Dutch self regulation on franchise, the Dutch Franchise Code, receive a basis in statutory law? | Kennedy Van der Laan

Will the Dutch self regulation on franchise, the Dutch Franchise Code, receive a basis in statutory law?

In the Netherlands, there is no statutory law on franchising. There is a wide range of case law on franchising from which it is clear that civil law applies, including statutory and case law on contracts, as well as the specific rules on trademarks, trade names, and Dutch and European competition law. In addition, franchisors who are members of the Netherlands Franchise Association have to comply with the European Franchise Federation’s European Code of Ethics for Franchising (“the European Code of Ethics”).

On 17 February 2016, the Dutch Franchise Code (“DFC”)[1] was published. Although the DFC currently only has the status of a self-regulatory Code (which normally should only apply if parties declare it applicable to their agreement), the Minister of Economic Affairs (“Minister”) has on 12 February 2017 published a draft bill that gives self-regulation for the franchise sector a statutory basis.[2] The DFC is not mentioned, but it is clear that the DFC is intended to be appointed in the AMvB as the applicable self-regulation. The draft bill, as well as the DFC itself, is based on a ‘comply or explain’ principle. This means that deviating from the Code is possible but it needs to be adequately explained in writing. If these criteria are not met, the draft bill provides that the contract (clause) can be nullified by the franchisee.

There was a public consultation of six weeks as of the publication date to respond to the draft bill, which has now lapsed. Of the in total 359 submissions, a majority (mostly from individual franchisees) was supportive. Most positive reactions lacked any substantiation. Many of the critical submissions were substantiated and often even academic in nature. Franchise organisations such as the IFA, the Dutch Franchise Organisation, as well as other institutions such as the American Chamber of Commerce, and franchisors, academics and private practitioners indicated their objections to the draft bill.

Statutory basis DFC: the draft bill

Because many large franchisors and the Netherlands Franchise Association have rejected the Code as ‘imbalanced’ and in violation of the principle of freedom of contract, the Minister decided to give the Code a statutory basis. The draft bill introduces an article in the Dutch Civil Code which gives a legal basis for an order in council (‘AMvB’), that will declare the Code (not the explanatory notes of the Code!) binding for franchise relationships. An order in council is a Royal Decree, a rule of lower standing that the government can adopt and that does not need to be approved by the Dutch Parliament. If sufficient basis in statutory law for the rules is absent, this may raise questions as to whether the rule has sufficient ‘democratic legitimacy’. Parliament can monitor and act against a Royal Decree after it is adopted, but –unless publication in advance of adoption takes place- there is no influence (nor possibility of submitting amendments) by Parliament. Even if prior publication takes place, the influence is limited. AMvB’s therefore usually have a statutory basis in which –at minimum- the main elements and structure and scope of the rules are summarised.[3] The draft bill seems to follow this path and consists of three articles.

The first article states the definitions, such as of a ‘franchise agreement’. The scope is limited in the sense that only if ‘monetary compensation’ is paid (directly or indirectly for example by a mark up of the purchase price for goods sold by the franchisor to the franchisee[4]) by the franchisee for the use of the brand and franchise concept, the bill is applicable. In this context it is relevant that Dutch courts tend not to apply protection provided by law by ‘analogy’. Either an agreement is ‘nominate’ and falls under the definition, in which case the protection provided for by law is granted, or not. On the other hand, manufacturing licenses (such as a soda bottling license) may fall, unintentionally, under the definition.[5]

The second article refers to the AMvB and describes the main elements and structure. This article lists topics that should be included in a self-regulation, but does not give any direction as to what the content of such rules could be (except for disclosure obligations, which are listed in the draft bill). The third article provides for a transition period of five years for existing franchise agreements.

The actual rules are therefore not in the draft bill, but in the DFC (and the AMvB which has not been adopted yet because it can only be adopted validly after the draft bill is adopted and enters into force). In addition, even if the draft bill would be adopted, the legal status of the self regulation, the DFC would not be ‘law’ in the sense of a generally binding rule (algemeen verbindend voorschrift).[6] This means that franchisors that were not part of the negotiation and drafting process of the DFC, or that officially distanced themselves from the outcome, or non Dutch franchisors (or Dutch franchisors operating outside the Netherlands) could take the position that they are not bound by the DFC (e.g. subject to ‘comply or explain’), even if the draft bill would be adopted.

