In a recent ground-breaking ruling the Dutch Supreme Court has expanded the liability of franchisors for incorrect sales forecasts provided to franchisees.
The matter concerned a store owner who entered into a franchise agreement with a fashion retail brand. Before entering into the agreement, the franchisor provided franchisee sales forecasts for the store on which the franchisee relied when entering into the agreement. These forecasts turned out to be incorrect. The franchisee accused the franchisor of failing in its duty of care and claimed damages and termination of the franchise agreement. The franchisor rejected the claim by saying that it was not aware that the forecasts were incorrect and could therefore not be held liable.
The Supreme Court ruled that a franchisor is responsible and liable for incorrect sales forecasts provided to the franchisee if those were prepared or compiled by the franchisor itself or by someone for who the franchisor is liable (e.g. employee or representative) and negligence of either one of them has led to the forecasts being incorrect. In such case, actual knowledge that the forecasts are incorrect is not relevant to determine liability. The franchisor should have been aware that the forecasts were incorrect and bears the risk. Consequently, the court has awarded the franchisee's claim for damages.
The above does not apply to forecasts compiled or prepared by a third party, such as a consultant, hired for that purpose. In principle, the franchisor may rely on the correctness of these forecasts and can only be held liable if he has actual knowledge that they are incorrect.
Franchises have gained popularity in the hotel industry in recent years. Hotel investors and operating companies alike should be aware of the fact that a franchisor bears the risk for incorrect forecasts which form a basis for the franchisee's decision to enter into the contract and which the franchisor has prepared, even if those are not guaranteed by the franchisor to be correct.