As per 2018, there is an intention to adopt franchise-specific regulations in Book 7 of the Dutch Civil Code: the ‘Franchise Bill’. Below you will read the content of the Franchise Bill.
Background
After a failed attempt to adopt the Dutch Franchising Code (self-regulation) in legislation, the Franchise Bill was published in preliminary form in December 2018. This was followed by an internet consultation of the preliminary draft bill in January 2019. A considerable number of franchisees, franchisors, law firms, franchise associations and multinationals submitted responses. In December 2019, the Dutch Council of State advised on the proposed and in the meantime amended Franchise Bill. The Dutch Council of State advised mostly positively and endorsed that rules regarding
- pre-contractual exchange of information
- interim changes of an existing franchise agreement,
- termination of the franchiseagreemeent, and
- consultation between the parties
are important for balanced relationships between parties in franchising. The preliminary draft was amended on the basis of the advice of the Council of State and presented to the House of Representatives for parliamentary review. The advice of the Council of State has not been fully acted upon. Amendments were made in relation to pre-contractual disclosure obligations, goodwill and prior consent to policy changes. In addition, new provisions were included. The amendments and newly added provisions are set out below.
Content of the Franchise Bill
- Mandatory law
The provisions of the Franchise Act cannot be derogated from to the detriment of the franchisees.
- 'Good franchisor and ‘Good franchisee’
The franchisor and franchisee must behave as ‘good franchisor’ and ‘good franchisee’. What is expected and required from both parties, depends on several factors, such as the type of franchise formula, the industry and the size of the franchise chain.
- Disclosure in the pre-contractual phase
The franchisor and franchisee must inform each other about their financial positions at least four weeks prior to concluding the franchise agreement. Further, the franchisor must provide all information that can be reasonably be expected to be of importance for the franchisee in relation to concluding the franchise agreement, including the franchise agreement itself, the information regarding the required financial contributions and investments by the franchisee, the way and frequency in which parties consult each other and financial data regarding the franchise location that is to be operated by the franchisee. However, the latter is no obligation to provide a turnover forecast.
- Franchisee’s research duty
The franchisee must, within the bounds of reasonableness and fairness, take the necessary requirements to avoid that he concludes the franchise agreement under the influence of misinterpretations. This means, for example, that the franchisee must properly study the information he received from the franchisor and, if necessary, must timely consult expert support.
- Disclosure obligations during the term of the franchise agreement
During the term of the franchise agreement, the franchisor must timely provide information on, for example, intended amendments to the franchise agreement, required investments, etcetera. The information must be provided in a way that after consulting the information, the information remains unchanged and available at a later time. Further, parties must consult each other at least once per year. Further rules regarding the nature, content and way of provision of information can be designated by governmental decree.
- Time-out period
The franchisor provides the information (see disclosure obligations) at least four weeks prior to conclusion of the franchise agreement. Within the term of four weeks, the franchisor cannot conclude the franchise agreement with the prospect-franchisee, may not change the policy and design of the franchise agreement and may not require the prospect-franchisee to make any investments or payments.
- Technical and commercial support
The franchisor must provide the franchisee with the technical and commercial support that can be reasonably be expected from him in relation to the nature and scope of the franchise formula.
- Goodwill
The franchise agreement must determine whether goodwill exists in the franchisee's business and, if so, the extent of that goodwill and the extent to which it is attributable to the franchisor. If, on termination of the franchise agreement, the franchisor takes over the relevant franchise business in order to continue it independently or transfer it to a third party with whom the franchisor enters into a new franchise agreement, the franchise agreement must provide how the goodwill that can reasonably be attributed is reimbursed on termination.
- Non-compete clause
A non-compete clause is only permissible if this is recorded in writing, essential for the protection of transferred knowhow of the franchiser formula, is limited to one year after the termination of the franchise agreement and lastly, if the geographical scope of the area is not broader than the area within which the franchisee has operated its franchise business in relation to the franchise agreement.
- Consultation and prior consent requirement
The franchisor requires the prior consent of a majority of the franchisees, or of each of the franchisees affected by the change in order to make changes to the franchise formula or to exploit directly (or via third parties) a “derived franchise concept”. This consent requirement applies if:
- the franchisor requires investments from the franchisee in connection with the proposed changes.
- the amendment of the franchise agreement involves an obligation to pay, store or another financial contribution to the detriment of the franchisee, or if
- the franchisor requires the franchisee to bear other types of costs or if it can reasonably be expected that the intended change will lead to a loss of turnover of the franchise business of the franchisee.
A threshold may be included in the franchise agreement to avoid the need for prior consent. The threshold must not be too high.
What has changed compared to the preliminary draft bill?
A relatively large amount of amendments were made to the Franchise Bill. The Cabinet has tried to clarify a number of provisions in the bill. The obligation to provide information explicitly does not include an obligation to provide (financial) forecasts. The remuneration of goodwill is limited to the situation in which the franchisor buys the franchisee's business. The consent requirement is a simple majority and only applies if there is a direct impact on the franchisees. The franchisor has a choice, he can only ask the franchisees who are affected for permission. Although this may seem good news for the franchisor, many open standards remain in the law, which may cause issues as the Franchise Act as a whole is of mandatory law. If rules cannot be deviated from, they must be clear. The franchisee's duty of investigation has been elaborated in the bill, but the frequent use of 'reasonableness and fairness' does not make this provision any clearer either. Most importantly, concerns about the innovation and strength of franchise networks have not been sufficiently addressed by the amendments to the provisions on prior consent and goodwill. In the battle for consumer favours, franchise networks often have competing subsidiaries and platforms, who can change course much faster and with lower costs.
Transitional arrangements and entry into force
For franchise agreements concluded before the entry into force date of the Franchise Act , a transitional period of two years applies to a number of articles, namely those on goodwill and on prior consent. At this stage of the legislative process, it is not yet clear in what form and when the Franchise Act will enter into force. The Franchise Act has been submitted to the House of Representatives and is now subject to full parliamentary scrutiny.
See our previous article in which we set out the content of the preliminary draft of the Franchise Bill.
For more information, please contact Martine de Koning, partner and head of the Commercial & International Trade section and partner EU and Dutch Competition law.
