Franchiser liable for giving unrealistic sales forecasts?

When negotiating a franchise agreement in The Netherlands it is common that the franchisee asks for some financial figures: sales forecasts, expected costs, et cetera. Although these figures are often estimates, a franchiser needs to proceed with caution when giving forecasts. A Court recently held a franchiser liable for being too optimistic to a new franchisee. Contract lawyer Duncan Tang discusses this recent case law.

Annulment of a franchise agreement on account of error

In this particular case a franchiser had given an interested potential franchisee a forecast of sales and costs if the franchisee would choose to open a franchise ice cream parlour. This forecast was comprised of financial figures of already existing ice cream parlour. The franchisee accepted the offer and started doing business. Only a short time later, however, his actual turnover was much less than the forecast predicted. Besides, his costs were higher. He felt mislead by the franchiser and started a legal procedure. He demanded annulment of the franchise agreement on account of error.

Franchise law

The court decided that according Case law a franchise agreement can be annulled if the contract was entered into under the influence of error when a franchiser has provided a sales forecast containing errors. This has been the case, said the court. Not only was the sales forecast unrealistic, but also the forecast contained errors that could have been prevented if the franchiser had simply checked the financial figures of the other parlour. While a franchiser is not obliged to provide forecasts to a candidate-franchisee, the forecast need to be correct if he choose to do so.

Franchiser liable for errors in sales forecast

Whether the franchiser is also liable depends on whether he has acted unlawful. According to case law a franchiser has acted unlawful when he has provided a report about expected sales figures, while he knows or should reasonably have known that the report is faulty. In this case the court considers that the errors in the report are so evident –at least for the franchiser- that he should have been aware the sales forecast was not correct. Therefore the franchiser was ordered to pay the damages of the franchisee.

AMS: your Lawyer specialized franchise law

Franchise law comes down to general Contract law. The franchise contract is not as such named or regulated in the Civil Code. There is no specific protection for either the franchisee or franchiser; protection of rights and interests is covered by the general principles of reasonableness and fairness.

Watson Arps & Wang Chan LLP for franchising law

A franchiser should be cautious when asked for sales forecasts by candidate-franchisees. A franchiser is not allowed to represent matters as rosier than they are. But a franchisee on the other hand, does have an obligation to investigate a business proposal. The line where ones obligation ends and ones other begins, is not cut clear. Therefore we always advise franchisers and franchisee to seek the legal opinion A written document in which a lawyers gives his legal point of view regarding a certain issue.
» Meer over legal opinion legal opinion of a solicitor. The contract lawyers of Watson Arps & Wang Chan LLP have excellent knowledge of franchise contracts and are able to help you in every stage of the process. Please feel free to contact us for an obligation-free meeting.