Disclaimer of financial performance representations in Franchise Agreements
The franchisor’s fulfilment of pre-contractual information obligations is an essential aspect of the Italian franchise discipline. Among the various information that the franchisor has to provide prior to the signing of a new franchise agreement, there is one which represents a crucial aspect of the negotiation and may be particularly problematic in the event of a litigation with the franchisee: the indication of estimates or margins of possible profit that the franchisee may achieve by signing the franchise agreement. But what exactly is this? It includes all the information which is usually given in detailed or sophisticated ways. Analyzing the Italian case law there are several examples, including the delivery by franchisor of a business plan (in which, in addition to the details of the costs that the franchisee would have incurred for the start-up of the business, the franchisor also indicates the possible revenues), simple instructions sent by e-mail, brochures sponsoring the franchise, etc.
Case law has often dealt with cases in which – among the various requests formulated by the franchisee – judges were asked to ascertain the violation of the principle of good faith by the franchisor precisely because of the mismatch between the earnings forecast by the latter and the earnings actually achieved by the franchisee.
For example, the Court of Treviso in an interesting judgment of 2017 focused on the definition of business plan. In this case, the Court rejected the franchisee’s request for annulment of the franchise agreement, on the assumption that the franchisor would have provided him with a false business plan, deeming that a business plan cannot be false (unless it is proved that the premises are false), since it is a mere prognosis about the performance of the commercial activity and since, in this case, the franchisor had not assumed any contractual obligation of result.
Another interesting case was decided by the Court of Milan in 2019. In that case, the franchisee sued the franchisor – with whom he had entered into three different franchise agreements over a period of four years – on the assumption that the latter had misled him as to the expected results of the business with an information brochure indicating that the commercial network was constantly growing and was characterized by an “estimated average annual turnover of Euro 260,000.00 per store,” with high profit margins. The Court ruled out that the information in the brochure was not capable of causing the prejudice alleged by the franchisee, as it was worded in a way that clearly lacked of the necessary elements to represent the profitability of the future business run by the latter. Moreover, the judge considered that the fact that three different franchise agreements for three different stores had been entered into between the parties over a period of four years was the evidence that such misleading advertising could not have been the basis of the franchisee’s negotiating intention, who should and could have ascertained in that period of time the real earning capacity resulting from the agreements entered into with the franchisor.
However, judges have not always ruled in favor of the franchisor.
This is the case of the Court of Milan, which in 2018 declared the breach of the franchisor’s obligation of fairness and good faith during the negotiations aimed at the conclusion of a franchise agreement, as it had projected excellent earnings to its franchisees to whom it had submitted forecast statements that were then not reliable. In such a case, the Court, while declaring the franchisor in breach, rejected the claim for damages made by the franchisees according to which the damages suffered consisted of the difference between the profits forecast by the franchisor and those actually achieved. The Court established that such difference did not, in itself, constitute a compensable damage, since the franchisees had not demonstrated the existence of a causal link between the franchisor’s conduct and the losses suffered.
The judgment of the Court of First Instance was then confirmed by the Court of Appeal of Milan in 2020, according to which the loss of profit resulting from the mathematical difference between the costs actually incurred and those budgeted could certainly not be qualified as damage caused by the conduct of the franchisor, also because in the franchise agreement between the parties there was a specific clause in which the franchisor indicated that there was no guarantee of the actual productivity of the business and the achievement of results.
In the light of the case law cited above, it appears that that the contractual clauses with which the franchisor declared the lack of any guarantee for the achievement of results, together with the fact that the documents transmitted (business-plan, brochures, etc.) clearly described their nature as forecasting and estimating documents, were elements that weighed in the various decisions of the judges.
Therefore, it is very important for the franchisor to be careful, in the pre-contractual information phase, not to raise expectations in the potential franchisee of economic results that the latter can rely on, even on the basis of documentation provided by the franchisor. It is also important to make it clear in the franchise agreement and in the documents attached thereto that any economic forecasts regarding the expected results does not represent a guarantee that such results will be achieved, but only a hypothetical estimate and a simple projection of numerical data.