Directors’ Liability Concerning Franchising: Deception or Collaboration Plan

On 9 June 2015, the Arnhem-Leeuwarden Court of Appeal ruled (ECLI:NL:GHARL:2015:4196) on the question of whether directors of a legal entity acted unlawfully by presenting the possibilities for, among other things, setting up a franchise formula in China. 

Appellants operate, among other things, cosmetic products under the name WinSpa. The directors of a legal entity presented a plan on the basis of which the appellants were invited to cooperate. In particular, a Business and Marketing Plan for sales in China was presented, in which the appellants were, for example, promised distribution through points of sale in China. The appellants were also told that they could set up a franchise organization in China to market the products of the appellants. On the basis of those statements, the appellants provided a large number of product samples free of charge. This collaboration ends in a fiasco.

The appellants claim, among other things, that the directors are personally liable for the damage. The accusation is that the appellants suffered damage because they entered into an agreement with the legal entity to provide valuable samples free of charge, based on the repeated statements being firmly convinced that these samples would be recouped in the short term, because these samples would be used to supply the pretended outlets, when these outlets did not exist at all.

The Court of Appeal focuses on the question of whether the statements are an (incorrect) representation of the existing situation (as the appellants seem to claim), or a plan for approaching the Chinese market. The Court of Appeal ruled that the latter is the case and that it was therefore not assumed that there was already a sales network in China. Because there were only promising and speculative plans, the provision of samples of products free of charge by the appellants cannot be traced back to the statements made by the directors. It makes no difference whether one now tests against the standard of Article 6:162 of the Dutch Civil Code or against the stricter standard for the liability of directors of a legal entity as elaborated by the Supreme Court in its judgment of 8 December 2006, ECLI:NL: HR:2006:AZ0758 (Recipient/Roelofsen). The conclusion is always that there is no liability on the part of the directors, according to the Court of Appeal.

It follows from this ruling that a plan to jointly target a market by means of franchising need not contain a misleading statement. There will therefore be no question of directors’ liability.

Mr AW Dolphijn – Franchise lawyer

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