Incorrect forecasts: franchisor must pay damages to franchisee

The court in Utrecht has recently rendered a judgment with regard to a prognosis issue. At issue in this case was that an incorrect operating forecast had been provided by the franchisor to the prospective franchisee. Based on this operating forecast, the franchisee decided to join the franchisor’s franchise formula. After all, the financial estimate provided by the franchisor with regard to the turnover to be realized and the profit to be realized is the most important starting point for a prospective franchisee to decide whether or not to actually enter a franchise formula. If in general this financial estimate provided by the franchisor turns out to be clearly incorrect, the franchisor is in principle liable for the associated damage, as suffered by the franchisee.

Gradually it turned out that the financial prognosis for the franchisee in question was completely incorrect, as a result of which the franchisee was forced to cease operations. The franchisee suffers considerable damage as a result, for which he holds the franchisor liable.

After an investigation, the court in Utrecht concludes that the location investigation, which formed the basis of the financial forecast in question, contains errors, including the following:

• The lack of relevant influences of (competitive) internet sales;
• An inadequate competitive analysis;
• An incorrect analysis with regard to relevant  purchasing power binding.

The result of the incorrect business location survey is therefore that the financial forecast based on it is also a mistake.

The court deems it proven that the prospective franchisee was presented with a misrepresentation at the time he concluded the franchise agreement with the franchisor. Thus, the franchisee has erred. On the basis of this error, the court awards damages equal to an amount that the franchisee would have received if he had been employed.

The ruling shows once again that the pre-contractual phase between franchisor and franchisee cannot be handled with enough care. The operating forecasts provided by the franchisor must be clear, properly substantiated and sound. The same applies to its translation into the final contractual relationship between franchisor and franchisee.

Mr Th.R. Ludwig – Franchise Attorney

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