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Performance of the franchisor’s pre-disclosure obligation in the COVID-19 era

Performance of the franchisor’s pre-disclosure obligation in the COVID-19 era

The pandemic may have affected franchise businesses financially. When disclosing information on their financial position, franchisors must ensure that the disclosure is current, accurate, and complete.

In the Netherlands, the Dutch franchise law (Wet franchise) will take effect on 1 January 2021. This law introduces a set of provisions to be added to Book 7 of the Dutch Civil Code (DCC) to regulate franchise agreements here. Among other things, the franchise law rules constitute a pre-contractual information obligation for a franchisor towards a prospective franchisee. How should a franchisor perform the pre-disclosure duty in the current COVID-19 situation?

Franchisor’s pre-disclosure obligation

DCC article 7:913(2) to (4) requires a franchisor to furnish a potential franchisee with multiple items of material information. According to DCC article 7:914(1), the franchisor shall give the franchisee the required information items at least four weeks before the conclusion of a franchise agreement. Nevertheless, the franchise law rules are silent as to the quality of the pre-disclosure information. In this respect, I believe that the franchisor owes the prospective franchisee a duty of care. That is, the franchisor shall disclose pre-sale information that is current, accurate, and complete. My conclusion is drawn from DCC 7:917(2). This article provides that the franchisor must ensure that the disclosed information enables the prospective franchisee to make an informed decision on whether or not to enter into a franchise agreement. It is clear that potential franchisees will be unable to make an informed decision unless they are provided with current, truthful, and full disclosures.

Performance of the pre-disclosure obligation in the COVID-19 era

Why emphasise that a franchisor performs a disclosure obligation with due care? One practical example is that the Dutch government has currently implemented stricter measures against coronavirus and one of the measures is the closure of non-essential businesses. These measures could affect businesses financially; some franchise businesses may have seen a decline in revenue during this exceptional period. From a purchaser’s perspective, the franchisor’s current financial status is imperative. This information would help a potential franchisee to assess the viability of a franchise business. Accordingly, a franchisor should assess the economic impact of COVID-19 on the franchise business and disclose such information truthfully and completely. This requirement does matter. In other countries, such as Australia, the Australian Competition & Consumer Commission has urged franchisors not to disclose any false or misleading information about the solvency and financial situation resulting from impact of the coronavirus.

Conclusion

The new Dutch franchise law requires franchisors to provide a prospective franchisee with material information to ensure the franchisee is well informed before concluding a franchise agreement. In achieving that goal, the franchisor should have a duty of care to ensure that the disclosed information is accurate, current, and complete. The pandemic has now significantly aggravated the financial position of many businesses. The information about the franchisor’s economic situation must be current, accurate, and complete. Thus, franchisors must endeavour to update their current financial status so that prospective franchisees have an accurate and full picture of their current financial health.

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