In short, the question is whether it is a good idea, given the tension in the market between franchisors and franchisees, to ‘delegate’ making of the rules to lower law because it bypasses a full review in Parliament of the rules that will apply between franchisors and franchisees (only the draft bill will go through Parliament), and it creates an unnecessarily complex situation that is not even binding in full.

Content DFC

The DFC contains many ‘open standards’. This is common in Dutch contract law and for many of these, case law has already developed a clear meaning. Most of the ‘rules’ in the DFC are not well drafted[7] but are largely similar to the rules which currently apply. For example, a franchisor is required to protect and develop the franchise concept, provide assistance to a franchisee if he needs and requests for it, etc. In relation to the termination of the franchise agreement the DFC requires parties to act in accordance with reasonableness and fairness (redelijkheid en billijkheid) in decisions on renewal and termination of the franchise agreement. This ‘rule’ is in accordance with Dutch contract law acknowledging the role of the reasonableness and fairness, but reasonableness and fairness can only be successfully invoked to set aside a contract term if the outcome in the given circumstances is ‘unacceptable’ – a high standard. In reality, Dutch courts tend to be reluctant to set a contract term aside, even in franchise contracts which are usually very one-sided in favour of the franchisor. Similarly, Dutch law, reflected in the DFC, does not provide for goodwill or other forms of compensation to be paid on termination unless the termination itself was unlawful (a reasonable notice period has to be applied in case of a termination for convenience), or if the franchisee has made investments at the request of the franchisor or at a time he could not have foreseen the termination, that he has not been able to earn back before the termination date.

The DFC introduces a set of disclosure obligations, that are not yet present in statutory Dutch contract law. There is a general pre-contractual duty to ask questions and to disclose facts of relevance. General contract law on cancellation of contracts on the basis of ‘error’, or ‘deceit’ makes it in the franchisor’s interest to disclose facts that are clearly relevant for the franchisee’s decision to enter into the agreement. Disclosure obligations are also in line with international practice. Many franchisors have franchise systems and contracts that already include disclosure, and the DFC is based on ‘comply or explain’, so a franchisor may deviate if he does not want to disclose certain information. Proper disclosure may indeed protect a franchisor from claims based on ‘error’ and ‘deceit’. Dutch contract law nor the DFC include an obligation to provide financial forecasts but if a franchisor does so, he may be liable for mistakes in particular if he is aware of the mistakes and does not inform the franchise thereof. The recent Supreme Court judgment in the case Street One8 clarifies its earlier Paalman / Lampenier9 judgment that if a third party provided the forecast and it contains mistakes that the franchisor did not know about, the franchisor is not liable, but the contract may be cancelled based on (mutual) error. The situation is different if the franchisor prepared the forecast. In this case he may be liable if he did not prepare the forecast diligently. The explanatory notes to the DFC seem to imply that the franchisor should represent (or even guarantee) that the forecast is ‘of virtue’, or in any case prepared ‘by virtue’ but this was rejected by the Advocate General Mr. Valk in his conclusion in the Street One case. Even though the Supreme Court’s judgment confirms nor rejects this notion, usually the opinion of the Advocate General carries a great deal of weight. In addition, since the explanatory notes to the DFC are not given a statutory basis, only the text, I think we must treat it as a ‘slip of the pen’ in a sidenote.

The DFC requires a franchisor to have operated pilot store(s) before rolling out a franchise system. Since this is also included in the European Code of Ethics, and a franchisor is permitted to explain why he does not comply with this requirement, it probably does not create huge problems for franchisors. The franchisor makes best efforts to develop, maintain and improve the strength and advantages of the franchise formula, and monitors uniformity and compliance with the franchise agreement. The franchisor provides support and substantiated written recommendations of a franchisee in trouble requests his help.

