Incorrect forecasts: far-reaching consequences for the franchisor-franchisee relationship

Court of The Hague

The Preliminary Relief Judge of the District Court in The Hague rendered a judgment on 6 January 2010, which may have major consequences for the position of the franchisee in the event of incorrect forecasts. A dissolution of the franchise agreement by the franchisor can be made more difficult or impossible as a result.

The issue at issue in the case is – briefly stated – as follows. A potential franchisee had approached a franchisor in order to become a franchisee of his formula. The formula also concerns the sale of clothing, therefore the delivery of goods. Prior to the conclusion of the franchise agreement, as is customary, the franchisee has been provided with a favorable operating forecast based on which the franchisee has entered into a franchise agreement with the franchisor. Later, the franchisee would enter into a second franchise agreement with the franchisor for a second store. Prior to the conclusion of the franchise agreement, the franchisor also provided the franchisee with a favorable operating forecast. 

However, in the course of operating its stores, the franchisee found that the sales forecast by the franchisor had not been achieved, despite various efforts by the franchisee to increase sales. This created an ever-increasing (financial) problem for the franchisee. The independent branch organization CBW Mitex was then called in by the franchisee, who determined without reservation that the forecasts provided by the franchisor could not be sound for both stores. It was therefore established for the franchisee that he had contracted with the franchisor under a misrepresentation of facts.

The franchisor was written to by the franchisee about the lagging turnovers, the incorrect forecasts and also asked to provide adequate support to the franchisee in order to resolve the matter amicably. Since there were two stores, the franchisee had a great interest in an amicable settlement, partly in view of the substantial investments he had made. 

The franchisor’s response was – to put it mildly – ​​not very cooperative. Firstly, there would be no franchising, so that the franchisee – according to the franchisor – could not rely on franchise law. The franchisor also took the position that the forecasts it provided would indeed be sound. In addition, the franchisor was of the opinion that in its view the franchisee was just a difficult person who should be banned from the formula as quickly as possible.

Instead of a proposal for an amicable settlement or an offer of adequate support, the franchisee received a pithy letter dated November 7, 2011 from the franchisor, stating that the franchisor immediately (!) terminated the franchise agreements for both wanted to dissolve stores with the franchisee. The main reason put forward was that the franchisee was perceived as a nuisance within the organisation.

Although the franchisee still protested against these dissolutions, the deliveries of clothing were immediately (!) stopped by the franchisor, so that an emergency situation arose on the part of the franchisee. In the franchisee’s view, this was unreasonable, partly in view of the damage he would suffer as a result. It cannot go unnoticed that in the period from September 23 to November 7, 2011(!) the franchisor had practiced total radio silence towards the franchisee, although the franchisee had asked several times during that period to enter into consultation in order to reach a solution. 

The franchisee was therefore forced to turn to the facilities in The Hague with a request to have deliveries resumed by the franchisor. The judge’s considerations are no less than clear. The franchisor disputes that there is franchising, but according to the judge the facts clearly show that there is a franchise agreement. The franchisee can therefore invoke the case law regarding franchising.

In addition, the court finds that the franchisor was not able to dissolve the franchise agreements because the franchisee was not in default. Absenteeism is a (legal) situation, which is one of the conditions for dissolving an agreement. However, only one party can be in default at any time; if one party is in default, the other party cannot be in default. And without that default, an agreement cannot be dissolved by the other party.

Because the franchisor had provided unsound forecasts to the franchisee during the negotiations, it committed an unlawful act. Pursuant to the law, the franchisor is therefore automatically in default. Because the franchisor was therefore in default, actually from the start of the term of the franchise agreement, the franchisee in turn could not be in default and that is precisely one of the conditions for being able to dissolve an agreement. In short, the dissolution of the franchisor could not be sustained, according to the judge.

The practical implications of the previous judgment are obvious. If and insofar as it is established that a franchisor has provided unsatisfactory forecasts to a franchisee at the time of concluding the franchise agreement, the franchisor will therefore automatically be in default from the start of the cooperation. This could make it considerably more difficult for the franchisor to dissolve the franchise agreement with a franchisee. The foregoing is therefore also a good (legal) reason for the franchisor to always provide sound forecasts to a franchisee at the time of concluding the franchise agreement.

The far-reaching consequences of the ruling discussed here will be further discussed in the next edition of the trade journal Franchise+.

Mr JH Kolenbrander – Franchise lawyer

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