On 16thof June 2020, the Dutch House of Representatives approved the proposal for the new Dutch Franchise Act. This Act regulates the relationship between franchisees and franchisors. What does this imply for the franchisors?
The purpose of the proposed Dutch Franchise Act is to balance terms between the franchisor and its franchisees, and to promote better cooperation. The Dutch Franchise Act makes no distinction between large or small franchise networks and applies to all sectors and types of franchise formulas.
What to consider when the Dutch Franchise Act becomes applicable?
The Dutch Franchise Act sets requirements for the franchise agreement. After approval by the Senate, the Dutch Franchise Act will be incorporated into Book 7 of the Dutch Civil Code. When drawing up a franchise agreement, there are a number of points of attention for franchisors. We will list a few:
The Dutch Franchise Act is of mandatory law. It is not allowed to deviate from the main provisions in a franchise agreement to the disadvantage of a Dutch franchisee. Such deviating clauses will be invalid. If the franchise agreement would contain deviating clauses, cannot be invoked.
This point has been the subject of debate in the House of Representatives. Franchisors may deviate from the Franchise Act if the franchisee is established in a foreign country. In the case of a Dutch franchisee, franchisors cannot deviate from the Dutch Franchise Act, not even if foreign law has been agreed upon. This can have a considerable impact on agreements in which an internationally operating franchisor contracts with a Dutch franchisee. The franchisor will have to align the agreements with the Dutch franchisees to the Dutch Franchise Act. This may lead to less consistency of franchise agreement within the network. State Secretary Mona Keijzer has been asked to clarify this point.
Obligation to provide information and duty to investigate
The Dutch Franchise Act contains an obligation for the franchisor to provide information. The franchisee is obliged to investigate. Prior to the conclusion of the franchise agreement and during its term of validity, a franchisor must provide all information that he can reasonably understand to be of interest to the franchisee. The Dutch Franchise Act lists the information to be provided at the pre-contractual stage. The franchisee must carry out a certain amount of research and failure to do so is at the franchisee’s risk and expense.
The relation between the obligation to provide information and the obligation to investigate depends on the circumstances of the case, the nature of the franchise formula and the size of the parties. In any event, it is important for a franchisor to properly document which pre-contractual questions have been raised and which answers and additional information has been provided.
The franchisor must provide the pre-contractual information to the franchisee at least four weeks prior to the conclusion of the agreement. During this standstill period, no additional conditions may be imposed or changes made which could be a disadvantage or onerous for the (prospective) franchisee. The franchisor must not induce the franchisee to sign agreements or to make investments earlier. The (prospective) franchisee is expected to study and examine the information provided by the franchisor during this period and to carry out further research himself.
Interim changes and threshold
In practice, it often happens that the franchisor wishes to make changes to the house style, the inventory or that policy changes take place. The franchisors must involve franchisees in changes that may have a significant impact on the franchisee’s exploitation. The agreement must lay down in advance a threshold, from which the franchisee must agree to amend a current franchise agreement in the interim. The proposal for the threshold must be reasonable and equitable. It is not intended to block important innovations by the franchisors – franchisees may not refuse thresholds on an ongoing basis.
Termination of the franchise agreement
Non-competition and goodwill clauses that continue to apply after the end of the relationship must be included in the franchise agreement. This includes, inter alia, that a non-compete obligation must not exceed one year after the end of the franchise relationship and must be limited to the geographic area in which the franchisee has operated. The goodwill arrangement should be clear on how the value of goodwill is determined and how it is remunerated.
Will open standards be further defined?
The Dutch Franchise Act contains a number of open standards. In this respect, Member of Parliament Aartsen (VVD) submitted a motion on the consultation between franchisees and franchisors. The motion concerns bringing together representatives of franchisees and franchisors in a periodic consultation body. The consultation body can provide model agreements and standard clauses on the interpretation of the open standards.
From when will the Dutch Franchise Act apply?
The House of Representatives has adopted the Dutch Franchise Act. The Senate still has to vote on it. If the Senate timely agrees, the Dutch Franchise Act will enter into force on 1 January 2021. From that moment on, new franchise agreements must comply with the Dutch Franchise Act. Existing franchise agreements are subject to a transitional period with regard to specific provisions, such as the right of consent, goodwill and the non-competition clause. As of 1 January 2023, all franchise agreements must fully comply with the Dutch Franchise Act.