Franchise appeal for error due to incorrect forecasts and lack of support rejected – dated April 25, 2019 – mr. K. Bastian

According to settled case law, the requirements of reasonableness and fairness – in connection with the nature of the franchise agreement – do not entail the general rule that the franchisor is under an obligation to inform the franchisee about the expected turnover and/or profit expectation. However, it should be noted that special circumstances of the case may entail such an obligation. If a report on the expected turnover and/or profit is provided to the (potential) franchisee, there is also a chance that the franchisor, under certain circumstances, will act unlawfully towards that franchisee.

The Court of Appeal of ‘s-Hertogenbosch ruled (ECLI:NL:GHSHE:2019:697) on the question whether the mere fact that forecasts did not materialize justifies the conclusion that the franchisee has been defrauded and whether this also constitutes a ground for error.

In 2010, the franchisee entered into a franchise agreement with the franchisor to operate a Café. Before the parties signed the franchise agreement, the parties consulted about, among other things, the potential location and the possible expected turnovers. Forecasts have been provided to the franchisee by the franchisor.

After the start of operation, it appears that the turnover realized by the franchisee was significantly lower than the turnover he expected. Subsequently, the parties have had contact on several occasions and held consultations about mutual complaints that have been established. Instead of coming closer together, the relationship between the parties deteriorated more and more and eventually resulted in an extrajudicial annulment by the franchisee and an extrajudicial dissolution of the agreement by the franchisor.

Error at the time of concluding the agreement

The franchisee wrongly argues that he has erred with regard to the forecasts presented to him. According to the franchisee, he had to conclude afterwards that the forecasts provided were not based on proper market research, but that these forecasts would have been the reason for the franchisee to enter into the franchise agreement with the franchisor.

The court states first and foremost that the mere fact that the forecasts did not materialize does not justify the conclusion that the franchisee has been wronged. The court also notes that the mere fact that the turnover of the franchisee lagged (far) behind the forecasted turnover does not show that the figures were incorrect. Nor does that mere fact constitute a ground for error. The lack of support alleged by the franchisee concerns a future circumstance and therefore does not constitute a ground for error. In accordance with Article 6:228 paragraph 2 of the Dutch Civil Code, errors regarding the future remain the responsibility of the erring party.

Lack of support from the franchisor

The franchisee also wrongly argues that the franchisor provided him with insufficient support during the term. The franchisor has already contested this accusation with sufficient reasons in the first instance.

Since the parties have not lodged any grievances against the declaratory judgment pronounced by the court that the agreement was dissolved as of December 18, 2012, the court does not reach a judgment on the dissolution on the basis of the breach of contract.

Acting unlawfully and not in accordance with the requirements of reasonableness and fairness

The franchisee argues that the franchisor has acted unlawfully or contrary to reasonableness and fairness towards the franchisee. In support, he puts forward the same facts and circumstances as those on which he based the claim with regard to the error and the attributable shortcoming. The Court of Appeal ruled that on the basis of what the franchisee has stated, the franchisee’s claims cannot be allowed. Since the franchisee has failed to explain why the facts and circumstances should lead to the allocation of its more and more subsidiary claims, the Court of Appeal cannot but deem these claims to be allowable.

Damages

The Court points out to the franchisee that the success of an appeal on error does not mean that the franchisor is liable to pay damages to the franchisee. There must be a specific legal basis for this.

The franchisee also claims compensation on account of the alleged breach of contract and claims a reference to a damage assessment procedure. However, the franchisee fails to substantiate that and in what way the alleged attributable shortcomings would have led to any damage on the part of the franchisee. The Court of Appeal shares the opinion of the District Court that there is no proper substantiation of the damage suffered as a result of the lack of support alleged by the franchisee. The requested reference to a damage assessment procedure is therefore not allowed by the court.

Conclusion

It cannot be inferred from the mere circumstance that the franchisor has provided the franchisee with a report on the expected turnover and profit during the negotiations prior to the conclusion of the franchise agreement regarding the expected turnover and profit, that an obligation to that effect rests on the franchisor.

If the franchisor chooses to provide the expected turnover and/or profit forecast to the (potential) franchisee, there is a chance that the franchisor, under certain circumstances, will act unlawfully towards that franchisee.

The mere fact that forecasts do not materialize does not immediately lead to the conclusion that the franchisee has been wronged, nor does that mere fact constitute a ground for error. It should also be noted that the success of an appeal of error does not automatically result in liability for damages.

Since the matter is largely case-based and also depends on a series of factors, we advise you to seek advice from a franchise specialist when entering into a franchise agreement (also in the pre-contractual phase).

mr. K. Bastiaans – lawyer Ludwig & Van Dam Advocaten, franchise legal advice.
Do you want to respond? Go to: bastiaans@ludwigvandam.nl