Economic headwinds and duty of care: sometimes a difficult relationship

Franchise formula, duty of care, franchisor, franchisee

The trade press, as well as the more general media, are full of it: the retail trade is under heavy pressure as a result of the continuing economic malaise. A look at the average shopping street in the Netherlands, especially in small to medium-sized towns, unfortunately confirms this all too clearly. The recent discussions in the media surrounding the V&D department store also speak volumes. Consumers are keeping their purse strings, and retailing in the Netherlands is noticing the consequences.

Time and time again, however, it turns out that this statement is not so unambiguous. In addition to all the malaise, there are also time and again examples of retail organizations that do achieve success, even in this period of headwind. Various franchise organizations in the food sector are a good example of this, but also in sectors that are under heavy fire, such as the clothing industry, examples can be given of (franchise) organizations that are doing well against the prevailing tide. The intriguing question then is, of course: why do they do well and others don’t?

And in franchising relationships in particular, there is an additional question: what can a franchisee expect from his franchisor with regard to counteracting economic headwinds.
Of course, this question cannot be answered completely unequivocally. However, time and again an old evolutionary wisdom seems to apply to the situation: it is not so much the strong who survive, but those who know how to adapt. In practice, the correctness of this principle has been proven time and time again. Franchise chains that know how to keep up with the social trend, adopt a dynamic and change-oriented attitude and are prepared to think innovatively have a considerably higher chance of success and survival than organizations that do not. In itself this is of course a general commercial wisdom, but in practice things are not always that simple.

In addition, a franchise organization has to deal with franchisees, who must also be prepared to move along with the changes desired by the franchisor. Then it comes down to timely and adequate communication and providing insight into the need for the intended changes.

However, the other way around also occurs: a franchisor who simply does not move along and leaves everything, simply put, as it was. In practice, such situations are often accompanied by increasingly loud warnings from the franchisees, whether or not united in an association or a franchise council. Franchisees’ results continue to decline, and in some cases, the only thing the franchisors are doing in such situations is to push harder and harder on outstanding debts, without looking further seriously or in depth at the concept.

Of course nuance is appropriate here: it is certainly not the case that if a small group of franchisees wants changes, while the chain is generally running fine, that small group has a monopoly on the truth. However, various situations are conceivable in which the entire chain slides down, despite all kinds of warnings from the people in the field. Such a situation can indeed have legal consequences. After all, franchisees are essentially “customers” of their franchisor and may expect the necessary, precisely when it comes to the development of the franchise concept. Suppose a franchise organization does a somewhat archaic example in cassette tapes, but still. Simply sticking to that product, despite clear signals that such a product is no longer salable, can be qualified as an attributable shortcoming in the fulfillment of the franchise agreement, and is therefore harmful to the franchisees. In any event, this would be a serious breach of the franchisor’s duty of care towards the franchisees. It takes little imagination to come up with alternatives to cassette tapes. Today’s practice unfortunately shows several such examples, where adaptation and a dynamic approach to the market is possible, but does not happen. As stated, this can, at any time, acquire a legal component in the form of attributable shortcomings and discussions of the duty of care.

Being strong is nice, but adapting is often necessary and better.

Mr DL van Dam – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice.
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