The bank’s duty of care in franchise agreements

On 23 May 2017, the Court of Appeal in The Hague, EQLI:NL:GHDHA:2017:1368, had to rule on the question whether the bank should have warned a prospective franchisee in connection with the financing arrangement that the bank had concluded with the franchisor . After all, on that basis the bank should have been aware of the deplorable financial situation of the franchisor and should therefore warn the franchisee about this when entering into the long-term credit and franchise agreement. 

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 Court of Appeal ruled that the bank, as a lender, in principle has a duty of care aimed at protecting the franchisee against its own carelessness and lack of insight, which depends on the franchisee’s own experience and expertise. The Court of Appeal rules that it has not been established 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 chain was not (or no longer) viable . 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. The court therefore concludes that the bank must be paid by the franchisee. Although the bank has a duty of care towards a franchisee (as a borrower), the bank cannot conceal what the bank does not know.

mr. AW Dolphijn – Franchise lawyer

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