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German court case: the scope of pre-contractual information obligations in franchise contracts

03/07/2019
In OLG Düsseldorf, judgment of 25.10.2013 – I-22 U 62/13 = NJOZ 2014, 1622I, the court considered the scope of pre-contractual information obligations in franchise contracts.

In OLG Düsseldorf, judgment of 25.10.2013 – I-22 U 62/13 = NJOZ 2014, 1622I, the court considered the scope of pre-contractual information obligations in franchise contracts.

  • Facts of the case

 A franchise agreement was concluded between the parties which the claimant was seeking to reverse. He justified this by stating that the defendant had incorrectly informed him in advance that he would maintain business relationships with a large number of major customers, from which the claimant, as a potential franchisee, could also profit economically on a large scale. In particular, the franchisor promised a turnover of approximately 33,000 Euros for the first four months according to turnover planning, but the franchisee was only able to achieve a turnover of 1500 Euros after conclusion of the franchise agreement in the same period.

  • Legal issues

 Where a party breaches the obligations imposed on it by the contract, this usually results in a claim for damages. However, German law goes even further than this and partially grants claims for damages if a breach of duty occurs even when no contract has yet been concluded. Such a breach of duty is possible in the initiation of franchise contracts, in particular, if the profitability and the economic risks of the business venture have not been sufficiently clarified.

 The courts often have difficulty assessing the distribution of risk between the contracting parties and, in particular, when the franchisee's entrepreneurial responsibility ceases and the franchisor's duty to provide information begins.

  • Entrepreneurial risk vs duty of disclosure

 Since it is often not easy to assign responsibility and weigh up the entrepreneurial risk of one party against the other's duty of disclosure, the individual case must always be considered. However, in this case, the court provided points which can be helpful in delimiting the respective spheres of the contracting parties.

  1. The franchisor does not have the same level of extensive pre-contractual obligations to provide information as would be expected from a start-up consultant. In particular, it is not the franchisor's duty to inform the franchisee about the general occupational risk of a self-employed person and to draw up comprehensive calculations in this respect.

  2. It is of decisive importance for a potential franchisee to be informed about the profitability of the franchise before concluding the franchise contract. Therefore, there is an obligation on the franchisor to clarify the profitability of the franchise system on an accurate factual basis – in other words, truthfully as a whole.

  3. The duty of disclosure includes making accurate statements regarding the turnover to be achieved and, in particular, not presenting the franchise system as more successful than it actually is. The data to be communicated in this context must not be based on a pure estimate, but must be attributable to a concrete, site-specific investigation of the market.

Co-authored by Ennio Schwind 

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