Monday 22 September 2008

Franchisors may be obliged to give financial information to their franchisees, rules Japanese court

Earlier this year the Japanese Supreme Court rendered a highly significant judgment in a case concerning a business format franchise. Under the terms laid down by the franchisor, each franchisee ran its own store but was unaware of the details of the franchisor's payments to the vendors from which franchisees procured products for sale. In this action the franchisees filed suit against the franchisor, demanding that it disclose certain information, including details of the products purchased for sale, payment dates and amounts and the names of the parties that received such payments. The franchisees argued that the franchisor had a duty to disclose these payment details under the Civil Code. The Tokyo High Court found that no such duty existed. The Supreme Court has now reversed the decision and remitted the action to the High Court for further consideration.

The court held that the purchase of products was essential to the franchisees' operations and that it would not have been difficult for the franchisor to inform the franchisees of the details of its payments to recommended vendors. Accordingly, although the franchise agreement did not explicitly impose a duty on the franchisor to disclose such information to its franchisees, the agreement could be interpreted as imposing a mandatory duty to make disclosures to the franchisees at the latter's request. The court added that, in general, a franchisor is subject to a duty to report information to its franchisees, but it did not specify the information that may be withheld from franchisees.

[source: Kenichi Sadaka, Aoi Inoue and Taisuke Yamamoto (Anderson Mori & Tomotsune), writing for International Law Office].

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