Director’s liability at franchisor?

On 28 January 2015, the District Court of Amsterdam ( ECLI:NL:RBAMS:2015:416 ) delivered an important ruling on, among other things, the liability of a director for issuing an unsatisfactory prognosis when entering into a franchise agreement.

A franchisee had concluded a franchise agreement on the basis of which he had to pay an entrance fee of EUR 20,000. After commencement of the franchise agreement, results fall short of the franchisor’s forecast. The franchisor is a BV and goes bankrupt after about a year. Because a bankrupt BV usually does not have sufficient assets to pay creditors, the director of the bankrupt is sometimes held liable. In this case, the franchisee addresses (among other things) the person behind the franchisor, namely the (indirect) director/director. The driver is accused of having given an incorrect or too rosy prognosis by means of misleading information.

The main rule is that the director does not act for himself, but on behalf of the BV. If a BV fails to comply with an agreement or commits an unlawful act, the starting point is that only the BV is liable for the resulting damage.

In fact, the franchisee bases the liability on two variants. On the one hand that the director in his position as director has wronged the franchisee and on the other hand as acting representative of the franchisor. This legal-technical distinction is important because different assessment frameworks apply to the different bases.

Under special circumstances, there is also scope for liability of a director of the BV. In this case, the point is that the director has acted contrary to the duties of the director. In order to assume such liability, it is required that the director can be personally blamed for the disadvantage. Thus, higher requirements apply to the assumption of liability of a director than is generally the case. A high threshold for liability of a director is justified by the circumstance that the actions of the BV are primarily involved and by the social interest in preventing directors from letting their actions be determined to an undesirable extent by defensive considerations. See HR September 5, 2014,  ECLI:NL:HR:2014:2628. In short, it is relatively difficult to successfully hold the director of a BV as such personally liable due to the stricter liability requirements.

Under certain circumstances, the director concerned can also be blamed for acting as an expert service provider. For example, a director of a brokerage firm may have acted as a broker himself. This broker can also be held accountable for acting unlawfully as an expert broker, while he (coincidentally) is also a director. The aggravated basis for liability in the capacity of director does not apply if the person concerned acts as an expert service provider, with a standard of care that applies to him in that capacity as an expert service provider.  See HR 23 November 2012, ECLI:NL:HR:2012:BX5881. It is possible that, in addition to being an expert service provider, the person concerned is also (coincidentally) also a director of the BV. However, the capacity of the person concerned as director is subordinate here. 

The court ruled that the starting point is that a future franchisee may be expected to adopt a critical attitude towards information provided by the franchisor regarding expected future turnover. After all, the goal (and interest) of the franchisor is, in principle, to ‘get’ the potential franchisee. The court also considers that it can be argued against the franchisee that the franchisor’s prognosis was not substantiated, the formula was fairly new,  success is largely dependent on the franchisee and that the forecast is by definition an expectation, which is not a guarantee. All in all, there is no question of an unsatisfactory prognosis, according to the court. There were also several other franchisees with disappointing operating results. For this reason, some franchisees have decided to terminate the franchise agreement in the meantime in consultation with the franchisor. The franchisor is accused of having indicated that there were dissatisfied franchisees. In the opinion of the court, at the time of the conclusion of the franchise agreement with the franchisee in question, there was no such situation that the director was obliged to make announcements about this to the prospective franchisee, let alone that she serious blame can be made because the franchisor has failed to do so. No liability for violation of the management task.

With regard to the liability of the director in the capacity of an expert service provider, the court finds that this claim is insufficiently substantiated. Apparently it has not been sufficiently argued that the director is pre-eminently known and expert with regard to the (financial) aspects of the franchise formula, sector and the relevant market (developments). The normal (not aggravated) liability basis is also rejected.

The Supreme Court has the doctrine of directors’ liability  increasingly crystallized. The present judgment concerns an illustrative application of the various liability criteria of a director. It cannot be ruled out that a director of a franchise organization may be personally liable under certain circumstances for the harmful consequences of an incorrect forecast by the franchisor. However, this is a matter that needs careful investigation.

Mr AW Dolphijn – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Mail to dolphijn@ludwigvandam.nl