Court of Appeal upholds misrepresentation and wrongful conduct in the event of an unsatisfactory prognosis

On June 6, 2015, the Court of Appeal of The Hague overturned the judgment of the District Court of The Hague of November 9, 2013 (ECLI:NL:GHDHA:2015:1707). The judgment has not (yet) been published. The franchisee claimed annulment of the franchise agreement on the grounds of error, because the franchisor allegedly presented an unsatisfactory prognosis. The franchisee also claimed compensation for damage because there was allegedly no franchise agreement and the disappointing operating results were allegedly the result of the economic crisis. However, the court ruled otherwise.

The franchisor is part of a large retail group and offers franchise agreements for the operation of clothing stores under a specific franchise formula. The franchisee was presented with a prognosis regarding the exploitation of the franchise formula. The prognosis was promising and a franchise agreement was signed. A franchise agreement is also concluded for the same franchise formula for a clothing store at a different location. Instead of the prognosticated flourishing operating results, the results are negative.

The Court of Appeal decides that a prognosis does not concern an exclusive future circumstance (within the meaning of Article 6:228 paragraph 2 of the Dutch Civil Code) if the prognosis is based on an incorrect representation of the circumstances existing at the time of the conclusion of the agreement. Such an unsatisfactory prognosis exists if it is based on incorrect assumptions or other (serious) errors in the substantiation and/or calculation of the prognosis. The Court of Appeal refers to the judgments of the Supreme Court of 19 February 1993, Prg. 1996, 4459 (Renault) and dated January 25, 2002. ECLI:NL:HR:2002:AD7329 (Paalman/Lampenier).

The forecasts are based on a certain average turnover per square meter. In itself, this method is not unsound. However, due to the presence of a so-called negative market space, which was limited at one location and substantial at another location, it was to be expected that the forecasted turnover would only be achieved in the third year and in Barneveld in the fourth or fifth year respectively. realised. Because of the negative market space, a newcomer has to fight his way into the market and it will take some time before he acquires the market share required for the forecast turnover. The Court of Appeal concludes that the prognosis is therefore unsound and sets aside for error.

If there is a mistake, this does not automatically result in an unlawful act. According to the Court of Appeal, this does not exclude the possibility that an unlawful act may have been committed if the franchisor can be blamed in this respect. For the award of the claimed tort, it is required that the franchisor can be blamed for not taking into account the lower turnover in the start-up phase and/or the negative market space at the locations and the consequences thereof.

With regard to one of the locations, it was established that the franchisor was aware that the store’s floor area was too large as a starting point in the forecast. Therefore, in addition to error, an unlawful act can also be assumed in this regard.

Preparing a forecast is a serious matter and this ruling shows once again that franchisors who present an unsatisfactory forecast will have to face the consequences.

Mr AW Dolphijn – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Mail to dolphijn@ludwigvandam.nl