Article De Nationale Franchisegids: The consequences of providing an incorrect (turnover and profit) forecast by the franchisor – mr. K. Bastiaans – dated June 9, 2021

In many cases, prior to entering into a franchise agreement, a franchisor provides a sales and profit forecast to a franchisee. So far not a problem in itself, but what if that prognosis turns out to be incorrect? A problem that occurs more often in franchising country, which the Court of Central Netherlands, location Utrecht, once again considered on April 21.

What was going on in this matter?

A franchisor of a concept in specialty stores in the field of mainly bake-off products from Anatolian/Turkish cuisine has provided a forecast to a franchisee prior to entering into a franchise agreement. In that forecast, a prediction was made of the turnover, gross margin and operating profit of the franchisee over the first three years. After receipt by the franchisee of the forecast, the franchise relationship between the parties has commenced.

Shortly after the start of operations, the franchisee already noticed that the turnover was disappointing; the turnover, gross margin and operating result were not at all comparable to what the franchisor had presented in the forecast. The franchisee was also of the opinion that the franchisor had failed to fulfill its obligations under the franchise agreement in a number of essential respects. All these facets together have ensured that the franchisee has been forced to nullify the franchise agreement on the basis of error.

The franchisor defends itself by taking the position that there is (i) no forecast would have been prepared by or on behalf of the franchisor, and if it had, the franchisee would have been warned that it was raw data, (ii) the franchisee would also have entered into the franchise agreement without forecasting and (iii) there was no wrongful act or shortcoming on the part of the franchisor.

The court’s assessment

In short, the court in this case is of the opinion that the franchise agreement was concluded under the influence of error. An incorrect forecast has been provided by the franchisor. A prognosis of which the franchisee could rely on the accuracy, according to the court. In addition, the court is of the opinion that the franchisor has acted unlawfully towards the franchisee by providing an incorrect prognosis, so that the damage suffered and still to be suffered by the franchisee qualifies for compensation.

According to the court, the following elements are important in this respect:

The court has established that the franchisor has drawn up the prognosis. With regard to the inaccuracy of the prognosis, it is not disputed between the parties that the prognosis is incorrect. It is debatable whether the franchisor was aware of the erroneous prognosis. The court believes that this is the case. The court attaches importance to the following points: (i) the franchisor has failed to conduct a feasibility and suitability study when it has promised to do so on its website, (ii) it has in no way appeared that the franchisee has requested a (too) rosy forecast and (iii) it has not been shown that the franchisor made any statements to the franchisee prior to the conclusion of the franchise agreement that would cause the franchisee to doubt the correctness of the forecast.

Since the franchisor failed to inform the franchisee about the unreliability of the forecasts and the forecasts corresponded to the statements on the franchisor’s website, the franchisee was justified in relying on the correctness of the forecasts.

The court rules that the franchisor has not sufficiently explained that the franchisee would have accepted the franchise agreement even without prognosis, as a result of which the franchisee has rightly annulled the franchise agreement, according to the court.

In addition, the court is of the opinion that the franchisor acted unlawfully towards the franchisee by providing an incorrect forecast, all the more so since the franchisor was aware that the forecast was incorrect, but failed to point this out to the franchisee.

The court orders the franchisor to reimburse the fees paid by the franchisee under the franchise agreement and also orders the franchisor to pay compensation for the damage suffered and to be suffered by the franchisee.

Conclusion

This ruling endorses the line in case law in which a franchisor can be liable to the franchisee for incorrectly forecasted data regarding turnover and operating results, if – in short – the forecast is based on incorrect assumptions, and the franchisee based on the conduct and statements of the franchisor did not have to take into account or otherwise be aware that the forecast was not realistic.

So let yourself be well advised when it comes to forecasts. Know what you are doing with the preparation of the forecasts. In many cases it is better not to issue forecasts or to have them prepared by the franchisee. If a forecast is nevertheless issued, make sure above all that the forecast does not raise false expectations and that it is based on verifiable and correct data. In any case, seek advice in advance. This matter, as the present judgment proves once again, is unruly and has many potential pitfalls.