under the credit agreement. The bank subsequently terminated the credit agreement with the franchisee. The franchisor also went bankrupt, after which the bank took the franchisee to court in order to collect the outstanding credit. The franchisee defended himself and took the view that the bank should have warned the franchisee about the poor financial position of the franchisor, since the cause of the payment arrears to the bank is the fact that the franchisor was insolvent. The franchisee thus took the position that his own responsibility towards the bank had to be nuanced because of the financial situation in which the franchisor found himself.

The Court of Appeal ruled that in general the bank, as a lender, has a duty of care aimed at protecting the franchisee against its own rashness and lack of insight, a duty of care that, however, also depends on the franchisee’s own experience and expertise. The Court of Appeal states that in this situation it has not been established in so many words that the bank knew or should have known at the time of entering into the credit agreement and the franchise agreement that the financial position of the franchisor was unsustainable and/or that the franchise organization was no longer viable. The bank must therefore be informed. What also plays a role is that it has not become apparent that the prospective franchisee asked the bank questions about the franchisor’s financial position at the time. An important addition. The franchisee therefore has an active obligation to investigate the franchisor’s financial status and must verify this with the bank. The court therefore concludes that the bank should simply be paid by the franchisee. Please note: if a franchisor is in dire straits and the bank is aware of this, its duty of care may entail that it must inform a prospective franchisee of this. It is also important that the franchisee himself asks the bank in question relevant questions in the pre-contractual phase. It is therefore true that the bank has a duty of care towards a franchisee (as a borrower), but the bank cannot conceal what the bank does not know or cannot know.

mr. J. Sterk – franchise lawyer

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