If the franchisor fails to fulfil this obligation, the franchisee can act relentlessly within 2 years’ time to have the franchise agreement nullified. This will result in financial and practical problems for the franchisor.
If the franchisor does not fulfil its obligation to inform, it runs the risk of having to refund any franchise fees and royalties, refund any extra commission or margin generated from the products that it had supplied to the franchisee, compensate for reputational harm, take back unsold products, face a soured relationship with a potentially interesting partner, lose an interesting location, reimburse marketing expenses, incur unnecessary costs for formation and training, …
As the obligations to inform are important, let us list them below for you.
Obligation to provide precontractual information at the start of the cooperation
At least one month before parties conclude a franchise agreement, the franchisor must provide the prospective franchisee with necessary and useful documentation about the franchise so that the prospective franchisee can formulate its opinion about the future cooperation.
Concretely speaking, this is a two-part precontractual obligation to inform: the franchisor must provide (either hard or electronic copies of) the following documents to the prospective franchisee:
- The draft franchise agreement; and
- The so-called Precontractual Information Document.
Afterwards, the prospective franchisee has a mandatory one-month period (minimum) to think about its decision. During this “cooling-off period,” the franchisor may not enter into any agreement with the prospective franchisee (except for a non-disclosure agreement) and may not seek any kind of compensation, sum of money, or security deposit.
This is so far-reaching that any amendment to the draft franchise agreement during this time will trigger the start of a new one-month cooling-off period, unless the amendment was sought in writing by the prospective franchisee.
Moreover, the abovementioned documentation must be drafted clearly and comprehensibly.
The Precontractual Information Document must consist of 2 parts
The Belgian legislature stipulates that the Precontractual Information Document must have two parts, namely:
- The legal dimension: this is more specifically the important contractual provisions of the proposed franchise agreement;
- The socio-economic information: these include in particular the information for the correct evaluation of the franchise formula (i.e., the social and economic consequences (“pros and cons”) of it).
To avoid unnecessary formalities and costs, a simplified procedure can be used if the same parties wish to renew or amend an existing franchise agreement or conclude a new one. Then, if appropriate, the franchisor will “only” be obliged to provide the franchisee with the draft of the new franchise agreement and a simplified document.
The simplified document contains more or less the same information as what the Precontractual Information Document refers to, yet limited to the information that has been amended compared to the original franchise agreement.
Sanctions and consequences for non-compliance with the precontractual obligation to inform
The Belgian legislature imposes strict sanctions for non-compliance of the precontractual obligation to inform. Failure to comply with this obligation will lead to nullity of the franchise agreement or certain provisions of it.
As explained earlier in the introduction, the franchisors are mainly burdened with many financial and practical issues.
The sanction is relative, however, since the franchisee can waive it after one month has elapsed from the date when then agreement was effectively concluded. This waiver is not unconditional though. The franchisee must indicate expressly the grounds for waiving the sanction. Needless to say, it will not be easy to get the franchisee to do this, although the franchisor will try its best to obtain it through negotiation.
In reality, the franchisees often reproach the franchisor for offering little assistance or for lack of specific information about the franchise formula. That is always a factual assessment and not an easy one to prove. The law requiring that precontractual information be provided is actually a much more simple tool that enables franchisees get out of a franchise agreement without bearing a heavy burden of proof.
The precontractual obligation to inform can therefore be seen as an exit mechanism for the franchisee, but it’s a bitter pill to swallow for the franchisor. The franchisee should therefore be cautious if it wishes to conclude a franchise agreement with a prospective franchisee.
For this reason, it is recommended that you, the franchisor, seek timely advice so that you can carefully consider the obligations to provide information to the prospective franchisee during the negotiation phase.