Franchise: Franchise Act lays down rules for franchise agreement

The Franchise Act provides for the first time a statutory provision for the conclusion of a franchise agreement. This is to protect the franchisee in the Netherlands. The Act prescribes, for example, which information the franchisor has to provide in advance. The Act also provides that the franchisee has a right of consent if the franchise formula is changed to his disadvantage.

Many well-known store chains, such as Subway, Hema, Albert Heijn, McDonald’s, Avis, etc., make use of a franchise formula. Increasingly often, there are problems between the franchisor (the trademark owner) and the franchisee (the shopkeeper). For example, if the turnover of the shop is disappointing or if the franchisor in the interim makes additional investments obligatory in order to better market the brand.

As there were no legal provisions for franchise agreements, there was a need for more clarity. Self-regulation attempts, such as the Dutch Franchise Code and the European Code of Ethics for Franchising, were not sufficiently effective according to the government. In particular with regard to the protection of franchisees. Therefore, the legislative proposal of the Franchise Act was submitted to and approved by the Senate on 30 June 2020. To whom does this Act apply, what does it entail and when will it take effect?

To whom does the Franchise Act apply?

The Act entails rules of mandatory nature for the protection of franchisees established in the Netherlands. It is therefore not allowed to depart from the statutory provisions to the detriment of the franchisee. If the franchisor is established in the Netherlands and the franchisee outside of the Netherlands, the provisions may be contractually deviated from, even if the parties made a choice for Dutch law. If the franchisor is established outside of the Netherlands and the franchisee in the Netherlands, the Act may not be deviated from.

The most important parts of the Franchise Act

Duty of disclosure

Prior to concluding the franchise agreement, the franchisor has an obligation to provide information. He has to provide the franchisee with sufficient information, so that he is able to have a sufficiently clear picture of what he agrees with. The submission of a turnover forecast is not mandatory. During the term of the agreement, the franchisor also has to regularly provide information on, for instance, how the franchise fee is used.

Reflection period

The information has to be provided to the franchisee at least four weeks before the conclusion of the franchise agreement. This will give the franchisee the time to carry out an investigation himself.

Goodwill

In any event, the franchise agreement has to include a goodwill provision, including:

• how goodwill is determined,
• whether there is goodwill in the franchisee’s company and, if so, what the scope is,
• and to what extent this goodwill is attributable to the franchisor.

Non-competition clause

The Act also determines when a non-competition clause is valid. The clause must be agreed in writing, not last longer than one year and be limited to goods, services and the area where the franchisee was active.

Consent scheme in the event of modification of franchise formula

In addition, the Act requires the consent of the franchisees in the event of a modification of the franchise formula to their disadvantage or if the franchisor wishes to exploit a franchise formula derived therefrom. However, it is possible for the franchisor to agree that no consent is required if the disadvantage remains below a certain threshold.

Entry into effect

The Franchise Act is expected to take effect on 1 January 2021. Franchise agreements that are concluded after the Act has entered into effect, must therefore comply with the mandatory provisions of the Franchise Act. To franchise agreements concluded before the entry into effect applies that some parts of the Act are subject to a transitional period of a period of two years

Points of special interest

• Check whether your existing franchise agreement complies with the legal requirements and, if necessary, modify it.
• Ensure that you provide mandatory information in good time in the phase prior to the conclusion of the franchise agreement and during the term of the agreement.
• Take into account a standstill period.
• Pay attention to the mandatory provisions and the conditions they have to meet with regard to, among other things, goodwill and non-competition.

More information

Would you like to know whether your franchise agreement complies with the new legislation? Or do you have a dispute concerning a franchise, distribution or agency agreement?  Our specialists have many years of experience in franchise law and will be happy to be of service to you. Please contact us: