The new Dutch Franchise Act (only in Dutch) is expected to enter into force on 1 January 2021. This Act introduces, among others in Book 7 of the Dutch Civil Code (DCC), rules concerning the relationship between franchisors and franchisees. In this blog these rules are described in general terms.
Definition of franchise agreement (Article 7:911 paragraph 1 DCC)
In the Franchise Act the concept of “franchise agreement” is defined as an agreement by which a franchisor grants a franchisee the right and the obligation to exploit a franchise formula with regard to the production or sale of goods or the provision of services in the manner specified by the franchisor.
All types of franchise are covered by the Franchise Act. The decisive factor in determining whether a franchise relationship exists is not the qualification, designation or title used by the parties to their agreement, but the actual content of their relationship. If that relationship contains all the elements covered by the definition of “franchise agreement“, the Franchise Act applies to that relationship.
Purpose of the Franchise Act
Within the franchise relationship, there is, according to the legislator, by its very nature a certain degree of dominance on the part of the franchisor vis-à-vis the franchisee. The franchisee is formally an independent economic operator, but in practice he is relatively dependent on the franchisor. After all, the franchisor is the determining factor with regard to the franchise formula and the further course determination. In practice, the franchisor could use his dominance in such a way that it leads to unreasonable and undesirable situations for the franchisee. The Franchise Act is intended to reduce this inequality by strengthening the position of the franchisee vis-à-vis the franchisor.
The legal regime
Basic principle (Article 7:912 DCC)
The Franchise Act states that the parties must behave towards each other as “good franchisor” and “good franchisee“. This principle covers not only the run-up to the franchise relationship, but also the franchise relationship as such. The parties must behave reasonably and carefully towards each other. For instance, the franchisor must, in addition to his own interest, explicitly take into account the interests both of the franchise chain as a whole and of his individual franchisees.
Pre-contractual exchange of information (Articles 7:913-7:915 and 7:917 DCC)
The Franchise Act contains a list of various subjects about which the franchisee must in any event be informed in sufficient time and specifically before concluding a franchise agreement. The franchisor must also inform the franchisee in sufficient time about matters not covered by the listed subjects. This is the case if the information on the matters referred to above is reasonably relevant to the intended franchisee for the conclusion and execution of the franchise agreement. However, there is no obligation for the franchisor to provide the (potential) franchisee with a business forecast. This is in line with the Lampenier judgement of the Dutch Supreme Court(recital 3.3.3).
“Timely‘ in this context means at least four weeks before the conclusion of the agreement. The intended franchisee is expected to use this standstillperiod not only to study the information received, but also to carry out his own research. If necessary, he may even have to involve expert support. In line with this, the franchisee is also obliged to provide some information to the franchisor. For example, he must disclose his financial situation so that the franchisor can assess whether the franchisee will be able to make the necessary investments required by the franchise agreement.
Consultation and consent (Articles 7:916, 7:917 and 7:921 DCC)
The franchisor may provide in the franchise agreement that he can unilaterally amend it. Indeed, the legislator considers it useful for franchisors to have a certain margin of discretion in order to have clout in the maintenance and further development of their franchise formula. However, certain modifications may have such a significant impact on a franchisee’s exploitation of his business, that it is only reasonable from a good franchisor’s point of view if they are discussed with the franchisee(s) concerned in advance.
In addition, if the effect of an amendment on the franchisees exceeds a certain financial threshold laid down in the franchise agreement, the franchisor needs the consent of his franchisees. Where appropriate, the franchisor may choose whether to submit his proposal (i) to all franchisees or (ii) only to individual franchisees who are or will be effectively faced with the financial consequences of the amendment. In the first case, the majority of the franchisees must agree, while in the second case, each of the franchisees concerned has to give his consent.
Assistance and commercial and technical support (Article 7:919 DCC)
In the view of the legislator, the provision of assistance and commercial and technical support by the franchisor to the franchisee is one of the core elements of a franchise relationship. The Franchise Act therefore obliges the franchisor to provide assistance and support which can reasonably be expected in relation to the nature and scope of the franchise formula at hand. The extent to which a franchisee may expect assistance and support therefore depends on the way in which the franchise formula is organised. The franchisee, in turn, is obliged to indicate to his franchisor what form of assistance and or support he needs.
Termination of the franchise agreement (Article 7:920 DCC)
The Franchise Act obliges the parties to provide in the franchise agreement for a compensation of accrued goodwill, insofar as this can reasonably be attributed to the franchisee. This arrangement only concerns the situation where the franchisor takes over the franchise for himself or with a view to transfer it to a new franchisee. If a new franchisee takes over the business of the departing franchisee, goodwill is implicitly or explicitly part of the takeover price negotiated between these parties.
Post-contractual non-compete obligations limiting the franchisee to carry out certain activities after the end of the franchise relationship will continue to be allowed. However, the scope of such clauses must be limited to (cumulative):
|(i)||what is necessary for the protection of know-how, competing goods or services|
|(ii)||a period of one year after the expiry of the franchise agreement, and|
|(iii)||the geographic area in which the franchisee was allowed to operate the formula|
Mandatory law and nullity (Article 7:922 DCC)
The Franchise Act cannot be derogated from to the detriment of franchisees established in the Netherlands. Goodwill and a post-contractual non-compete clauses which are not in line with the Franchise Act are null and void.
Consequences of the Franchise Act
New franchise agreements must fully comply with the Franchise Act as from its entry into force. For existing franchise agreements, the Franchise Act is also directly applicable, but only to the extent that it concerns articles which, at most, require an adjustment of actual behaviour. With regard to the rules on goodwill, the post-contractual non-competition clause (article 7:920 DCC), the information obligation and consent in case of interim changes (article 7:921 DCC) parties will have two years to adjust their franchise agreement.
* picture of Louis Hansel on www.unsplash.com, the graphic depiction is from my hand