Buying a franchise: review liability before signing

A franchise agreement can leave you responsible for much more than fees and day-to-day operations. If a customer is injured, a delivery fails or a breach of contract causes a loss, the allocation of liability becomes crucial. Franchising brings independent business owners together, but that does not mean risks are automatically shared. Before buying a franchise, you should therefore investigate which losses your business may have to cover — and what responsibility the franchisor actually accepts.

1. Establish who is liable when things go wrong

Start by distinguishing between liability towards customers and other third parties, and liability between you and the franchisor. A clause requiring the franchisor to help you with a customer claim does not necessarily mean the customer must bring their claim against the franchisor. The internal allocation of liability and the customer's rights are separate matters.

Read the agreement with three specific scenarios in mind: a customer claims compensation, the franchisor believes you have caused a loss, and your business suffers a loss because of the franchisor's actions. Mark the provisions that apply in each situation.

Look particularly closely at wording requiring you to indemnify the franchisor. This may mean your business must cover costs or claims made against the franchisor. Check:

• What events trigger the obligation?
• Does your business have to be at fault?
• Are the actions of employees and subcontractors also covered?
• Are legal costs and settlement payments included?
• Does the obligation also apply when the franchisor has contributed to the loss?

Ask for an explanation using a realistic example from your proposed business. A general assurance that the clause is never used tells you little about its financial implications.

2. Compare liability caps and exclusions for both parties

A limitation of liability may set a maximum amount of compensation or exclude certain losses. Check whether the limitation protects both parties or only the franchisor. If your liability is unlimited while the franchisor's is capped at a low amount, you need to factor that imbalance into your purchasing decision.

Examine how any liability cap is calculated. Is it a fixed amount, linked to fees paid or based on a particular period? Does the cap apply per claim, per year or across the entire agreement? If it is based on fees already paid, ask your lawyer to assess what that means at the very start of the relationship.

Also check which claims fall outside the cap. Apparently clear protection may be worth less if several substantial obligations are excluded. Read the limitation alongside the agreement's indemnities and any contractual penalties.

Pay particular attention to expressions such as ‘indirect loss’ and ‘loss of profit’. Do not assume that both parties interpret them in the same way. Ask for clear definitions and test how the clauses would work if a failure caused downtime, additional staffing costs or lost sales. The aim is to understand which losses your business would have to absorb even if the franchisor had failed to fulfil its obligations.

3. Check the insurance against the actual agreement

A requirement to hold liability insurance does not mean that every contractual risk is insured. Cover is determined by the insurance policy, whereas the franchise agreement may impose wider liability on you. A specific undertaking to pay someone else's costs, for example, may need to be assessed separately.

Send the relevant parts of the agreement to your insurer or an insurance broker before signing. Ask for a written review of the scope of cover, exclusions, excess and maximum payout. Describe the business accurately, including any deliveries, installations or treatments you will provide.

Also check how a claim must be handled. Who must be notified, within what timeframe, and who can approve a settlement? You should not promise compensation to a customer or the franchisor without first checking how this would affect your insurance cover.

Then prepare a simple summary with three columns: contractual risk, insurance cover and remaining risk borne by your business. If someone refers to a group insurance policy for the franchise network, check that your particular business and its activities are covered. Do not treat membership of the network as proof of insurance cover.

4. Base your review on Swedish law

Sweden's Act (2006:484) on the Duty of Franchisors to Provide Information requires franchisors to provide clear, comprehensible written information about the agreement's implications and other relevant circumstances well before it is signed. Liability clauses that impose a particularly heavy financial burden need to be highlighted in the pre-contract information.

However, the Act does not comprehensively regulate the parties' liability for damages. The agreement and general principles of contract law, including the Swedish Contracts Act, are highly significant. Nor is there a specific registration requirement solely because a business operates as a franchise.

Unreasonable contractual terms may, in certain circumstances, be adjusted under section 36 of the Swedish Contracts Act. However, this is no reliable substitute for a review before signing. Ask a lawyer to assess unclear, one-sided or unlimited liability clauses and propose specific amendments.

Practical conclusion: Do not sign until you can explain which losses you are liable for, what cap applies and what the insurance actually covers. Taking on an uninsured risk should be a conscious decision, not a surprise.