Forecast jurisprudence: Liability and evidence

Franchise, Franchisees, Franchisor, Franchisors, Franchise Contract, Franchise Contracts, Franchise Agreement, Franchise Advice, Franchise Legal

The facts

By judgment of 16 October 2013, the subdistrict court in Breda ruled against a franchisee of a small petrol company on almost all fronts. The franchisor’s activities include the development and operation of a formula aimed at shops at petrol stations. Franchisees can participate in the formula through so-called partner agreements. Against the use of the formula is the payment of a monthly participation fee. At the beginning of February 2011, the parties involved in these proceedings concluded a partnership agreement with a term of five years, which concerned the operation of a shop at a petrol station.

Prior to signing the partner agreement, the franchisor provided forecasts including annual turnovers for the period 2011/2013. The franchisor further leased the retail space to the franchisee in parallel and linked to the partnership agreement.

Since November 2012, the franchisee has been in default with regard to the payment of the rent and the franchise fee. December 2012  franchisee has informed the franchisor that the forecasts would have been too rosy and has held the franchisor liable for his damage as a result. Furthermore, the franchisee gave the franchisor written notice of default for non-compliance with its various obligations under the franchise agreement in the areas of formula development, instruction and training, sales support, advertising and management and administration. Franchisor has contested any form of liability with reasons. Ultimately, in February 2013, the franchisee dissolved the partnership agreement and the rental agreement extrajudicially as of 1 May 2013.

The franchisor then claimed compliance with the franchisee’s obligations under the lease and partner agreement in court, primarily consisting of the payment of a rental deposit, rental installments and the franchise fee, reinforced by prejudgment attachment on various items. The franchisee put up a defense, relying on the allegedly incorrect forecasts. In the counterclaim, a declaratory judgment was claimed that the franchisor was liable for the damage resulting from those forecasts, to be further determined by the state. The franchisee also argued that the franchisor had failed to fulfill various obligations under the partnership agreement, in order to justify the extrajudicial dissolution. The franchisor has contested these claims with reasons.

The assessment

Nature of the agreement

In assessing this matter, a number of matters of interest to the franchise practice have been raised. The parties first debated whether there was an actual franchise agreement now that this agreement was known as a “partner agreement”. The franchisee made quite a point of that distinction. In its assessment of the foregoing, the subdistrict court has aligned itself with the common appearance of franchising in legal practice. Since the present agreement contained the characteristics and elements of a franchise agreement, and the franchisee had a large degree of independence, the Subdistrict Court ruled that what the agreement is called was irrelevant and should be qualified as a franchise agreement.
Forecasting and Liability
With regard to the allegedly incorrect forecasts, the subdistrict court’s assessment sought to link up with the judgment of the Supreme Court of 25 January 2002 (NJ2003, 31-Lampenier). It follows primarily from that judgment that a franchisor is not obliged, in short, to issue turnover and/or result forecasts, but if he does issue these, he must guarantee their correctness. The mere fact that the result is lower than the prognosis does not necessarily mean that the prognosis is unsound. According to the present case, the Subdistrict Court has assessed against this assessment framework.

Evidence

With regard to the accuracy of the prognosis, the subdistrict court ruled that although the franchisee’s results lagged behind, the franchisee simply argued and argued too little to be able to conclude that the prognosis was incorrect. This is therefore yet another example of many cases where issues such as the present one fail on the available evidence. After all, he who asserts must prove. In this case, the franchisee has not done enough.

Duty of care

Subsequently, the subdistrict court will address the alleged failure to observe a duty of care on the part of the franchisor. The subdistrict court reiterated that, according to established case law, the duty of care of the franchisor is entailed  means that if the forecast provided is not met by the franchisee, the franchisor has an obligation to provide advice and assistance to the franchisee in order to arrive at a situation that does justice to the franchise agreement, i.e. mutual benefit. If the franchisor does not comply with this obligation, he will be liable for the damage suffered by the franchisee.

In the proceedings, the parties have extensively debated whether and to what extent this duty of care has been sufficiently fulfilled on the part of the franchisor. In addition, extensive consideration has been given to whether and to what extent the franchisee has made sufficient use of the various services and support measures provided by the franchisor. In the end, the subdistrict court judge ruled that the franchisee had insufficiently substantiated the assertions made by the franchisor that the duty of care had indeed been adequately fulfilled. In the present case, the franchisee failed to indicate concretely at what points in his opinion advice and instructions for the business operation should have been given by the franchisor and which subsequently failed to give. Furthermore, the franchisee failed to state why the advice that was given was not adequate or what further assistance should have been provided. It has also not become clear whether and when the franchisee asked for help and what specific support was expected from the franchisor. This hangs in particular on the allegation that the franchisee had made an oral request for assistance. In the view of the Subdistrict Court, this too has not been sufficiently proven. The subdistrict court concludes that the franchisee has not fulfilled its duty to furnish proof, so that there is no room for evidence by means of witnesses or otherwise. Alleged attributable shortcomings on the part of the franchisor are set aside as not proven and therefore all rejected.

Subsequently, the franchisor’s conventional claims are assigned. The suspension effected by the franchisee is reversed and the franchisee is ordered to make all overdue payments as yet. Furthermore, the franchisee is ordered to pay his payment obligation under the rental and franchise agreement until the termination date of both agreements  to fulfill. Finally, the franchisee is also ordered to pay the (extra) judicial costs.

Conclusion

The issue underlying this ruling is a common one in franchise practice. Litigation in franchise relationships is often caused by discussions about prognosis. It is not uncommon for the franchisor to be found against in this context: there are now many known examples of franchisors who have actually been held liable for the consequences of incorrect turnover and profit forecasts. However, the present case shows once again that these kinds of issues are by no means a race. Success for the franchisee, but of course also for the franchisor, in these types of cases is often related to adequate evidence. That is where the franchisee’s primary problem was in this matter: much was said, but little was proven. The franchisee will have to come from a good background to be able to actually assume the liability of a franchisor on the basis of unfulfilled forecasts, although that is of course possible, as the various judgments in favor of franchisees show. However, that is not a given, the evidence will have to be convincing.

Ludwig & Van Dam Franchise attorneys,franchise legal advice.  
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