Incorrect forecasts: franchisor must pay damages to franchisee
The court in Utrecht has recently rendered a judgment with regard to a prognosis issue. At issue in this case was that an incorrect operating forecast had been provided by the franchisor to the prospective franchisee. Based on this operating forecast, the franchisee decided to join the franchisor’s franchise formula. After all, the financial estimate provided by the franchisor with regard to the turnover to be realized and the profit to be realized is the most important starting point for a prospective franchisee to decide whether or not to actually enter a franchise formula. If in general this financial estimate provided by the franchisor turns out to be clearly incorrect, the franchisor is in principle liable for the associated damage, as suffered by the franchisee.
Gradually it turned out that the financial prognosis for the franchisee in question was completely incorrect, as a result of which the franchisee was forced to cease operations. The franchisee suffers considerable damage as a result, for which he holds the franchisor liable.
After an investigation, the court in Utrecht concludes that the location investigation, which formed the basis of the financial forecast in question, contains errors, including the following:
- The lack of relevant influences of (competitive) internet sales;
- An inadequate competitive analysis;
- An incorrect analysis with regard to relevant purchasing power binding.
The result of the incorrect business location survey is therefore that the financial forecast based on it is also a mistake.
The court deems it proven that the prospective franchisee was presented with a misrepresentation at the time he concluded the franchise agreement with the franchisor. Thus, the franchisee has erred. On the basis of this error, the court awards damages equal to an amount that the franchisee would have received if he had been employed.
The ruling shows once again that the pre-contractual phase between franchisor and franchisee cannot be handled with enough care. The operating forecasts provided by the franchisor must be clear, properly substantiated and sound. The same applies to its translation into the final contractual relationship between franchisor and franchisee.
Mr Th.R. Ludwig – Franchise Attorney
Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to info@ludwigvandam.nl
Other messages
Article The National Franchise Guide – “Corona discount of 50% on the rent” – mr. AW Dolphijn – dated September 15, 2020
Disappointing turnover due to the corona crisis may mean that the rent is halved, even if the rent is partly turnover-related.
Article Franchise+ – “Franchisor uses “derivative formula” (without his knowledge)” – mr. AW Dolphijn – dated September 9, 2020
Many franchisors will not be aware of the fact that they use a "derived formula" as referred to in the Franchise Act.
Article Franchise+ – “Obligations and rights of the starting franchisee” – mr. AW Dolphijn – dd
What should you pay attention to as a starting franchisee, what are your obligations and what are your rights when concluding the franchise agreement?
Article Mr. C. Damen – Three conditions for the right to customer compensation for the agent upon termination of the agency agreement – dated August 26, 2020
In the agency relationship between an agent and a client (the principal), the parties record their cooperation agreements in an agency agreement. When the principal enters into the agency agreement
Article Mr. C. Damen – “When does the obligation to provide proof apply for the submission of the franchise agreement?” dated August 17, 2020
Does the obligation to produce information apply to showing a (franchise) agreement in proceedings if the parties to the proceedings do not have a legal relationship to the (franchise) agreement?
Article Mr. AW Dolphijn – “How do you value a franchise company with a discharge loan?” – dated August 14, 2020
A discharge loan is a proven means of franchisors to find long-term franchisees.