Formido franchisee stumbles over burden of proof in prognosis case

Franchise, franchisor, forecasting, location research, tort, duty of care

On 2 July 2018, the Amsterdam District Court (ECLI: RBAMS:2014:3831) ruled that despite the fact that a Formido franchisee achieved only 60% of the forecast turnover, the franchisor had not acted unlawfully by basing that forecast on the collaboration. A remarkable thing about the judgment is that the rejection of the claims is mainly motivated by the fact that the franchisee allegedly had insufficiently substantiated his assertions and was unable to prove them.

Once again it follows from this judgment that the mere failure of expectations raised is not sufficient for a liability claim. Among other things, it must be proven that the assumptions on which the forecasts were based were intrinsically flawed. This is settled case law.

In the present case, the franchisee was first of all unable to prove that the failure to meet the expected customer flow in relation to the competition rendered the prognosis unsatisfactory. Simply because it was insufficiently stated and/or substantiated why that expectation should not have been raised.

The same fate met the claim that insufficient account was taken of the shrinking market due to the recession. That consideration is remarkable because I would believe that such industry information is readily available. After all, it was known that the housing market was already collapsing prior to the start of the franchise relationship. It is unclear why the court considers that Formido was not aware or should not have been aware of the effects this has on the do-it-yourself market, only because the franchisee did not state enough about this. Here, the franchisee was (too?) met little, especially if it turns out that the market would shrink by 24%.

The reproach that the report was not handed over to the franchisee in time, which stated that there was “little potential for such a large construction market”, did not take root either. To this end, it is considered that the franchisee was aware of the existence of the report itself and could therefore have requested it himself (culpa in eligendo). Needless to say, it is also considered that the claim lacks a causal connection, since the franchisee had already entered into a ten-year rental obligation.

An extremely frustrating outcome for the franchisee in question, now that everyone feels that such a large deviation from the forecasts cannot be attributed to the franchisee alone. After all, within the franchise relationship he is not able to rectify this independently.

To make matters worse, no (alternative) claim in relation to the duty of care was filed in this regard, while the franchisee did not sufficiently contradict that this had also not been complied with.

The ruling teaches us once again that franchisees must adopt a critical attitude and, in principle, must not blindly rely on forecasts. This does not alter the fact that insufficient fulfillment of one’s own obligation to investigate may not be a justification for unsound prognoses.

The pre-contractual phase should preferably also be recorded in writing, as the burden of proof is heavy.

Furthermore, it is precisely in prognosis cases that a proper substantiation of all facts and assertions is absolutely necessary and that the lagging result should not be lightly referred to as (only) grounds for liability. Finally, it does not follow from the judgment why the franchisee did not also invoke error. After all, after four years, assuming that it was not clear from day one that things went structurally wrong, this would not have had a chance in advance, because of the moment at which the statute of limitations starts.

The ruling is, incidentally, a good example in the discussion on the reversal of the burden of proof in prognostic cases. This will certainly have a preventive effect in order to organize the pre-contractual phase more carefully.

It is an interesting question whether there will be an appeal in this case.

Mr J. Sterk – franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Mail to Sterk@ludwigvandam.nl