Buying a Franchise: Check the Franchisor’s Liability

A franchise network depends on both sides keeping their promises. But what happens if the franchisor fails to provide a key service and your business suffers a loss as a result? Before joining, check not only the services promised but also the associated liability provisions. What matters is whether you can substantiate and enforce a valid claim if something goes wrong.

1. Understand the legal starting point

Germany has no dedicated franchise legislation. A franchise agreement is a mixed contract, combining elements of licensing, service and sale agreements, for example. Liability is governed primarily by the general provisions of the German Civil Code (BGB); depending on the circumstances, the German Commercial Code and other rules may also apply. No special state registration or approval of a franchise system serves as a substitute for these checks.

If the franchisor breaches a contractual duty, a claim for damages may arise, particularly under section 280 BGB. This generally requires a breach of duty, a resulting loss and legal responsibility for the breach. Under the legislation, the party owing the obligation must establish that it was not responsible for the breach if it wishes to avoid liability on that basis. Depending on the claim, further requirements may apply, such as setting a deadline for performance or remedial action.

Duties to have regard to the other party’s interests and to provide relevant information already arise during contract negotiations under sections 311(2) and 241(2) BGB. Germany does not, however, have a specific statutory franchise disclosure form. A culpable breach of pre-contractual duties can also give rise to damages.

Important: The franchisor is not automatically liable if your business fails to succeed commercially. You must distinguish between ordinary business risk and a loss caused by a specific breach of duty.

2. Link the promise, the breach and the loss

A liability clause is of little help if it is unclear what the franchisor is actually obliged to provide. Read each key service commitment alongside the clauses covering liability, remedies for defects and failures to perform. For each one, ask: what must happen, by when, and how can you tell whether the obligation has been met?

Take a centrally provided ordering system, for example. A promise of ‘access to the system software’ does not explain what availability is guaranteed, who handles faults or what fallback solution is provided. An outage alone therefore does not establish a breach of contract that entitles you to compensation.

Draw up a short checklist for particularly important services:

• Obligation: What specific service must the franchisor provide?
• Failure: How would you identify defective or late performance?
• Consequence: What additional costs or lost revenue could result?
• Evidence: Which records would establish the cause and the amount of the loss?

Distinguish a binding commitment from a non-binding description. Terms such as ‘guarantee’ also need to be assessed legally: not every use of the word in marketing creates a separate legal guarantee.

Also clarify who is responsible for any third-party service providers involved. If the franchisor uses third parties to fulfil its own contractual duties, their fault may be attributed to the franchisor under section 278 BGB. Simply pointing to an external provider therefore does not settle the question of responsibility.

3. Check the practical effect of liability exclusions

Do not look only for a section headed ‘Liability’. Restrictions may also appear in provisions on software services, technical faults or general terms and conditions. Key points to check include liability caps, excluded types of loss and particularly short deadlines for bringing claims.

A cap may look generous at first glance but prove inadequate during a prolonged business interruption. Ask whether the limit applies to each claim or in aggregate, and whether several connected events are treated as a single incident. Scrutinise any exclusion of lost profits particularly carefully: lost profits are not automatically recoverable, but a blanket exclusion can significantly reduce the financial scope of potential claims.

Standard-form liability clauses are generally subject to scrutiny under sections 305 to 310 BGB. Even in business-to-business contracts, they must not unreasonably disadvantage the other party. Under section 276(3) BGB, liability for intentional misconduct cannot be excluded in advance. The legal limits on other restrictions depend, among other things, on the degree of fault, the type of loss and the contractual duty concerned.

Do not assume that a problematic clause will simply be held invalid later. Before signing, have its effect reviewed by a lawyer experienced in franchise law.

4. Agree a workable procedure for service failures

As well as compensation, your business needs a route back to normal trading. Agree clear points of contact, reporting channels and reasonable response times for significant service failures. Record when fallback solutions may be used and who will bear their cost.

Keep service specifications, incident reports, responses and supporting evidence in an organised system. In the event of an outage, document its start, duration, the processes affected and the steps taken to address it. The duty to mitigate loss also matters: under section 254 BGB, allowing a loss to increase avoidably may reduce the compensation you can claim.

Do not unilaterally reduce ongoing franchise fees as a supposed form of compensation. Whether you are entitled to withhold payment or set off a claim against fees depends on the specific claims and contractual provisions.

Practical takeaway: Before buying, assess three things together: the service owed, the limits on liability and the procedure when something goes wrong. Only by looking at how these work together can you judge how robust your protection within the franchise network really is.