Can a franchisee rely on the franchisor’s forecasts?

Court of Haarlem

The Court of Haarlem recently ruled on a franchise issue in which prognosis problems were discussed. The issue is – in short – as follows. A (potential) franchisee concluded a franchise agreement with a franchisor eight years ago. Under this franchise agreement, the franchisee would operate a store in a new shopping center (“Shopping Center A”). In addition, an exclusive territory (“Region B”) is provided to the franchisee. A nearby residential area of ​​Shopping Center A (“District C”) falls outside this exclusive district.

Prior to entering into the franchise agreement, the franchisor provided the franchisee with an operating forecast, called a “standard costing”, which stated that the franchisee would make a profit at a certain turnover. In the fifth year of operation, a decent entrepreneurial income could even be obtained.

Based on this standard calculation, the franchisee has drawn up a business plan. Although District C does not fall under the franchisee’s exclusive district, the latter has – for reasons of its own – included this district as a source of turnover. This business plan was sent to the franchisor, but the franchisor – due to an apparent lack of time – did not assess the plan and indicated that the franchisee should send this plan to the financier.

About a year after the franchisee has concluded the franchise agreement, the franchisor has carried out a location survey (VPO) with regard to Rayon B. This forecasts a turnover that is several tens of thousands of euros below the turnover forecast in the standard calculation. This information has not been shared with the franchisee.

After some time of operation, it appears that the turnover lags behind what was forecast, which the franchisor explains by a delayed start of the (full) opening of Shopping Center A, as well as the commercial implementation of this by the franchisee himself.

Furthermore, the franchisor has expressed an intention to also give a franchisee the opportunity to operate a shop in District C. The franchisee of Shopping Center A has objected to this, given its low turnover. For this reason, the parties agree that the franchisee will (also) be responsible for the operation of the shop in Wijk C.

The franchisor conducts a limited investigation into the possibilities of District C. This investigation shows that the presence of a store in District C does not have a cannibalizing effect on the turnover of the store in Shopping Center A. In order to achieve maximum turnover, according to the report to exploit a strong and active entrepreneur.

However, the parties do not reach final agreement because the franchisee starts proceedings against the franchisor. In those proceedings, the franchisee claims that the franchisor has provided him with incorrect and incomplete information about the profitability of a shop in Shopping Center A. The standard calculation is said to have been provided to him as a well-founded forecast based on market research. The franchisor also allegedly concealed its intention to open a shop in District C, although the franchisee had mentioned this district in its business plan. The franchisor would also have wrongly failed to provide the franchisee with access to the VPO. In short, it is misleading. The franchisor disputes the foregoing and invokes – inter alia – prescription, as well as an exoneration clause with regard to forecasts provided by the franchisor.

The court notes that a standard calculation has been provided to the franchisee. Without further explanation from the franchisee, it cannot be assumed that there was indeed a well-founded forecast based on market research on which the franchisee could have relied. Since this further explanation was (apparently) not provided by the franchisee, this judgment of the court is understandable.

It is remarkable, however, that a court once again (see previous articles on this website) honors a franchisor’s appeal to an exoneration clause. Perhaps this appeal will be considered justified in the eyes of the court, because the information provided was only a standard calculation and (apparently) no statements were made by the franchisor on the basis of which it could be assumed that there would be more than one standard calculation. In that light, it is perhaps also understandable that the court notes that the franchisee, as an independent entrepreneur, had his own responsibility to conduct independent research into the feasibility of his (to be started) business.

However, it is to be hoped that this reasoning only applies in the specific case where – without any doubt – there is a forecast of which the franchisee knew, or should have known, that the forecast could not be correct, for example because the is a standard calculation. After all, if this reasoning were used in cases where a prognosis has been provided, i.e. also in the event that the franchisee could justifiably trust that there was a properly substantiated operating forecast, then the adage ‘the obligation to disclose takes precedence over the obligation to investigate’ would be can come under pressure. And wrongly.

Furthermore (b) the court seems sensitive in its judgment to the fact that the franchisor has tried in various ways to alleviate the suffering on the part of the franchisee. It cannot therefore be ruled out that the court might have ruled differently on certain points if the franchisor had not taken these measures. In practice, unfortunately, such measures are not taken as often as they should be, but as a franchisor it is good to know that such actions can be rewarded by a court.

The previous judgment again indicates that forecasting issues are often very nuanced and that the franchisee must clearly substantiate why he believes that he should rely on an operating forecast provided by the franchisor. A possible appeal in this matter, in which the franchisee – where possible, of course – tries to supplement his points of view, will probably only be of academic value, now that the franchisor has made various (substantial) claims of prescription as a primary defense. However, this primary defense has not been dealt with by the court in the present proceedings – for reasons that are unclear. A possible appeal in the present case can therefore easily fail on this element, without the other elements being answered by the Court of Appeal.

Mr JH Kolenbrander  – Franchise attorney

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to info@ludwigvandam.nl