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Germany is often missed
out when franchise experts compile a list of
disclosure countries. However, those who are
familiar with German franchise law are well aware
that Germany is in practice a disclosure country.
German laws knows a general obligation to disclose
important information to the other contractual
party. This applies in particular where one party
(usually the franchisor) has superior knowledge.
Two basic disclosure obligations are thought to
arise under German law:
- All information
which the franchisor makes available to the
franchisee must be correct (no
misrepresentation)
- There is an
obligation on the franchisor to disclose certain
key data to the franchisee, even if the
franchisee does not ask for this
information.
It is of course the
second item which causes concern. What exactly is
"key information"? The German Franchise
Association makes certain recommendations as to
the information which should be disclosed and some
franchisors follow these recommendations. In
addition, German case law continues to produce
surprising additional requirements. Here are some
of the items which franchisors should consider
including in their disclosure document for
Germany:
- Number of stores
operating in Germany, together with success and
failure rates
- The fact that the
franchisee is the first German franchisee (if
that is the case)
- Whether or not there
has been a pilot operation in Germany
- Certain financial
information about investment cost, amortisation
rate and likely break-even point
- In a recent decision
of May 2005, the Essen Regional Court suggested
that, in addition, the franchisor should be
obliged to provide the franchisee with a
detailed feasibility study for the proposed
franchise location.
The current view taken
by most franchisors is that the franchisee knows
his local town better than the franchisor and
should take responsibility for selecting the best
location. Most franchisors provide abstract
criteria for location selection but quite rightly
refuse to analyse a specific site. In our view,
failure to conduct a feasibility study does not
amount to failure to disclose unless the
franchisor knowingly withholds existing data. We
understand that the case is under
appeal.
If you would like any further
information please contact Babette
Märzheuser-Wood or Mark
Abell
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