Short Reads

Special regulation on franchise agreements proposed: more protection for franchisees

Special regulation on franchise agreements proposed: more protection

Special regulation on franchise agreements proposed: more protection for franchisees

18.01.2019 NL law

On 12 December, a draft legislative proposal ("proposal") was published containing a special regulation on franchise agreements. Until now, there have been no special regulations regarding franchise agreements. The Explanatory Memorandum mentions that franchisees believe that franchisors have a more dominant position within their relationship.

According to franchisees, this causes unreasonable and undesirable situations. The Dutch Franchise Code, a means of self-regulation, has allegedly not solved the problems experienced by franchisees. As a result, the legislator now aims to create a more balanced relationship between franchisors and franchisees. The draft proposal is available on the internet for public consultation until 31 January 2019.

The legislator has stressed how important franchises are for the Dutch economy: at present, there are approximately 800 active franchise formulas with over 30,000 branches in the Netherlands. Moreover, 300,000 people are employed within franchise enterprises. These enterprises generate a total revenue of EUR 30 billion every year. Franchise formulas are used in many different sectors, in various forms. The proposal applies to all franchises involving an agreement that is defined as a franchise agreement under Dutch law.

The legislator aims to offer franchisees more protection, for example, by requiring franchisors to be more transparent regarding information that could be relevant for franchisees before concluding the agreement as well as during its performance. Under the proposal, franchisees will have a period of four weeks to think the terms of the agreement through before they commit. Franchisors will also be required to acquire the franchisee's approval for significant changes to the agreement. The stipulations contained in the proposal are binding to the extent that clauses in current and future agreements that deviate from the proposed stipulations to the detriment of the franchisee will be voidable. The most important aspects of the proposal are discussed below:

- The basic principle of acting as a good franchisor and a good franchisee

According to this principle, the franchisor and the franchisee will have to treat each other reasonably and with care before concluding the agreement as well as during its performance. The franchisor must take into account not only the interests of the chain as a whole, but also the individual interests of the franchisee. For instance, the franchisor needs to verify whether the potential franchisee has sufficient entrepreneurial skills.

- Provision of information & consultation term

The franchisor and the franchisee have to provide each other with all information that may be reasonably regarded as relevant for the opposing party with regard to the conclusion and performance of the agreement, such as financial information. All relevant information should be made available well before concluding the agreement. In order to make sure that the franchisee has enough time to make a well-informed decision, the franchisor has to send the draft agreement to the franchisee four weeks before concluding the agreement. In the meantime, if the franchisor wishes to alter the draft agreement to the detriment of the franchisee, this will trigger a further period of four weeks , starting from the day on which the franchisee is notified of the changes. After conclusion of the agreement, the franchisor has to give the franchisee reasonable notice of mid-term changes to the agreement or its actual performance.

- Substance of the agreement

o Exclusive purchase clauses

The contractual obligations regarding the quantity of goods or services that the franchisee purchases from the franchisor may not be more far-reaching than what is common in usual commercial transactions. The same goes for the price. The price may contain a mark-up, but any increase must be reasonable.

o Non-compete clauses

The proposal limits (i) the duration of these clauses to one year after termination of the agreement and (ii) the geographical scope of the area within which the franchisee operates the franchise formula.

o Reimbursement of goodwill after termination of the relationship

The agreement must contain a provision that stipulates how goodwill will be reimbursed, to the extent that it may be reasonably allocated to the franchisee. Also, it has to include a method of assessing goodwill and how it should be valued. If the clauses with regard to goodwill do not contain such information, (this part of) the agreement will be voidable.

- Consultation between franchisor and franchisee

If the franchisor aims to make alterations to the agreement that have a substantial impact on the position of the franchisee, he will first need permission from the franchisee. The legislator recommends defining in the agreement what the parties consider 'substantial'. If the franchise formula has many franchisees, it may be useful for the franchisor to organise a representative body that can give permission for alterations on behalf of all franchisees. This enables him, for example, to respond quickly to market changes.

The intention of the government administration to create additional legislation to enhance the position of franchisees in the pre-contractual phase, as laid down in the coalition agreement [regeerakkoord], is given substance by this draft legislative proposal. However, this proposal seems more far-reaching than intended, given that this special regulation on the relationship between franchisor and franchisee would also concern the performance of the agreement.

Responses to the draft legislative proposal may be submitted until the end of the consultation period on 31 January 2019 (www.internetconsultatie.nl/wet_franchise).

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