Court: franchisor not responsible for inaccurate prognosis

The turnover of a newly opened DIY market of the Formido group was much less than the turnover expected in the prognosis in the feasibility report: the difference was over 40 percent. The franchisee summons Formido (franchisor) and claims a declaratory ruling to be issued by the court, that Formido acted wrongfully by providing inaccurate prognoses. But the court of Amsterdam does not accept this and dismisses the claims. Dutch contract lawyer Thomas van Vugt explains.

The reproaches of the franchisee

The franchisee’s lawyer blames Formido that it failed to take into account that there were already two Formido shops in the vicinity of the new shop. Formido therefore should not have included the inhabitants of the areas around those shops in its prognoses. Also, Formido failed to take into account the shrinking market, due to the economic recession. Furthermore, according to the franchisee, an old report states that a Formido DIY market of over 2,000 square meters at the location that the franchisee had in mind, had little potential. Formido allegedly suppressed that report.

Franchisee knew about other shops

However, the court finds that the franchisee himself was also aware of the two other Formido shops in the vicinity. The feasibility report also stated that turnover was going to those shops. The fact that the expectation, that customers from those existing shops would now go to the new shop, did not come true, is not enough to assume wrongful acts by Formido.

Location already rented prior to the feasibility report

The fact that an old report allegedly stated that there was little potential in the place of business for a large DIY market is also insufficient to assume wrongful acts. In the opinion of the court, Formido complied with its duty to disclose information by referring to that old report in a later report and by mentioning this during one of the meetings. Furthermore, the new report explicitly follows on from the old report.

Renting a large location was own choice

Also, Formido cannot be blamed for the fact that the shrinking market was not included in the feasibility report, because it is not argued that Formido was or should have been aware of this shrinkage. The court finally takes into account that the franchisee had rented the space of over 2,000 square meters even before Formido started a feasibility study. Renting such a large location was the franchisee’s own choice.

Lawyer specializing in franchising

This means that if the prognoses in a feasibility study conducted by the franchisor do not come true, this is not necessarily a wrongful act towards the franchisee. Also, a feasibility study is not conducted to provide guarantees to the franchisee. It is important, for both franchisees and franchisors, to review feasibility studies critically and to be aware that it is often difficult to give any guarantees for the future.