Liability of the Franchisor for Failing to Exercise Due Care in Approving the Site
A Practical Guide by a Franchise Lawyer
The location of a franchise unit is one of the most decisive factors in the success of any franchise project,
because it directly affects sales volumes and investment returns. When a franchisor fails to provide proper
disclosure or does not define clear professional criteria for selecting the site, the franchisee is exposed
to serious and avoidable risks. Many of these risks could have been prevented if a
franchise lawyer had been engaged from the outset to review the disclosure document, the franchise
agreement, and the franchisor’s obligations related to choosing and approving the site.
This raises a central question: what is the scope of the franchisor’s duty of care in approving the site? And
does the franchisor’s approval of the site constitute a technical decision for which it may be held liable if
the site later proves commercially unsuitable?
What Will You Read in This Article?
- The meaning of failing to exercise due care when approving the property/site in franchise agreements.
- The franchisor’s duty to provide a complete disclosure document under franchise regulations and the effect of non-compliance.
- The technical criteria of “site engineering” and how they impact franchisor liability.
- How to prove negligence in site selection and the main legal consequences.
- The role of a franchise lawyer in protecting the franchisee before signing and in resolving disputes.
About the Author
Attorney and arbitrator Mohammed Almuzayen, with more than fifteen years of experience, specializes in
construction disputes, commercial and government contracts, and franchise agreements. He holds a Bachelor’s
degree in Law from King Saud University in Riyadh (2009), and has extensive practical experience gained
through working with several major national companies, including Al-Majdouie Group, Binzagr Company, United
Mining Investments Company, Al-Mawarid Joint Stock Company (listed), and Golden Petroleum Investment Company.
1. What Does “Failure to Exercise Due Care” Mean in Approving a Franchise Site?
What does it mean when we say that the franchisor failed to exercise due care in approving the franchise unit’s site?
Failure to exercise due care means that the franchisor approved the site without applying reasonable professional
and technical standards, and without conducting an adequate study of the investment aspects linked to that
location. This is particularly serious because the franchisor, by virtue of owning the brand and its operating
system and having access to performance data from other units, is the party most capable of assessing site
suitability.
In the situation under discussion, the franchisor refrained from providing the franchisee with a complete
disclosure document containing the material information required by franchise law, including:
- Initial investment information.
- Expected operating costs.
- The revenue model.
- Technical criteria for selecting the franchise unit’s site.
Because of this refusal or omission, the franchisee entered into the contractual relationship without being
presented with the full technical and economic picture of the project, as required by law and sound commercial
practice. This constitutes a breach of the pre-contractual disclosure obligation and undermines the franchisee’s
fully informed consent.
Is it sufficient for the franchise agreement and its annexes to contain only general language about the site?
No. An agreement that lacks clear professional standards (standards that can be measured and evaluated) for
choosing the site, and merely uses generic phrases such as “commercially suitable site” or “site deemed
appropriate by the franchisor”, does not meet the professional level expected from an experienced franchisor.
In a properly structured franchise system, the franchisor is expected to provide the franchisee with
specific technical criteria that allow the franchisee to evaluate any proposed site before making a
full investment commitment, rather than relying on vague, non-measurable language.
2. What Are the Franchisor’s Disclosure Obligations and What Is the Effect of Breaching Them?
What is the franchise disclosure document and what is its purpose?
The disclosure document is a mandatory pre-contractual document that the franchisor must provide to the
prospective franchisee before signing the franchise agreement. It typically includes key information such as:
- Description of the business activity and the brand.
- Initial setup and investment costs.
- Expected operating costs and ongoing franchise fees.
- Historical financial or operational results for the brand (where available).
- Major risks associated with the franchise.
- Technical and commercial criteria for selecting a suitable site.
The main purpose of this document is to protect the franchisee from entering into a structurally
unbalanced relationship in which the franchisor holds most of the information and experience. The disclosure
document narrows this information gap and enables the franchisee to make a rational and informed investment
decision.
What is the legal effect if the franchisor fails to provide a complete disclosure document or omits material information?
If the franchisor fails to provide a complete disclosure document, or provides a document that omits material
information—especially regarding site-selection criteria—this may lead to:
- Contractual liability for breaching a statutory or regulatory obligation of disclosure.
- The franchisee’s right to seek rescission or termination of the agreement if the missing
information is material and directly affected the decision to enter into the franchise. - The right to claim damages for financial losses caused by the breach, provided causation
between the breach and the loss can be established.
At this point, the role of a franchise lawyer becomes essential: analysing whether the disclosure breach
is serious enough to justify rescission, or whether the case should focus on damages only, and how to structure
the franchisee’s claims before the court or arbitral tribunal.
Legal Consultation
For tailored legal advice on franchise disputes, disclosure failures, or site-approval issues, you can contact
the office of attorney Mohammed Almuzayen, a franchise lawyer experienced in representing
both franchisors and franchisees in complex commercial disputes.
3. What Is “Site Engineering” and Why Is It So Important in Franchise Liability?
Is the franchisor’s site approval merely a formal step?
