Exoneration of duty of care with the franchisor’s prognosis

Court of Overijssel, 9 April 2014, ECLI:NL:RBOVE:2014:1985

In a judgment of the Overijssel court of 9 April 2014, ECLI:NL:RBOVE:2014:1985 (about a branch of Top 1 Toys in Best), the interesting question arose whether a collaboration should be qualified as a franchise. The defendant argued not. Furthermore, it was disputed by the defendant that forecasts had been issued prior to the cooperation. The defendant apparently stated this in order to avoid the franchisor’s duty of care as assumed in established case law. With regard to both aspects, the defendant fails.

Referring to case law of the Supreme Court and EC Regulation 4078/88 (PbEG 1988, L 359/46), the court qualifies the cooperation as a franchise. Decisive were that the defendant had granted the right to operate a business under the Top 1 Toys formula for a monetary fee, made the know-how available in this regard, imposed the obligation to use the (image) brand Top 1 Toys, the to publish advertising brochures determined by Top 1 Toys, to participate in umbrella campaigns and also to impose the obligation to bring the layout and appearance of the store in accordance with the guidelines. The company description of the defendant included in the commercial register and the content of the articles of association do not lead to a different conclusion.

The question also arises as to whether there was an operating forecast prior to the collaboration. The court rules that if this is the case, the content of that operating forecast is subject to the franchisor’s duty of care. There was indeed a prior operating forecast, according to the opinion. The assessment of purchasing power binding appears to be important here and indications such as “targets” do not detract from this.

The court concludes that the operating budget issued was unsound. The franchisor had estimated a customer retention rate of 90. Based on that percentage, after multiplying the number of inhabitants and the spending per capita, the net turnover was budgeted. This percentage actually had to be only 52, it has been determined. This establishes a breach of the franchisor’s duty of care.

The franchise agreement had already been annulled out of court, which stands. The franchisee claims damages. However, the franchisor had explicitly stipulated the following:

“The contracting party has had information provided by (franchisor) (including, among other things, market exploration, operating budget and target turnovers) tested by expert third parties. The contracting party therefore acknowledges that (franchisor) cannot be held liable for the information and figures provided by it.”.

The franchisee had not carried out this duty of investigation. It is true that the business plan (tested in parts) had been tested by three experts, but a site investigation into the feasibility of profitable operation had not been carried out. The exoneration is also taken into account by the court. It is considered that two thirds of the loss should be borne by the franchisor, largely in view of the expertise of the franchisor. The extent of the damage has yet to be determined. The court reserves the decision in that regard.

In short, a judgment that underlines the various importance of the duty of care of operating budgets in franchise agreements.

Mr AW Dolphin  – Franchise attorney

Ludwig & Van Dam Franchise attorneys,franchise legal advice.

Do you want to respond? Mail to dolphijn@ludwigvandam.nl