Pre-contractual forecast

The forecast: basis of the decision, source of dispute

Before a prospective franchisee joins a franchise system, he typically bases his decision on a revenue or profit forecast. That forecast determines whether he dares to invest, how much he dares to finance, and what return he expects. When actual results fall far short of the forecast, one of the most common and fundamental disputes in franchise practice arises: was the forecast sound, who prepared it, and to what extent was the franchisee entitled to rely on it? The legal assessment of this is sophisticated and depends heavily on the facts.

Who do we work for?

We assist franchisors who wish to provide responsible forecasts without giving an unintended guarantee, and franchisees whose results are lagging far behind and who wonder whether the forecast was flawed. We assess the forecast, the substantiation, and the manner in which it was provided, and advise on the position and potential claims.

Is the franchisor responsible for the forecast?

The premise in case law is nuanced. Following the Paalman/Lampenier judgment (Supreme Court, 25 January 2002), the Supreme Court has ruled that a franchisor is not automatically liable for the accuracy of a forecast provided by him. There is no general obligation on the franchisor to provide a sales forecast. However, if he does so, he may be liable under certain circumstances, particularly when the forecast contains serious errors that the franchisor knew or ought to have known, and he failed to point this out to the franchisee. This was further elaborated in the Street-One judgment (Supreme Court, 24 February 2017), with attention to the question of whether the forecast was prepared by the franchisor himself or by a third party.

The difference between in-house and outsourced forecasts

Whether the forecast was prepared by the franchisor itself or by an engaged third party makes a difference regarding liability. In the case of a forecast prepared by the franchisor itself, a duty of investigation and care regarding the accuracy of the data used is more likely to be assumed. In the case of a forecast prepared by an independent expert, the franchisor's position is generally more favorable, provided that he had no reason to doubt its accuracy. The actual course of events surrounding the preparation and provision of the forecast is therefore crucial.

The interaction with the Franchise Act

The Franchise Act has increased the franchisor's duty to provide information. Although the Act does not introduce a general obligation to provide a forecast, the tightened duty to provide information and the mutual duty of care (Article 7:912 of the Dutch Civil Code) strengthen the position of the franchisee when a forecast has been provided that proves to be unsound. At the same time, the franchisee's own duty of investigation remains fully applicable: he must critically assess the forecast and, if necessary, seek expert advice.

Error and compensation

When a franchisee has joined based on a flawed forecast, he may, under certain circumstances, invoke error (Article 6:228 of the Dutch Civil Code), resulting in the annulment of the agreement, or bring a claim for damages due to a breach of the duty of disclosure or unlawful act. The outcome depends on the severity of the errors in the forecast, on what the franchisor knew or ought to have known, and on the extent to which the franchisee should have conducted his own investigation. An accurate reconstruction and, often, a financial analysis of the forecast are indispensable in this regard.

Our working method

For franchisors, we assess how forecasts are prepared and provided, and advise on a responsible approach that limits liability without failing to adequately inform the prospective franchisee. For franchisees, we reconstruct the forecast and its substantiation, assess whether the forecast is flawed, and determine whether a claim based on error or compensation is likely to succeed. Where necessary, we engage a financial expert.

Pre-contractual duty of information and standstill under the Franchise Act

Since the Franchise Act (January 1, 2021), a detailed pre-contractual duty of information applies. Pursuant to Article 7:913 of the Dutch Civil Code, the franchisor must provide the prospective franchisee with timely information necessary to make a realistic assessment of the risks of the agreement. A provided turnover or profit forecast falls within this context: when financial expectations are shared, the law also specifies how sound and substantiated they must be. In addition, Article 7:914 of the Dutch Civil Code prescribes a standstill period of at least four weeks: during this period, the franchisor may not amend the draft agreement to the detriment of the candidate, conclude the agreement, or induce the candidate to make payments or investments. This period is intended to give the prospective franchisee the opportunity to critically assess the forecast and the substantiation and, if necessary, to seek expert advice. We assess whether the information and standstill obligations have been complied with, as a breach thereof significantly strengthens the franchisee's position in a forecasting dispute. See also our page on pre-contractual obligations and the statutory obligations of the franchisor.

Error or unlawful act: two routes with different requirements

A franchisee who relied on a flawed forecast has, in principle, two legal avenues, each with its own requirements. A plea of ​​error (Article 6:228 of the Dutch Civil Code) leads to the annulment of the agreement; for this, the franchisor does not need to be at fault; it suffices that the franchisee had an incorrect understanding of the facts due to errors in the forecast and would not have entered into the agreement (in that way) had the understanding been correct. Error is therefore often the most promising basis. Annulment, however, has retroactive effect and does not in itself result in compensation for damages; a separate basis is required for damages. This is usually found in unlawful act (Article 6:162 of the Dutch Civil Code), for which negligence on the part of the franchisor must be demonstrated, or in a breach of contract (Article 6:74 of the Dutch Civil Code). Which route is most promising depends on the facts: whether the forecast was prepared by the franchisor itself or by a third party, what it knew or ought to have known, and the substantiation underlying the forecast. We weigh these routes against each other and determine which combination offers the best outcome for our client, whether that is an international franchise group or an independent entrepreneur with a single location.

Evidence, expert report, and the appeal to the court of first instance

A forecast dispute is rarely settled in summary proceedings: it requires in-depth investigation into the forecast, the underlying figures, location and market research, and communication between the parties, and therefore belongs in main proceedings. The burden of proof and factual substantiation are decisive. For the franchisee, this means demonstrating that the forecast contained errors and, in the case of a tort claim, also that the franchisor acted negligently in this regard. A financial expert who reconstructs the forecast and tests the assumptions used against actual and comparable locations is often indispensable in these proceedings. For the franchisor, the reverse applies: a well-documented file regarding how the forecast was arrived at, which sources were used, and which reservations were made, is the best protection. In the mixed teams of MKB Juristen, lawyers and in-house counsel collaborate with financial specialists to ensure that the legal and numerical aspects of the file align.

Part of Franchise Legal Advice

Pre-contractual forecasting is a specialist area within our broader practice field of Franchise Legal Advice. Within this area, we advise on the entire lifecycle of a franchise relationship, from the franchise agreement and the pre-contractual phase to disputes and termination. Whether you are an international group scaling up your formula or an entrepreneur considering becoming a franchisee, our lawyers and in-house counsel assess your forecast in conjunction with the rest of the franchise relationship.