The court ruled that to a candidate franchisee some time ago essential information in the pre-contractual phase has been withheld. Ultimately, the franchisee justifiably dissolves the pre-agreement and the franchisor is sentenced to compensation for damages.
Franchisor and franchisee have jointly drawn up a business plan, in which the franchisor’s accounting firm has also made a financial forecast. At some point, the franchisee requests the franchisor for the underlying documents that formed the basis of the business plan, after the initial external financier of the franchise organization has withdrawn, the franchisee wants to know more. However, Franchisor does not provide these documents on the grounds that the business plan as such would be sufficient and that the underlying documents would contain sensitive business information that cannot be made available. The prospective franchisee slowly but surely loses faith in the franchisor, eventually rescinds the pre-agreement and claims damages from the franchisor.
The court ultimately ruled that the franchisor was indeed obliged to provide not only the business plan, but also the underlying documents to the prospective franchisee and that merely showing part of these documents is insufficient. The importance of this for the prospective franchisee has only increased after the initial external financing party withdrew. As a result of this course of events, the prospective franchisee has suffered damage and the franchisor must compensate the franchisee financially.
The court’s ruling shows once again that one should never think too lightly about the use of financial forecasts. If a franchisee requires underlying information, this must be provided. Incidentally, it is important that all relevant information is provided by the franchisor to the franchisee in the pre-contractual phase and therefore not just supporting documents for a financial forecast. It is part of the franchisor’s duty of care to carefully and fully inform the prospective franchisee and to provide maximum support during this phase.
It is also relevant in this ruling that the activities of the external auditor are directly attributed to the franchisor, even if there is a direct legal relationship between the candidate franchisee and that external auditor. This also shows that the franchisor has a very clear and far-reaching duty of care in the pre-contractual phase, where it concerns financial forecasts for the benefit of the prospective franchisee. If the franchisor is negligent at that stage, for example, as this case shows, by not providing underlying information, this can lead to liability of that franchisor and damages to the franchisee.
Mr Th.R. Ludwig – Franchise Attorney
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