Can exclusion of error in forecasting benefit the franchisor?

Error, forecasts, turnover forecast, summary proceedings, non-competition clause, franchise contract

Franchisors are often accused of having painted too rosy a picture of the experiences and financial results of the franchise concept prior to and when concluding a franchise agreement. The disappointed franchisee then often invokes error. Can the far-reaching consequences of such an appeal be parried in advance?

If the franchisee’s appeal for misappropriation succeeds, the franchise agreement may be nullified. This nullification means that the franchise agreement is deemed never to have existed. Similarly, a non-compete clause in the franchise agreement will therefore have no effect. The District Court of Rotterdam (ECLI:NL:RBROT:2014:8895) recently ruled on an attempt by a franchisee to get the non-compete clause inoperative in this way. Moreover, as a result of the destruction, all achievements will have to be undone on both sides. For example, the franchisee will in principle be able to reclaim the paid franchise fee. Can the franchisor now parry this mighty weapon in advance?

Insofar as the answer to that question is simple, an appeal to annulment on account of error can, in principle, be successfully ruled out in advance. In principle, the franchisor can therefore legally include in the franchise agreement that the franchisee cannot invoke annulment of the franchise agreement on the grounds of error. Does this mean that if such a clause is included in the franchise agreement, the franchisor can make incorrect forecasts with impunity? Certainly not.

It is paramount that it should be borne in mind that error refers to the situation in which a misrepresentation has arisen, without there necessarily being any question of deliberate deception. In the event of such malicious intent, exclusion from annulment of an agreement will not succeed. Error can then coincide with fraud, which can also lead to destruction, but cannot be excluded contractually. Even in the case of deliberate recklessness, an appeal to the exclusion of destruction will in many cases fail. It will therefore not be easy to parry an appeal for annulment. If the misrepresentation is not caused by the franchisor itself, but by an agent of the franchisor, such as an external recruitment agency, the possibilities for exclusion from annulment may be broader.

Furthermore, the exclusion of an appeal for annulment does not preclude an appeal for dissolution of the franchise agreement. Dissolution does not have the effect that the franchise agreement is deemed never to have existed, but leads to termination of the franchise agreement. Dissolution may be accompanied by an obligation to pay compensation. In addition, causing a misrepresentation may be unlawful, resulting in liability for damages.

Mr AW Dolphijn – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice.
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