German law provides for the enhanced protection of franchisees and, in particular, provides that a franchisor must fully inform a potential franchisee about the profitability of the proposed franchise during contract negotiations prior to the conclusion of the franchise agreement.
This protection was reinforced by a judgment last Autumn in the Higher Regional Court of Hamburg where an earlier court decision that the franchisor pay damages to the franchisee in excess of €156k was upheld.
The issue was that the franchisor had provided the prospective franchisee with financial information which was not based on turnover figures that corresponded to the average turnover of all other franchised outlets, nor did it correspond to franchised outlets that were comparable to the size and location of the outlet that the franchisee intended to establish.
The position was exacerbated by the fact that the projected turnover figure provided by the franchisor was only based on assumptions, hopes, and an overall feeling on how the turnover might develop in the future.
The prospective franchisee became a franchisee of the franchisor based on this information. However, from the outset of the franchise agreement, the turnover of the franchised outlet remained far behind the forecast contained in the financial information provided by the franchisor. Worse still, it was not even sufficient to cover the running costs of the franchised outlet!
Given this judgment, it is imperative that a franchisor during contract negotiations with a prospective German franchisee:
- provides turnover forecasts or profitability calculations based on comprehensible facts or experience;
- informs the prospective franchisee (whether or not requested) if such forecasts and calculations are not available because there are no outlets established which are of a comparable size or location to the outlet that the prospective franchisee intends to establish, or makes it clear that forecasts and profitability calculations are based only on the franchisor’s estimates.
Michaela Schwuchow and Marcus Schriefers of Heussen Rechtsanwaltsgesellschaft mbH