It has become our hobbyhorse. Franchisees cannot simply pass on their disappointing turnover results to the franchisor. In our newsletter of 23 June 2020, we discussed the established case law in franchise practice: turnover forecasts in local market reports provided to franchisees cannot automatically be regarded as income guarantees. In a recent judgment of the Court of Appeal in Arnhem, handled by our firm, this was reaffirmed.
In this case, the franchisor had provided the franchisee with an external local market report that included forecasts. The research company had mapped out the market areas from which the branch would be able to draw customers and linked these to purchasing power percentages. On this basis, revenue forecast with clear margins were made.
The actual turnover of the franchisee decreased over time. The franchisee held the franchisor and the research company liable for damages and pleaded, inter alia, error, fraud and wrongful act. The franchisee was initially ruled against and now lodged an appeal unsuccessfully.
Counter-reports off the table – no “hard science”
As in many franchise cases on allegedly wrong financial forecasts, the franchisee submitted counter reports from experts in which the initial report and the methods used by the research company were heavily criticized. The Court of Appeal made short shrift of this: a difference of opinion on how a report is set up and how the market areas must be demarcated does not mean that the initial report was incorrect. There is “no hard science” according to the Court of Appeal.
Research obligation of the franchisee
The Court of Appeal charged the franchisee with not having carried out any research of its own in the local market area although sufficient time was made available for this purpose and well before the franchise agreement was signed. The (recent) Dutch Franchise Act has now introduced a mandatory standstill period of four weeks for this. The obligation of franchisees to conduct their own investigations has also been laid down in this Act.
There are never any real winners in these franchise disputes on forecasts. Years of litigation, considerable costs that often cannot be recovered and an enormous amount of time and negative energy for both parties. The prolonged uncertainty of the outcome of such proceedings is undesirable, for all parties involved. Unfortunately, the Franchise Act probably does not provide sufficient direction to bring these matters to an end.