More controversial is the explanatory note (but again the notes will not receive a statutory basis) that a franchisor should not operate competing or secondary franchise concepts. The presumption that this would harm the franchisees is not supported by the facts, and in my view the situation should rather be assessed on a case by case basis. Also, the rule that a franchisor should not unreasonably withhold consent if the franchisee wishes to open a new location or wishes to assign or terminate the franchise business, limits the freedom of contract, a recognised principle of Dutch contract law, and the prerogative of the franchisor to protect and develop the franchise network. The limitation that sourcing from particular suppliers (including the franchisor) may only be prescribed insofar as directly related to the performance of the franchise agreement raises the question whether this is aimed at following existing competition principles or to go further in restricting the franchisor. Also, the DFC advocates (but does not require) that an association of franchisees is set up for consultations and/or negotiations with the franchisor. The association (or some other system of consultation) should agree, in principle, on topics to that have a material effect on the operation of the franchisees’ collective. For major changes, the explanatory notes indicate that for sufficient support a qualified majority of franchisee votes can be necessary. If an individual franchisee does not agree but the association agrees, his franchise may be terminated, but it may be necessary to release him of the non compete clause.

The franchise agreement should be in the language of the country where the franchisee is located. Even though language requirements are common throughout the world, these are very unusual in Dutch law. Not even employment contracts have to be in Dutch. Certain clauses may not be unilaterally changeable by the franchisor (such as franchise fees, payment conditions, use of trademarks, exclusivity, e-commerce and processing consumer data). The principle of reasonableness and fairness required by contract law would in certain circumstances limit a franchisor’s ability, in any event, to make certain clauses unilaterally amendable, except perhaps the one’s relating to the trademarks and reputation of the brand, which should in my view remain the franchisor’s prerogative. Finally, the DFC refers to a dispute resolution committee (that does not exist yet), but it follows from the draft bill that this is not mandatory and the parties may agree to as a last ressort being referred to regular courts or arbitration.

Conclusion

At the moment, there is tension between franchisors and franchisees in the Dutch market. This has led to self-regulation, the DFC, which is not embraced by many franchisors. This caused the Minister to publish a draft bill that gives the DFC a statutory hook in the Dutch Civil Code.

Much of the content of the Code is uncontroversial, because such rules apply in many other countries in the world, and most internationally operating franchisors have already crafted the franchise system and their agreement in line with these requirements (for example disclosure, no rash terminations, etc.). However, the structure is complex, the DFC is not well drafted and the principle of ‘comply or explain’ seems inherently inconsistent with the sanction of nullification by the franchisee if the explanation for a deviation of the DFC falls short of the criteria. There are some controversial topics in the draft bill, mostly for unnecessarily limiting the freedom of contract of the parties. The DFC may create the need for franchisors, to explain deviations in the agreement following the rules regarding form and content. If the draft bill would be adopted, and this is not certain at all because it must still go through the full parliamentary process including possible amendments, franchisors should review their franchise agreements and if necessary, add explanations to the franchise agreement as to why the DFC is not complied with. I may be necessary to provide for Dutch language agreements.

 

[1] http://www.franchise.nl/Portals/0/Nederlandse%20Franchise%20Code_1.pdf.

[2] https://www.rijksoverheid.nl/actueel/nieuws/2017/04/12/minister-kamp-presenteert-wetsvoorstel-voor-afspraken-franchisesector.

[3] While some types of law cannot be delegated to AMvB’s, such as criminal law, this is not the case for contract law such franchise agreement and dispute resolution thereof.

[4] See p. 28 of the Explanatory Memorandum to the draft bill.

[5] The definitions as well as the place in the civil code of the draft bill raise questions, because these do not fit in the structure and systematic way the civil code is set up and uses definitions. If this more detailed way of multiple definitions is chosen (in line with EU regulations and Directives), it is odd that no definition for the term ‘franchise’ is included.

[6] Art. 79 Act on the Judicial Organisation (Wet RO).

[7] See for example the definitions, lack of a logical order in which the topic are placed, overlap between clauses and mixing of rules and explanatory comments, and overall vagueness in the descriptions of obligations.

[8] HR 24 February 2017, ECLI:NL:HR:2017:311 (Street One).

[9] HR 25 January 2002, ECLI:NL:HR:2002:AD7329 (Paalman/Lampenier).

Author(s)

  • Martine de KoningMartine de Koning