Mistake about prognosis, annulment of non-compete clause?

On November 3, 2014, the Interim Relief Judge of the District Court of Rotterdam ( ECLI:NL:RBROT:2014:8895) made an interesting ruling in a dispute between a franchisor and a franchisee regarding a non-compete clause in the franchise agreement. The franchisees did not consider this non-compete clause to be valid as they had nullified the franchise agreement on the basis of error, due to incorrect sales and profit forecasts. During the course of the franchise agreement, the franchisee, like five other franchisees, had annulled the franchise agreement on the grounds of error, among other things. In summary proceedings, the franchisor then demanded that the franchisee be fully bound by the obligations under the franchise agreement, including a non-compete clause. If the franchisee’s appeal of error were successful, the franchise agreement would be deemed never to have been entered into. This means that there would also be no non-compete clause, let alone that it could have been violated.

The preliminary relief judge rules that it can be established that the parties are of the opinion that fruitful continuation of the cooperation is not possible. The franchisor’s claim for fulfillment of the financial obligations under the franchise agreement is therefore not allowable. After all, there are no more franchise activities.

The franchise agreement stipulates that the franchisee may not engage in any competitive activities for a period of 1 year after termination of the franchise agreement. The franchisee assumes that this non-compete obligation no longer applies, now that the franchise agreement has been nullified on the grounds of error due to an incorrect forecast.

Referring to case law, the provisional relief judge succinctly sets out the assessment framework for an appeal to error in the event of incorrect forecasts. The preliminary relief judge argues that according to settled case law, the nature of the franchise agreement entails that the franchisor has an obligation to ensure that the forecasts provided to the future franchisee are sound. The franchisor must guarantee the correctness of the data on which the forecast is based. If a franchisee fails to realize the operation of his business as budgeted in the forecast and it is also established that the franchisor has not provided a proper forecast, the franchisor is in principle liable for damages (cf. HR 25 January 2002, ECLI:NL:HR:2002:AD7329). However, the mere fact that the result achieved by a franchisee is lower than forecast by the franchisor does not imply that the forecast is faulty. After all, a prognosis is by its very nature a statement about the probable course of future events that are not yet known. After all, given the many uncertainties that characterize the start of a company, it is quite conceivable that a prognosis that is itself based on correct assumptions and an expert judgment, turns out to deviate from the reality that will reveal itself in the subsequent period. . If a prognosis that has been drawn up properly in all respects is followed by a reality that deviates substantially from it, then there will usually at most be an error in future circumstances only, which does not provide grounds for an action to set aside. The entrepreneur disappointed in his expectations for the future will have to accept such disappointment as part of his entrepreneurial risk. An incorrect prognosis can therefore only provide grounds for annulment on the grounds of error if circumstances arise that necessitate a deviation from this general starting point (cf. Arnhem Court of Appeal 25 March 2008, ECLI:NL:GHARN:2008:BG1402).

When assessing the facts and circumstances of the present case, it is striking that the preliminary relief judge rules that the franchisor cannot hide behind the forecasts issued by its hired recruitment and selection agency. According to the preliminary relief judge, this falls under the responsibility of the franchisor.

Furthermore, the consideration deserves attention where the franchisor invokes a provision in the franchise agreement stating that the prognosis is based on the franchisor’s own efforts and experiences and that the formula, given its relatively short existence, is still under development and that a franchisee must therefore himself investigate the soundness of the assumptions of the forecast made available to him. In the provisional opinion of the preliminary relief judge, this provision constitutes a clear reservation with regard to the usefulness of the prognosis. It can therefore by no means be ruled out that the franchisor cannot be held liable if the result of a franchisee is disappointing.

The preliminary relief judge ruled that answering the question whether the franchisee is entitled to annulment of the agreement due to error requires an investigation into the facts and probably also the provision of evidence. Summary proceedings are not (well) suited for this. The provisional relief judge can therefore only reach the conclusion that it is not yet sufficiently plausible that the appeal for annulment will succeed in proceedings on the merits. In the present interlocutory proceedings, the appeal for annulment therefore fails and the non-compete clause also remains intact. The preliminary relief judge rules that the franchisee is prohibited from developing competitive activities under penalty of a penalty.

It appears once again that a great many facts and circumstances can be relevant to the assessment of whether there is a question of error regarding a prognosis. The catalog of conditions is almost inexhaustible. When entering into a franchise agreement and formulating that franchise agreement, it is very important to indicate as much as possible individually how the franchise agreement was concluded. This can prevent disputes and provide clarity about the validity of the agreements laid down in the franchise agreement, including the non-compete clause.

Mr AW Dolphin  – Franchise attorney

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