No. In the franchise industry, site approval is not a mere formality. It is a core technical decision
that falls within what is often called Site Engineering. Proper site engineering requires, at a minimum, the
application of a structured set of technical and commercial criteria, including:
- Measuring actual traffic and footfall:
Number of vehicles or visitors per hour, directions of entry and exit, and peak hours during the day and week. - Assessing visibility from the traffic flow:
Whether the kiosk or unit is in a front-facing position or hidden at the back, and whether there are visual obstacles that may obstruct visibility. - Evaluating access and parking (Access & Parking):
Ease of access on foot and by car, availability and practicality of parking spaces, and clarity of entry and exit routes. - Defining the dominant customer profile at the site:
Transit customers (e.g., highway travellers), office workers, or residents of a nearby neighbourhood, each with different purchasing patterns. - Measuring the intensity of direct competition in the area:
The existence of similar kiosks or outlets at the same station, mall, or nearby streets and the likely impact on market share. - Analysing the rent-to-sales ratio:
Comparing annual rent with realistic projected sales based on actual data from other units or comparable locations.
How does neglecting these criteria affect the franchisor’s liability?
When the franchisor approves a site without applying such criteria—or without sharing the results of its analysis
with the franchisee—this indicates a failure to exercise the required professional care. If the franchisee then
suffers losses because the site is commercially weak, it is possible to argue that:
- The franchisor breached its professional advisory duty towards the franchisee.
- The site-approval decision was not based on sound technical grounds, contrary to established commercial practice in the franchise industry.
- The financial failure of the unit is directly linked to the franchisor’s negligence in site engineering, and
not merely to normal commercial risk.
Here again, a franchise lawyer plays a critical role in connecting the technical shortcomings in site
selection with the financial results on the ground, using comparative data and expert reports.
4. How Can a Franchisee Prove Site-Selection Negligence? What Are the Main Arguments?
What are the practical ways to prove that the franchisor did not exercise due care in approving the site?
The franchisee may rely on several tools, including:
- Absence or incompleteness of the disclosure document:
Proving that the document was never delivered, or that it did not cover key aspects such as site-selection criteria. - Email correspondence and meeting minutes:
Showing that the franchisor gave only general assurances without providing any technical analysis of the site. - Comparison with other successful units of the same brand:
Comparing traffic, rent levels, surroundings, and sales volumes at successful sites with the disputed site. - Expert or consultant reports:
Engaging a commercial or technical expert to evaluate the site and explain why it is unsuitable under accepted standards.
What are the main legal arguments available to the franchisee?
Key arguments include:
- The franchisor breached its legal and contractual duty of pre-contractual disclosure.
- The agreement and its annexes do not contain clear professional standards for selecting the site.
- The franchisor’s approval of the site was merely formal, not based on proper site engineering or objective criteria.
- The losses incurred by the franchisee are not ordinary commercial risks but the direct result of the franchisor’s failure to exercise due care.
Frequently Asked Questions (FAQ)
Q1: Does signing the franchise agreement waive the franchisor’s disclosure obligations?
No. The franchisee’s signature does not cancel statutory or regulatory disclosure duties. If the franchisor failed
to provide proper disclosure before signing, this may still give rise to liability and legal remedies.
Q2: Can a franchisee seek termination based solely on poor site selection?
Yes, if it is proven that poor site selection was caused by the franchisor’s breach of its disclosure obligations
or its duty of care, and that this breach was a substantial factor in the failure of the business.
Q3: What is the role of a franchise lawyer before signing a franchise agreement?
A franchise lawyer reviews the disclosure document, the franchise agreement, and all annexes, checks whether
clear site-selection criteria are defined, identifies legal and commercial risks, and proposes amendments to
protect the investor.
Q4: Are general or approximate sales projections sufficient?
No. Projections should be based on realistic and transparent methodology, preferably using actual performance
data from comparable units or locations. Vague or unsupported figures are not sufficient.
Q5: When is arbitration recommended for franchise disputes?
Arbitration may be suitable when the agreement contains a well-drafted arbitration clause, the dispute involves
complex technical or financial issues, and the parties value speed, expertise, and confidentiality in resolving
the dispute.
Conclusion
Failure to exercise due care in approving the franchise site is not just a commercial issue; it is a legal and
professional breach for which the franchisor may be held liable, especially when accompanied by incomplete
disclosure or the absence of clear technical standards for site selection. By understanding the concept of
site engineering and its central role in the success or failure of a franchise unit, the franchisee—supported by
an experienced franchise lawyer—can build a strong legal case to seek rescission, compensation, or other
appropriate remedies.
Preventive legal review is always better than litigating after the fact. Careful examination of the disclosure
document, the franchise agreement, and the proposed site before signing can turn a franchise opportunity into a
sustainable investment instead of a long-term financial burden.
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Short Summary
This article explains the franchisor’s liability for failing to exercise due care when approving the site of a
franchise unit, especially where disclosure obligations and technical site-selection standards are ignored. It
outlines key elements of site engineering, the legal impact of incomplete disclosure, and practical methods for
proving negligence. It also highlights how a franchise lawyer can help franchisees assess risks before
signing and pursue remedies such as rescission and damages in the event of a dispute.
