As of 1 January 2021, new legislation will apply to franchise relationships
Current Dutch legislation does not contain any regulations that apply specifically to franchise agreements. That will change soon, when the Franchise Act enters into force on 1 January 2021.
Background of the Franchise Act
Franchise is a close form of cooperation between two independent market parties (the franchisor and the franchisee) relating to the sale of goods or the provision of services, involving the use of a common name and uniform working method towards the customer (the franchise formula). According to the legislator, presently an inequality exists between the position of the franchisor and that of the franchisee. In practice, the franchisor appears to have a certain dominance over the franchisee. One of the main reasons for this is the lack of statutory rules governing the relationship between the franchisor and the franchisee, which, according to the legislator, should change. The new Franchise Act aims to strengthen the position of the franchisee and, in doing so, establish a more balanced relationship between the franchisor and the franchisee.
Important sections of the Franchise Act
Pre-contractual information obligations
First of all, the Franchise Act contains so-called pre-contractual information obligations. Both the franchisor and the franchisee are obliged to provide each other promptly with the information mentioned in the Franchise Act in the period prior to concluding the franchise agreement. Although the obligation to provide information is a two-way street, the main purpose of this regulation is to strengthen the information position of the franchisee. In this respect, it is worth mentioning that the franchisor is obliged to provide the franchisee with information concerning the franchisee’s financial position and a draft of the franchise agreement. This will enable the franchisee to assess whether or not he (she, or it) wishes to enter into the intended franchise relationship. In that regard, it is explicitly stated that the franchisee has an obligation to investigate. The background of that obligation is that the franchisee is required, within the boundaries set by the principles of reasonableness and fairness, to take the necessary measures to prevent him from entering into the franchise agreement under the basis of incorrect assumptions.
To ensure that the franchisee can properly assess the information received, possibly with the help of professional advisors, a standstill period of four weeks applies, which means that the franchisee is granted a period of four weeks to consider his or her position. During this period, the draft franchise agreement may not be changed to the detriment of the franchisee. In addition, during this period, the franchisor may not request that the franchisee makes any investments or other payments in view of the upcoming franchise relationship. During the standstill period, the franchisee should conduct a thorough investigation to determine whether he actually wishes to enter into the franchise relationship.
Contractual information obligations
Not only in the pre-contractual phase, but also when the franchise agreement has already been concluded, an obligation to provide information applies. For example, during the term of the agreement, the franchisor is required to provide information about an intended revision of the agreement in time. The purpose of this obligation is to give the franchisee sufficient opportunity to take action in view of any upcoming contract revisions. Such action can include, for example, adjusting business operations or administrative processes.
Assistance and support
One of the core elements of the franchise relationship is the provision of assistance and commercial and technical support by the franchisor to the franchisee. According to the legislator, practice shows that assistance or support is not always provided when needed or is insufficient. Therefore, the Franchise Act includes an explicit obligation for the franchisor to provide assistance and support to the franchisee. This entails, for example, commercial and technical support by providing advertising materials, software or equipment.
The scope of the obligation to assist and support varies depending on the type of franchise formula. The franchisor is therefore only obliged to provide such assistance and support as may reasonably be expected considering the nature and scope of the franchise formula. In addition, the franchisee, as an independent entrepreneur, has his own responsibility to give notice if and when he needs specific assistance or support. He must therefore inform the franchisor of this on his own initiative.
Termination of the franchise relationship: goodwill and post-contractual non-competition clauses
The Franchise Act contains a number of substantive requirements for the franchise agreement with respect to the termination of the franchise relationship and the way in which this is carried out by the franchisor.
First of all, it is mandatory to stipulate in the franchise agreement how to determine whether goodwill is present in the franchisee's business and, if so, what the value of the goodwill is and to what extent it is attributable to the franchisor. In addition, the agreement must clearly determine how goodwill, which is reasonably attributable to the franchisee, will be compensated by the franchisor upon termination of the agreement if he takes over the franchisee's business.
In order to protect the franchisee in his position towards the franchisor, the Franchise Act contains certain conditions for the validity of a so-called post-contractual non-competition clause. Such a clause prohibits the franchisee from carrying out activities that compete with the franchisor's business after the franchise relationship has already ended. The Franchise Act provides, inter alia, that such a clause must be in writing, must have a maximum term of one year and must be indispensable to protect the know-how transferred by the franchisor to the franchisee.
The Franchise Act will have important consequences for both existing and new franchise relationships. It is important to note that all of the above applies to franchise agreements entered into on or after 1 January 2021. For franchise agreements concluded prior to that date, certain provisions will be subject to a transitional arrangement. For example, the statutory goodwill and post-contractual non-competition provisions will not apply to existing franchise relationships until 1 January 2023.
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