Under German law, each party to a contract is generally obliged to inform himself of the general market conditions and the risks arising therefrom before entering into the contract. As an economically independent entrepreneur, the franchisee has to assume his own economic risks in concluding contracts, just like any other entrepreneur. However, in order to enable the potential franchisee to realistically assess these risks, the franchisor is required to inform the potential franchisee before entering into the contract of such circumstances which are known only to the franchisor and which the franchisor knows or should know who may influence the decision of the potential franchisee as to the conclusion of the contract. In franchise law, the pre-contractual information obligation of the franchisor is addressed in particular in the context of the conclusion of franchise contracts. However, the pre-contractual information obligation applies not only prior to the conclusion of a franchise contract, but also to the conclusion of any contract that the franchisor concludes with the franchisee. Indeed, the initiation of contractual negotiations creates a pre-contractual relationship of trust which gives rise to reciprocal duties of protection (articles 311 (2) and 241 (2) of the Civil Code).
In its judgment of 23 June 2021, the Munich Higher Regional Court had to decide whether a franchisor had breached its pre-contractual obligation to inform a franchisee in connection with the conclusion of a business purchase contract.(1)
The franchisor (the defendant) operated a franchise system in the fast food industry and owned 100% of the shares of a company (the company) which was fully sold to the plaintiff through a notarized purchase agreement . The company was to operate a restaurant – which was not yet in operation when the purchase contract was concluded – as a franchisee in the defendant’s franchise system. The parties have agreed to pay the purchase price in installments.
The company had already entered into a franchise agreement with the franchisor before the conclusion of the purchase agreement (i.e. at the time when it was still 100% owned by the franchisor as a parent company and the applicant was not yet the managing director). Later, the franchisor terminated the franchise agreement due to the non-payment of franchise fees and the cessation of business activities.
In the lawsuit, the plaintiff and the purchaser of the company’s shares contested the performance of the purchase contract with which the defendant asserted the outstanding purchase price debt. In addition, the plaintiff asserted claims for damages on his part.
He mainly based his claim on the fact that the contract to purchase the shares of the company should be terminated due to incorrect pre-contractual information, which should prevent the defendant from demanding payment of the unpaid purchase price. Instead, the plaintiff argued that he had a claim for damages against the defendant from him. The plaintiff was of the opinion that the franchisor had verbally promised minimum sales figures. Further, he said the franchisor also forecast annual sales that would increase annually in a profit forecast passed to him. However, the projected figures were completely incorrect. Sales were found to be significantly lower.
The plaintiff’s action was dismissed by the Munich regional court.(2) In the appeal proceedings, the Munich Higher Regional Court assessed whether the franchisor had failed in its pre-contractual information obligation.
The Munich Higher Regional Court dismissed the appeal. There was no breach of the pre-contractual information obligation.
The Court first clarified that a clear distinction must be drawn between individual contractual relationships. The plaintiff disputed the claim arising from the notarized purchase contract to which he – and not the company – was a party. He requested the cancellation of this purchase contract. In addition, he argued (at least, primarily) his own claims for damages, and not those of the company. All of this is based exclusively on the contract to buy the shares of the company, not the franchise contract. The fact that the purchase contract was preceded by the conclusion of a franchise agreement between the company and the defendant did not change the fact that the contractual relations were distinct and therefore had to be assessed separately.
This became particularly clear from the fact that the defendant had no obligation to inform the company before entering into the franchise agreement. Indeed, at that time, the defendant was still the shareholder (mother) of the company. Also, the franchisor and the company always had identical general managers, as such, they had the same knowledge.
With regard to the purchase contract, the Court determined that only an intentional breach of the pre-contractual information obligation could lead to the cancellation of the purchase contract. Indeed, in the present case, it was disputed that a quality (income potential) of the object of purchase had been agreed. However, the court held that the German warranty law, which prevails in this regard, required intentional behavior. Therefore, this should also apply to the pre-contractual information obligation. Otherwise, the warranty law would be compromised.
After having gathered the evidence, the Court could not find an intentional violation of the pre-contractual obligation to inform by the defendant. During the hearing of the evidence, it turned out that the defendant had not presented as certain the actual achievement of a certain level of turnover by the plaintiff. The statements of the witnesses for the Applicant were rebutted by the statements of the witnesses for the Respondent. The Respondent’s witness credibly testified that he neither promised nor guaranteed any sales. He also released the internal data only at the insistence of the requester and with the explicit remark that the requester could “play with” the data.
During the investigation, it also appeared that the figures provided by the Respondent had not been given arbitrarily. The accused’s witness credibly testified that he believed the numbers provided. Therefore, the figures reflected the defendant’s expectations, even if they were only estimates.
There was also no breach of the duty to inform arising from the fact that the franchisor had to file for bankruptcy in 2003 and 2007. Insolvency is not a circumstance requiring disclosure in this regard and it was unlikely that it would jeopardize the performance of the contract. In fact, the franchisor had faced insolvency five years earlier and had overcome it. Consequently, it was up to the plaintiff to find out about the franchisor’s path, which he could have done via Internet research.
In addition, the purchase contract contained an unambiguous exclusion of liability in favor of the defendant, which also included any claim for breach of a pre-contractual information obligation. The exclusion of liability also covered – as is customary in company purchase contracts – information relating to profitability. “Profitability” in this context includes information about sales that is used to determine profitability. In addition, when the defendant sent figures to the plaintiff, it was repeatedly pointed out that this was only an estimate and that no responsibility was assumed.
The judgment of the Court illustrates that the pre-contractual information obligation of the franchisor plays a role not only in the conclusion of the franchise contract, but also in the context of business purchase contracts. It also becomes clear that it is generally the responsibility of the franchisee to obtain full information before entering into the contract. Indeed, disputes relating to breach of the pre-contractual obligation to provide information often result in the obtaining of evidence. Therefore, the franchisor should make it clear that the figures it presents are only an estimate. For verification purposes, this statement must be made in writing. Otherwise, the franchisor risks being exposed to claims for damages or the cancellation of the company’s purchase contracts. Franchisors may also wish to include exemptions from liability for earning capacity in business purchase contracts.
For more information on this, please contact Karsten Metzlaff or Jasmin Schulzweida at the Noerr LLP office in Hamburg by phone (+49 40 300 3970) or by e-mail ([email protected] Where [email protected]). You can also contact Tom Billing at the Berlin office of Noerr LLP by phone (+49 30 20 94 20 00) or email ([email protected]). The Noerr LLP website can be accessed at www.noerr.com.
(1) Decision 7 U 6141/19.
(2) Judgment of September 19, 2019, 29 O 12976/17.