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By Ynze Kliphuis, LL.M.
Russell Advocaten B.V.
Amsterdam, Netherlands

Does a franchiser have to pay compensation to the franchisee if he has provided him with improper sales and profit forecasts?

Far Too Rosy Forecasts

Before concluding a franchise agreement, the franchiser often provides sales and profit forecasts to the (potential) franchisee. These forecasts are important to franchisees for making the choice whether or not to team up with the franchisor.

But what happens if the forecasts do not come out and financial problems will arise for the franchisee? Can he call the franchiser to account because the forecasts were unrealistic and he would  never have concluded the franchise agreement had matters been presented correctly?

Franchiser’s Liability

Until recently, this was usually unsuccessful. This was because it was assumed that a franchiser providing a forecast would only be liable if he had known that the information was incorrect and had not informed the potential franchisee accordingly. This was hard to prove for franchisees.

In a recent decision, the Supreme Court nuanced this strict standard. If the franchiser had performed investigations or had someone perform investigations he is liable for (i.e. for employees), a lower threshold for liability would apply. In that case the franchiser can also be liable if he had not known that the information was incorrect and the errors in the report are due to negligence of the franchiser or the person he is liable for.

If the franchiser contracts a third party to conduct an investigation and draw up a report on the forecast, the franchiser may rely on the information provided by this third party to be correct.

More information

Would you like to learn more about liability of franchisors for providing incorrect forecasts? Do you have any other questions regarding franchising? Would you like a lawyer to check an agreement which is already drawn up? Please contact us.

For more information about Russell Advocaten B.V., please visit the International Society of Primerus Law Firms.

The general information contained herein is intended for informational purposes only.  It is not intended to be, and should not be construed as, legal advice or legal opinion on any specific facts or circumstances.