Mistake and Void Franchise Agreement Based on False Forecast – Tort

Introduction

On January 15, 2014, the District Court of the Northern Netherlands rendered an interesting judgment between Lilly’s Ice Cream & Chocolate as franchisor and one of its franchisees. In short, the franchisee concerned, one of the first of the concept, was provided with a significantly over-optimistic turnover and result forecast, on the basis of which the franchisee ultimately successfully appealed for error, on the basis of which the franchise agreement was nullified and compensation was awarded. has been awarded on the basis of an unlawful act, which damage must still be assessed in more detail. The franchisor was also ordered to pay various costs.

The facts

Franchisor, Lilly’s Ice & Chocolate (Lilly’s), has been producing ice cream since 1947. In 2009, the first steps were taken on the retail path by opening its own branch in Hoogezand. In 2009 it also started looking for franchisees. The franchisee involved in these proceedings was one of the first.

Prior to concluding the franchise agreement, Lilly’s Ice Cream & Chocolate prepared a turnover and result forecast. The parties confess that this is based on the results of Lilly’s own branch and the 2008 Rabobank report Figures and Trends. In the first months of 2010, the franchisee opened its shop.

In mid-2011 it turned out that the prognosis was far from being met. The franchisee has communicated this to the franchisor several times. By mid-2012, a small collective of franchisees had formed, all of whom were in financial trouble.

In February 2013, an external expert assessed the prognosis for the franchisee involved in these proceedings. The expert was approached by the franchisee. The expert’s opinion was that the prognosis was unrealistic. It has also become apparent to the expert that during the preparation of the prognosis information was available at the franchisor which, with proper research, should have led to a different prognosis. Also up  on the basis of this opinion, the franchisee has initiated the present proceedings with the aim of annulment of the franchise agreement on the basis of error and compensation on the basis of tort.

The legal framework/assessment

The court has issued a number of judgments, including regarding the term of complaint and dispute settlement agreed between the parties, partly in relation to the fact that the franchise agreement was not signed between the parties. This circumstance is indeed taken into account by the court when assessing the matter. Here is a first lesson from this statement: in practice, it often happens that franchise agreements are not signed. In this case, this therefore has consequences for, for example, the dispute settlement procedure and the complaint period referred to.

The court reached the judgment mentioned above that the franchise agreement can be nullified on the grounds of error in a number of ways. First of all, it notes that the forecast deviates substantially from the actual results. In itself that is of course not sufficient to honor an appeal on error, but in this case the opinion of the expert is used, despite the fact that it was a party expert who reported on behalf of the franchisee. The court agrees with the expert that, by basing the prognosis almost exclusively on the franchisor’s existing branch in Hoogezand, an error has been made. The franchisee’s branch was located in Veendam, a place that is structured differently from Hoogezand, resulting in completely different footfall counts. Furthermore, according to the court, the prognosis does not sufficiently take seasonal influences into account, which is of great importance in the ice cream industry. The court also finds that the forecasted margin on the ice has been forecasted too high, based on the margin figures of its own branch in Hoogezand. There was a 10% difference between them. The expert has also established that the personnel costs were also estimated too low in the prognosis, which is the opinion of the court.

However, one of the court’s most fundamental considerations in this regard is that the fact that the franchisee knew that the franchisor was a start-up organization does not justify the franchisee’s failure to rely on the forecast. This is therefore a matter of weighing up the franchisee’s obligation to investigate when entering into the franchise agreement versus the franchisor’s obligation to disclose. The circumstance that in this case the franchisor had provided the franchisee with the prognosis of its own accord means that this duty of disclosure outweighs the duty of investigation on the part of the franchisee. In this context, importance is also attached to the fact that the franchisee has indeed carried out his own investigation, including in the form of a visit to the franchisor’s branch in Hoogezand, and has therefore, in the opinion of the court, complied with the requirements in this case. his duty to investigate.

The court ultimately ruled that the franchise agreement was concluded under the influence of error resulting from errors in the forecast and that the franchisee would not have entered into the agreement had the facts been correct. The franchise agreement is nullified.

Unlawful act

The court is therefore of the opinion that the prognosis contained serious errors. The court also considers that the prognosis was (voluntarily) provided to the franchisee, even though the franchisor was a start-up. The court is of the opinion that the franchisor should have seen this as a reason to exercise the necessary caution when making that prognosis. It is therefore important that the franchisor presented itself to the franchisee as experienced and knowledgeable. The fact that the franchisor nevertheless provided the franchisee with a prognosis based on only two sources, namely the (provisional) results of the Hoogezand branch and Rabobank’s Figures and Trends, is heavily blamed on the franchisor. It also turned out that the annual figures of the Hoogezand site were incorrect. Subsequently, the franchisor is also heavily blamed for the fact that the franchisee, on request, was not given access to the trial and trial balance of the branch in Hoogezand and was therefore partly prevented from conducting its own investigation.

Under the circumstances described above, the court is of the opinion that the franchisor knew, or at least should have known, that the forecasts would contain errors and that it should have made the franchisee aware of this as well. The court therefore rules that there is an unlawful act that must be attributed to the franchisor. On that basis, it ultimately comes to a judgment for the damage, which has yet to be determined by the state.

Conclusion

This is a pure forecasting issue. This illustrates once again what should be paid attention to in matters of this kind and furthermore that under certain circumstances, in line with the Lampenier jurisprudence, it is indeed possible to nullify a franchise agreement on the basis of an error in the conclusion of that agreement. Furthermore, the court has clearly set out on what basis, under certain circumstances, an action for damages based on an unlawful act can be made. Being a starter weighs extra heavily at the expense of the franchisor. The judgment of the court is therewith  far-reaching, however, the consequences of the failed forecast were also for the franchisee.

Mr DL van Dam – Franchise lawyer

Ludwig & Van Dam Franchise attorneys,franchise legal advice.

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