Article Franchise+ -The risks of a minimum turnover requirement in the franchise agreement for the franchisor

Including a minimum turnover to be achieved in the franchise agreement – ​​which is subsequently not achieved by the franchisee – regularly leads to discussion. This was also recently the case (ECLI:NL:RBNNE:2020:3514) at the District Court of Noord-Holland. In this case, the franchisee claimed annulment of the franchise agreement due to a misrepresentation of the turnover to be achieved, or dissolution of the franchise agreement due to the attributable failure of the franchisor. Both claims were dismissed because the primary misappropriation claim could not succeed. The franchisor is more successful and claims payment of a franchise fee and damages, which are partially awarded.

In this case it became clear once again that care is required when including a minimum turnover expectation in the franchise agreement, because – partly in view of the Franchise Act, which came into force on 1 January 2019 – this cannot only be in favor of the franchisor.

Background
The franchisor operates a formula with branches focused on training, education and coaching. At the beginning of 2018, the franchisee will close a franchise company to operate the formula in the Netherlands. Conditions for early termination have been agreed in the franchise agreement, which stipulates that the franchisor has the right to terminate the franchise agreement within twelve months of signing it if the franchisee does not achieve a minimum turnover of €75,000 in any contract year. Initially, the collaboration started in good harmony, but in the spring of 2019 it turned out that the franchisee wanted to get rid of the agreement. At that time, the franchisee has already been granted a few months’ extension for the payment of the franchise fee. In October 2019, the franchisee writes an e-mail to the franchisor in which he states that acquisition would not be ‘his thing’ after all and that he therefore wishes to get rid of the cooperation. The franchisee later argued that there had been a misrepresentation by the franchisor when the franchise agreement was concluded and that it should therefore be nullified.

Proceedings for annulment of the franchise agreement on the grounds of error
Although the franchisor at that time still offers an amicable settlement to arrive at a proper unbundling of the cooperation, the franchisee sees things differently and persists in the primary claim for annulment of the franchise agreement on the grounds of error. The reason for this is that the franchisee has made a mistake when entering into the franchise agreement about the turnover to be achieved, because it includes a minimum turnover expectation of €75,000.

Court assessment
Pursuant to Article 6:228 of the Dutch Civil Code, a franchise agreement can be voidable if it appears that it was concluded under the influence of error and would not have been concluded if the facts had been correctly presented. Unless the franchisee could assume that the franchise agreement would have been concluded even without this information. The court considers that the franchise agreement concluded by the parties is a standard agreement that the franchisor offers to all its franchisees and that the minimum annual turnover is used as a standard for all franchisees. According to the court, no prognosis has been issued. In its opinion, it appears that this standard minimum turnover, as included in the franchise agreement, concerned a realistic turnover to be achieved and only insofar as there was ‘information’ pursuant to Article 6:228 of the Dutch Civil Code. According to the court, the franchisor has sufficiently substantiated in this matter that the franchisee would have achieved the minimum turnover and that other franchisees who would also not have achieved the minimum turnover. In view of this, the mere assertion that the franchisee would not have achieved the minimum turnover is insufficient for the conclusion that the minimum turnover would not be realistic in this situation. For this reason, it is ruled that the primary appeal of error fails and the claims are therefore dismissed.

Defacto can qualify a turnover forecast as a forecast under the Franchise Act and the European Code of Honor on Franchising (hereinafter: “the Code of Honor”) namely as a forecast. This can entail considerable risks for the franchisor.

The Franchise Act
The Franchise Act came into force on 1 January 2021. Pursuant to Article 7:913 of the Dutch Civil Code, the franchisor is obliged to provide the franchisee with all relevant (financial) information that is reasonably important for the conclusion of the franchise agreement. A mandatory minimum turnover in the franchise agreement will therefore have to be provided to the franchisee and, in view of the erroneous doctrine, this can result in the franchise agreement being nullified or dissolved if the results are not achieved by the franchisee.

The Honor Code
Moreover, this obligation applies all the more to all franchisors affiliated with the Dutch Franchise Association (hereinafter “NFV”). The members of the NFV have committed themselves by virtue of their membership to the Code of Honor. The Code of Honor provides a frame of reference against which franchise organizations can test their behavior and is also a code of conduct, the content of which is taken into account in the judgment of the court in a dispute. Article 4.5.5 of the Code of Honor prescribes that the franchisor must provide all written information and documentation relating to the franchise relationship within a reasonable time before the conclusion of the franchise agreement. If available, this also applies to financial estimates or forecasts.

Conclusion for the franchising practice
Including a minimum revenue expectation for the franchisee in the franchise agreement can involve risks, as it can actually qualify as a forecast. Under the Franchise Act, the franchisor is obliged to provide all relevant (financial) information that is important for the conclusion of the franchise agreement. The Code of Honor also obliges the franchisor to provide such financial information if it is available. However, if the minimum turnover expectation is not achieved by the franchisee, this may possibly lead to the nullification or dissolution of the franchise agreement if it appears that any misappropriation appeal succeeds.

Making good agreements about the expected results before concluding a franchise agreement can help prevent such problems between franchisor and franchisee at a later stage. All the more so now that the Franchise Act has recently come into force, it may be important for the franchisor to carefully consider the basis on which the (financial) information – including a possible turnover forecast – is shared with the franchisee, in order to reduce the risks of a successful misrepresentation appeal. and thereby prevent the nullification (or dissolution) of the franchise agreement.