Nullification of franchise contracts for insufficient pre-contractual disclosure

To what extent insufficient pre-contractual information can justify termination of a franchise contract and a claim for monetary restitution under Spanish law?

The legal regulation of franchise contracts in Spanish law is rather scarce. For instance, only one section of Royal Decree 201/2010, namely article 3, contains the description of the pre-contractual information to be disclosed at least 20 days prior to signing any agreement or to receiving any money from the prospective franchisee. However, unlike in other jurisdictions, where the franchisee is assimilated to a consumer person, Spanish law considers that both franchisor and franchisee are businesspeople and therefore the lack or insufficient pre-contractual information does not determine an automatic right of contractual termination and a claim for restitution of payments made or a claim for damages against the franchisor.

Spanish case law on franchising regarding insufficient pre-contractual information is fluctuating because it takes into consideration, not only whether full disclosure of the pre-contractual information prescribed by the law in a true and not misleading manner has been made, but also other aspects surrounding the specific matter. Among these, the experience of the franchisor and the franchisee, the know-how and technical assistance effectively rendered, the duration of the contract, the essential or non-essential character of the information not disclosed or inadequately disclosed, as well as the general doctrine of nullification of contracts due to error or lack of consent.

Spanish case law confirms: lack of disclosure may lead to nullity, but restitution is not absolute

In a still rather recent judgment of the Provincial Audience of Madrid of 21 November 2024, the ruling concluded that the defendant was not sufficiently provided with the information required by Article 3 of Royal Decree 201/2010, because the franchisee was not informed of the franchisor's experience, its business system was not sufficiently explained, nor was it given the expected commercial or technical assistance, nor real data on the viability of the franchise, and the prior advertising that is said to have been delivered was inaccurate. Consequently, the court considered that there were grounds for nullification of the contract due to error or defect of consent of the franchisee.

However, even if the franchisor had partially breached its pre-contractual information and disclosure obligations, the court took into consideration that the franchisee did receive formation on the franchise method, the shop layout and received the initial delivery of products. The franchisee, in addition, used the franchised system for 21 months. According to the court, these facts had to be taken into consideration when deciding about the value transmitted to the franchisee and the restitution of the amounts paid by the franchisee as entrance fee and royalties. The court, therefore, applying the principles of continuing performance contracts, resolved that restitution of amounts was due on a pro-rata tempore basis considering the contractual term and the actual duration of the relationship.

To take home: Disclosure of the pre-contractual information in a true and non-misleading manner is of paramount importance under the Spanish franchise regulations. However, before deciding whether there are sufficient grounds for overriding a franchise agreement based on breach of information obligations of the franchisor and, given the case, approaching the possible financial consequences, a thorough assessment of the specific circumstances of the case will be required.