Liability for forecasts
In practice, one of the most prominent obligations of the franchisor in connection with pre-contractual information provision is the provision of a sound financial forecast regarding the franchisee’s expected income. According to settled case law, a franchisor is liable to the franchisee for incorrectly forecasted data regarding turnover and operating result if – in short – the forecast is based on incorrect assumptions and has ignored negative effects that should have been included in the forecast, while the franchisee should not have taken this into account on the basis of the behavior and statements of the franchisor or otherwise should have been aware that the forecast was not realistic.
The far-reaching responsibility and liability of a franchisor that can be derived from this has since led to a stream of judgments in which the above-mentioned standardization has been elaborated. This insight has meanwhile been translated both in and out of court into the generally accepted requirement that forecasts must be based on a thoroughly prepared and well-executed business location and market research, which in combination is sometimes referred to as a “feasibility study”. Such a feasibility study should at least include an investigation into the local competitive position, the demographic and income-related structure of the customer potential, as well as the foreseen and foreseeable market development in the entire sector. The foregoing clearly shows the importance of conducting a proper feasibility study. There may be special circumstances conceivable that could justify the omission of such an investigation. However, the fact that a franchisor involved has been conducting its own feasibility studies for many years or believes that it knows the industry well enough to make a proper forecast without carrying out a feasibility study is not in itself such a circumstance, although there are (sporadically) exceptions possible.
If a franchisee successfully argues in or out of court that he was misrepresented when entering into the franchise agreement, this may, depending on the circumstances of the case, have the consequence, on various legal grounds, that the franchise relationship ends, which may result in an indemnification or compensation obligation on the part of the franchisor. If the feasibility study has been carried out by an independent research agency, this may result in the research agency being jointly liable for the damage suffered by the franchisee.
The liability of a franchisor on account of the above-described problems can also be increased if, after problems have been identified as a result of this, he does not adequately guide and advise the franchisee in order to deal with the problems that have arisen. Pursuant to established case law, a franchisor has a far-reaching duty of care for this purpose. Obviously, it is not unlimited and is significantly nuanced in the event of the franchisee’s own fault or other circumstances beyond the franchisor’s control.
This jurisprudence will remain important even after the entry into force of the Franchise Act. The Franchise Act requires the franchisor to provide an intended franchisee with specific (financial) information prior to signing the franchise agreement. This obligation does not go so far that there is a forecasting obligation, but the franchisor must guarantee the information it provides.
Ludwig & Van Dam franchise attorneys advise on a very regular basis in conflict situations that have arisen as a result of prognostic problems. If necessary, procedures will be carried out in this regard. In many cases, partly on the basis of the efforts of Ludwig & Van Dam franchise attorneys, the problems that have arisen are resolved to the satisfaction of the parties involved.