Not just a successful appeal to incorrect forecasts

Not just a successful appeal to incorrect forecasts

Introduction

When entering into a franchise agreement, a franchisor is not automatically obliged to provide a turnover and/or profit forecast. However, a certain turnover or profit forecast is often provided to the prospective franchisee. This may be done from a commercial point of view, but perhaps also for the benefit of the franchisee to obtain financing. What are the consequences if this forecast is subsequently not met?

Below I will first briefly explain the applicable regulations and then discuss a recent ruling in which the franchise agreement was legally annulled pursuant to art. 3:40 paragraph 2 of the Dutch Civil Code due to conflict with mandatory law (failure to observe the standstill period of Article 7:914 paragraph 2 of the Dutch Civil Code), but it has not been established that the prognosis provided was incorrect. Partly because of this, the franchisee has not (yet) succeeded in having his claim for compensation granted.

What are the current rules regarding forecasts?

The legislator has indicated [1] that the Franchise Act is not intended to deviate from the course set by the Supreme Court [2] . The following situations are mentioned, among others, in which providing an inadequate forecast may be unlawful:

• the franchisor who has a report drawn up by a third party on the expected turnover and expected profit. The franchisor who provides this report to his other party is acting unlawfully under certain circumstances if he knows that this report contains serious errors and he does not draw the attention of his other party to these errors.
• the franchisor who himself (or a person for whom he is liable on the basis of one of Articles 6:170-6:172 of the Dutch Civil Code) carries out the investigation and provides the results thereof to his other party without the franchisor knowing that the report contains errors, but that carelessness on the part of the franchisor led to the errors in the report.

Not every incorrect forecast is a shortcoming

However, an incorrect forecast does not immediately mean that a franchisee has actually been shortchanged. After all, forecasts look at the future and are not guarantees. In order to determine this, the franchisee must come up with more serious weapons, for example by pointing out inaccuracies, imperfections or carelessness.[3] If a franchisee subsequently succeeds, this may lead to a successful appeal to the negative consequences of a lack of will (for example error), or another basis for liability of the franchisor (such as a tort).

A recent example

A recent ruling by the District Court of The Hague dated 8-11-2023 is illustrative. [4] What was going on in this matter? The franchisor of the Burgerme formula (hamburger restaurants) in the Netherlands had amended the draft agreement on ‘more than minor’ points within the standstill period of 4 weeks. The judge concluded that the franchise agreement signed on March 10, 2021 was legally annulled (extrajudicially) on June 29, 2022, due to conflict with mandatory law (Article 7:914 paragraph 2 of the Dutch Civil Code).

Franchisee also took the position that he made a mistake when entering into the Franchise Agreement (Article 6:228 of the Dutch Civil Code) and that there was fraud on the part of the franchisor (Article 3:44, paragraph 1, of the Dutch Civil Code), because he was provided with turnover forecasts that misrepresented matters and were defective. If he had known that the forecasts did not provide a sound and completely correct picture, he would have made a different assessment and would not have concluded the Franchise Agreement and/or he would have at least stipulated different conditions. Nor would he have concluded long-term agreements with third parties, at least not in the form in which this occurred. The franchisee’s error has been further reinforced by the franchisor’s failure to comply with pre-contractual legal obligations.

However, the judge puts a stop to this. In this regard, the judge considered that the franchisee had only stated in general terms that the information submitted by the franchisor was incomplete and the turnover forecasts and figures were inadequate. Franchisee has not specifically substantiated how the information was incomplete or inadequate. For this purpose, the mere statement that the realized results deviated negatively from the forecast results is insufficient, because this does not automatically mean that the forecasts as such were unsound. Nor has the franchisee adequately substantiated that the franchisor knew that the forecasts contained (serious) errors and thus acted negligently towards the franchisee. Franchisee has also not substantiated the (claimed by him) misleading nature of the franchisor’s submission of the (according to franchisee incorrect) forecasts and figures. This means that the franchisee has not sufficiently substantiated that the franchisor has provided misleading information.

In line with this, the franchisee has also not substantiated that and why, if he had received the (in his opinion) correct information, he would not have concluded the Franchise Agreement.

Conclusion

This ruling shows that a claim on receipt of an incorrect forecast does not simply mean that this forecast is inadequate and unlawful. The franchisee must properly substantiate and prove this. In any case, it must be shown that there is really something wrong with the prognosis. This can be done, for example, on the basis of an expert and relevant reports. It must also be established that the franchise agreement was not concluded (or was concluded under different conditions).

As often stated, we advise you to seek proper advice when it comes to forecasts. Franchisors must therefore carefully clarify their duty of care in advance. On the other hand, franchisees would do well to conduct thorough research (for example, who drew up the forecast and which shows that it is incorrect) before they possibly invoke error, for example, because an incorrect forecast has been issued.

[1] Parliamentary Papers II , 35392, no. 3, p. 33

[2] HR February 25, 2002, ECLI:NL:HR:2002:AD7329, HR February 24, 2017, ECLI:NL:HR:2017:311, HR September 21, 2018, ECLI:NL:HR:2018:1696

[3] Public Prosecution Service at the Supreme Court 4 May 2018, ECLI:NL:PHR:2018:461 paragraph 3.24

[4] District Court of The Hague November 8, 2023, ECLI:NL:RBDHA:2023:16665