Spain | Franchising, Theory Of Risk and Guarantees By Franchisee

Foreign franchisors entering into franchise agreements in Spain should take careful note of the content of the judgment issued by the Provincial Court of Córdoba on November 20, 2025, and require that the partner(s) and the directors of the franchisee company expressly guarantee and indemnify the payment of any debts arising from the franchise agreement.

Spanish corporate law establishes the principle of liability for the directors of corporations or limited liability companies when the company is subject to dissolution (for example, due to losses that reduce equity to less than 50% of the share capital) and, despite this, they fail to convene a meeting to adopt corrective measures (dissolution or capital increase).

In the case of the aforementioned ruling, the franchisor was unable to collect the debt arising from the franchise agreement from the franchisee due to the latter’s insolvency; so it decided to claim that debt from the company’s administrator based on the provision mentioned above, that is, due to the fact that the franchisee company was facing dissolution due to losses and the administrator had not convened a shareholders’ meeting, as was his obligation, so that the shareholders could decide how to resolve the situation.

The ruling we are discussing from the Court of Appeal of Córdoba upholds the lower court’s decision and dismisses the franchisor’s claim against the sole administrator of the franchisee company, stating that:

With regard to liability for corporate debts under Article 367 of the Capital Companies Act, the court recognised the existence of the corporate debts, the presence of grounds for dissolution, the breach of the legal obligations by the corporate administrator, and his liability, but found that a ground for exoneration from liability existed in accordance with the doctrine of “known risk.” Thus, it was noted that the plaintiff is a franchisor and X. S.L. was the franchisee, and it was evident from the electronic communications that the franchisee was under constant monitoring and the franchisor was aware of the risk involved in the operations, halting the shipment of goods (clothing) as soon as the limits of the guarantees granted were exceeded, meaning the plaintiff voluntarily assumed the risk. For all these reasons, the claim was dismissed.

In conclusion, and in light of the foregoing, the present franchise relationship and its conduct allow us to consider that it has been established that the franchisor (creditor) had greater knowledge of the franchisee’s (debtor’s) financial situation, beyond the information appearing in the annual accounts filed with the Commercial Registry, as it was the franchisee’s primary supplier. And this knowledge and control of the debt by the franchisor (through the increase in orders) justifies the exoneration of the corporate director’s liability for corporate debts under Article 367 of the Capital Companies Act, which leads to the dismissal of the appeal

The legal theory or principle of Known/Accepted Risk, to which the judgment refers, holds that harm caused to a third party, with or without a contractual relationship in place, is not considered unlawful if the victim was aware of the risk and voluntarily assumed it.

This doctrine was initially developed within the framework of tort liability: whoever engages in a risky activity and reaps its benefits must bear its negative consequences, that is, the risk—(cuius commodum, eius incommodum).

However, case law has extended the application of this theory to the field of contractual liability, as demonstrated in the judgment under discussion.

Therefore, since the plaintiff was aware of the defendant’s financial situation and solvency—having “monitored” its activity as a franchisor—and despite this, decided to maintain the contract’s validity, thereby increasing the debt, the ruling holds that the franchisor assumed the risk, which constituted grounds for exonerating the administrator from liability. However, more concerning than the above is that this “known risk” theory could be  considered applicable to the liability of the franchisee company itself, which could be exonerated from liability based on the franchisor’s monitoring of its activities.

The conclusion of all the above is that, based on this application of the known risk theory, franchisors may face difficulties in claiming debts owed by the franchisee company from its directors in the event of the company’s insolvency; therefore, it is highly advisable that, when signing the franchise agreement, a joint and several guarantee for the franchise’s potential future debts be required from its directors and partners, which, moreover, is a fairly standard practice.

In this way, the objection based on the theory of known risk would not come into play.