Forecast: developments franchisees

The court in Arnhem has recently again ruled on so-called ‘prognosis problems’. In short, this problem means that a franchisor provides incorrect (too rosy) forecasts to the franchisee in the form of an operating forecast. The forecast turnovers and results are then often not achieved by the franchisee, so that – in many cases – a loss-making situation arises and the franchisee is forced to prematurely cease its operation.

The court case before the court in Arnhem concerned a franchisee who had entered into a franchise agreement with a franchisor in order to be able to operate a magazine shop under a certain formula name. Part of this store would be a postal agency, where consumers could buy stamps and the like. For the entire store, including the postal agency, an operating forecast had been provided by the franchisor to the franchisee.

Less than half a year after the opening of the shop, a second post office is opened in the vicinity of this shop. The franchisee loses income as a result and holds the franchisor liable because the operating forecast provided is not sound. According to the franchisee, the franchisor knew before the store opened that a new postal agency might be established in the vicinity of the franchisee’s store. In any case, the operating forecast should have been adjusted accordingly. The franchisee would also have received insufficient assistance and support.

The franchisor defends itself by stating that the umbrella organization of postal agencies has indeed indicated this at some point, but that this statement would be too vague. In addition, adequate assistance and support would have been provided.

The court is of the opinion that there was no obligation on the franchisor to inform the franchisee in more detail, because the operating forecast had already been provided, so that in the opinion of the court it can remain unclear what the franchisor did or did not know. The franchisor’s obligation to provide information would therefore apparently end when the franchise agreement was concluded. The additional competitor would only be an entrepreneurial risk.

This is a remarkable position. Should the franchisor’s information obligation indeed cease once the franchise agreement has been signed and an operating forecast has already been provided? Such a position seems to be at odds with the duration element of a franchise relationship. In view of this duration element, it could be argued that the franchisor has an obligation at all times to properly inform its franchisee in order to arrive at a situation that does justice to the franchise agreement. It could even be argued that the franchisor should have actively gathered further information, after becoming aware of a competitor’s possible opening, in order to determine how its franchisee might be affected by these developments. As a result, action could still be taken by the franchisor and franchisee. However, the court seems to formulate a duty of care that amounts to a ‘guarantee up to the front door’.

The court also uses the word “entrepreneurial risk”. Although this is understandable, since the franchisee is an independent entrepreneur, it does misunderstand the nature and content of the franchise relationship. After all, once a franchisee has opted for a certain formula, it is in principle impossible for him to deviate from this formula. If circumstances arise or arise that affect its turnover, the franchisee cannot (easily) respond to this by, for example, adjusting its range or adapting the interior of its store. In other words: the franchisee has limited freedom of movement, so that he actually runs a greater entrepreneurial risk if a franchisor does not inform him (completely) correctly.

In addition, the court in Arnhem honored the franchisor’s appeal to an exoneration clause included in the franchise agreement, which – in short – means that the franchisee must complain within three months about the inadequacy of the operating forecasts. Apart from this specific issue, such (short) exoneration periods should have no place in a franchise agreement. After all, such clauses would very easily relieve a franchisor of its duties of care with regard to the provision of sound information. It is good to consider the following: a franchisor is not obliged to provide an operating forecast to a potential franchisee. However , if the franchisor does provide a prognosis, then, on the basis of case law, this prognosis must be sound and based on sound research.

A franchisor therefore chooses to provide an operating forecast. There is no legal obligation on her to do so. Couple this with the fact that inaccuracies in an operating forecast only become visible after some time and it can be argued that exoneration clauses with such a short complaint period have no right to exist. The court therefore seems to have chosen an easy route in this matter.

The previous assessment of the court in Arnhem does not stand alone. A large part of the courts in the Netherlands seem to have no eye (anymore) for the plight of a franchisee due to incorrect forecasts and quickly ‘throws’ it at the entrepreneurial risk and/or exoneration clauses. Based on the foregoing, this cannot be called completely correct and – in some cases – even completely incorrect and unreasonable. In those cases, the franchisee is left with considerable damage, actually caused by the negligence of the franchisor. It would therefore be good if (more) attention was paid to the interests of the franchisees in this regard.

Mr JH Kolenbrander – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to coal burner @ludwigvandam.nl