Steady line in case law will be continued!

The judgment of the Supreme Court of 25 January 2002 in the so-called Paalman/Lampenier case has already been discussed several times in this series of articles. Unlike the writers of this series of articles, many saw this as a reversal of the established line in case law regarding, in short, the problem of forecasting. It has been repeatedly argued that this is not the case, partly because the Supreme Court was only presented with a very limited point of law in this matter. That this vision is the right one is apparent from a recent judgment of the District Court of Utrecht dated 20 October 2018. In this case, which was brought by a franchisee and in which, in short, the failure to achieve the operating budget provided by the franchisor and the loss suffered by the franchisee as a result was central, the District Court stated, among other things, the following.

“In the present case, X (the franchisor, MS) has provided Y (the franchisee, MS) with an operating budget prior to the conclusion of the franchise agreement regarding the operation of an X establishment in the first two years . In the opinion of the court, Y was entitled to trust that the forecasts included in the operating budget were established correctly. The mere circumstance that it is stated on the cover page of the operating budget that no rights can be derived from it does not change this. X – as a franchisor – may be deemed to be able to provide a sound report on the expected turnover and profit in the future on the basis of its experience and knowledge of the returns of the X establishments in general and the X establishment in question set up at this location. The operating budget itself also offers no leads for a suspicion that it could be incorrect or that it could be based on incorrect assumptions or careless research. After all, the report only mentions the forecast figures themselves, and not the way in which X arrived at these figures. Furthermore, X has not disputed that it gave Y a cooling-off period of seven days before entering into the franchise agreement. Such a period should be considered too short to have a proper investigation carried out into the turnover and profit expectations of the X branch. In addition, it has been established – if contradicted with insufficient reasoning – that Y, after receiving the operating budget, requested X to send the turnover and profit data of the previous franchisee, but that X did not comply with this request.

Subsequently, it must be assessed whether the operating budget has been drawn up correctly and is based on sound principles and careful (market and location) research. The Court finds that the operating budget only contains figures and no substantiation of these figures. The report also does not state the basic principles used in this respect or the results of the market and location survey, on the basis of which it arrived at the figures presented in the operating budget. In defense of its operating budget, X has only argued that it is based on a visit by two employees of X to the area in which the X site is located and on its experience in drawing up operating budgets. In the opinion of the court, such a visit – without further substantiation – cannot be regarded as a careful market and business location investigation. This justifies the presumption that the operating budget was not based on careful research and that the operating budget was therefore not drawn up in a careful manner.”

As stated, the Court here once again confirms the consistent line in case law that has existed for many years that if a franchisor provides an operating budget and there are no circumstances attributable to the franchisee as a result of which this is not achieved and furthermore the operating budget is not based on a sound market and location research the franchisor may be liable for the loss suffered by the franchisee as a result thereof. Furthermore, it is once again confirmed that a franchisee must be given sufficient reflection time before signing the franchise agreement.

Ludwig & Van Dam franchise attorneys, franchise legal advice