Liability advisor for franchise agreements

When entering into a franchise agreement, the prospective franchisee sometimes engages an advisor to arrange financing, for example. An assessment of the prognosis issued may also be part of the adviser’s activities. It is also conceivable that the franchisor will engage a consultant to carry out work for the prospective franchisee. On 28 January 2015, the Amsterdam District Court ( ECLI:NL:RBAMS:2015:416 ) issued a judgment on, among other things, the question of whether the consultant involved is liable.

A franchisor had engaged a consultant to offer its prospective franchisee a start-up plan with an operating forecast that the franchisee could work out himself. The franchisee held the consultant liable now that it subsequently turned out that the advice and prognosis were unsound.

The question arose whether the consultant had a legal relationship with the franchisees. The court ruled that the consultant in question was put forward by the franchisor as the person whom the franchisee should contact with questions about the business plan. In addition, the consultant also checked the business plan completed by the franchisee. Due to this construction – despite the fact that the formal client was the franchisor – there was a certain relationship of trust between the consultant and the franchisee, whereby the franchisee could assume that the consultant also took his interests into account. Furthermore, with regard to the financing application, an agreement has indeed been concluded between the franchisee and the adviser on the basis of which the adviser would advise the franchisee on this application. The (content of the) financing application was of course very closely related to (the content of) the business plan, now that the financing application had been submitted in order to obtain the financing required according to the business plan. Therefore, the consultant must take the interests of the franchisee into consideration. This applies to both the business plan and the financing application.

The consultant stated (during a preliminary hearing of witnesses) that he told the aspiring franchisee that he could assume a certain fee per order generated under the formula when filling in the starter plan. This turned out to be unfounded.  Although the consultant stated that he had heard this from the franchisor, the consultant failed to verify this on the basis of the annual accounts in his possession.

The court also finds that the consultant had wrongly written to the aspiring franchisee that there were assignments with a turnover of € 250,000.00 received by the already active franchisees. Again, this turned out to be factually incorrect.

It may be expected of a reasonably acting and reasonably competent adviser who takes the interests of his client into account that he checks the figures that he passes on to his client (or that he informs his client that he has not done so). This was all the more true in the present case, where the consultant knows that the client uses these figures in his business plan that forms the basis of the financing application that the client submits. It can therefore be concluded that the consultant has failed to act towards the franchisees.

The franchisee claimed to have suffered damage as a result of the consultant’s shortcomings. However, the court ruled that the decision to become a franchisee had already been made at the time the consultant provided the incorrect information. The consultant is therefore not liable for damages to the franchisee.

It follows from this ruling that those who advise aspiring franchisees on forecasts and financing applications may be liable. This may also be the case if the consultant in question is engaged and paid by the franchisor. It is a good idea for an adviser to include in his advice which data has been taken as a starting point and what its origin is. It is also advisable to indicate which data have been accepted (in the first place) and which have not been (further) verified.

Mr AW Dolphijn – Franchise lawyer

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