The Franchisor’s Disclosure Obligation

Germany has quite elaborate case law on franchising, even though it does not have specific franchise laws – unlike e.g. Belgium, Italy, Latvia, Lithuania, Romania, Sweden and Spain. Such case law is based on the general rules on contracts, including the general requirement to always act in good faith. It includes rules about the franchisor’s disclosure obligation, i.e. on the necessity of providing information to the future franchisee before the conclusion of contract.

There is extensive case law concerning which information to provide pre-contractually, based especially on said good faith principle. Both the franchisees and the franchisors are obliged to disclose to the other party the circumstances which may affect the purpose of the contract.

Such circumstances to be disclosed include the profitability of the franchise system / the achievable turnover on the basis of generally applicable facts (reconfirmed e.g. still quite recently by the Hamburg Regional Court, Case No. 334 O 14/18). Reason given is that the profitability of the system is of particular importance to the franchisee to decide about whether entering into the franchise contract. The franchisee must rely on the accuracy of the information provided; he is generally dependent on the franchisor's pre-contractual information to be able to form a picture of the future viability and development opportunities of the franchise system.

Therefore, franchisors shall exercise increased and special care in the presentation and utilization of data to make the economic possibilities of the franchisee predictable. The facts and figures communicated must not be "glossed over" by the franchisor in any way. To comply with German franchise laws, the information provided must be 1. correct in content, 2. up-to-date and 3. clear / not misleading (cf. Higher Regional Court of Düsseldorf, Case No. I-22 U 62/13).

What, however, a franchisor does not need have to inform without being asked about are circumstances which do not concern the performance of the franchise contract (constant case law, see e.g. Higher Regional Court of Munich, Case No. 8 U 2207/87). Accordingly, in the most recent case decided now in June 2021, the franchisor did not have to disclose that the franchisor had to file for insolvency in the past, more than five or almost ten years ago – concretely concerning the German fast food franchise chain “Wienerwald”, specializing in chicken. In the concrete case, the court decided that it was “not recognizable that and how the distant, overcome insolvency of the franchisor – especially with an established brand such as "Wienerwald" – could impair the implementation of the business of the franchisees in 2012. It was therefore the responsibility of the plaintiff to inform himself about the previous history of Wienerwald. This would also have been easily possible for him via the Internet. Moreover, the plaintiff’s contrary view would, as a practical result, mean that business reorganizations could hardly be carried out successfully any more.”

Practical advice:

• Franchisors in Germany are, even without specific statutory franchise laws, subject to pre-contractual disclosure. They must generally disclose those circumstances which may affect the purpose of the contract.
• Information provided must accurately reflect the realities of the franchise system in question as the necessary basis for any suitable profitability forecast.