New Dutch Franchise Act poses challenges for franchisors

On June 30, 2020, the Senate of the Netherlands passed the new Franchise Act.  This confirmatory vote was expected after the legislation passed the House of Representatives on June 16, 2020, with an overwhelming majority; the lightning speed with which this legislation moved through both chambers, however, was somewhat surprising. The law will take effect on January 1, 2021, although it provides a two-year transition period for existing agreements.

The legislation offers a number of protections to franchisees, many of which will be problematic for franchisors, in particular foreign franchisors who transact with well-established Dutch franchisees. The new Franchise Act intends to provide more certainty on key topics which were previously covered by open norms and general principles of Dutch contract law. The Franchise Act contains numerous mandatory provisions, which require franchisors to amend their agreements with Dutch franchisees within a relatively short term.

The Franchise Act has had a long history. Before the Franchise Act was introduced, the then-current administration actively pushed for a code of conduct based on self-regulation: the Netherlands Franchise Code (the Code). The Code was widely criticized, especially by franchisors who felt that their interests were not adequately considered. A perceived unwillingness on the part of franchisors to voluntarily adopt the Code ultimately prompted the Dutch government to introduce franchise legislation.

Foreign franchisors must amend their agreements in order to comply with this mandatory law and to mitigate potentially burdensome effects of the Franchise Act. Given the expected effective date of the Franchise Act, franchisors have only a small window of opportunity to align their franchise agreements with Dutch franchisees with the mandatory provisions of the Franchise Act.

Key topics covered by the Franchise Act

• Introduction of open norms relating to the basic principles of good franchisor and good franchisee
• Far-reaching disclosure obligations in the pre-contractual phase. This includes a general obligation for the franchisor to inform the franchisee about anything that is or could reasonably be relevant for the conclusion of a franchise agreement
• A minimum cooling-off period of four weeks between the disclosure of the abovementioned information and the conclusion of the agreement
• Franchisees must take the necessary precautions to prevent themselves from entering into agreements under false pretenses
• Disclosure obligations during the term of the agreement with respect to contract amendments, required investments, franchisor’s intended use of so-called derived formulas and any other information deemed relevant
• Franchisors must provide assistance and commercial and technical support that may be reasonably expected by the franchisee, bearing in mind the nature and scope of the franchise formula
• Franchisors must seek prior written consent from a majority of the franchisees established in the Netherlands if they want to make changes to the formula or operate a derived formula and the costs or loss of turnover associated with such a change exceed the threshold as agreed between the parties in the agreement
• Restrictions on exclusive purchasing provisions and post-term, non-competition clauses
• The obligation to expressly include a provision in the agreement relating to accrued goodwill in the franchisee’s enterprise
• A two-year transition period to ensure that agreements concluded prior to the Franchise Act taking effect are aligned with the provisions of the Franchise Act
• Article 922 of the Franchise Act states that no derogation from the Franchise Act may be made to the detriment of franchisees established in the Netherlands and a clause contrary to Article 920 (goodwill and non-compete provisions) is null and void, irrespective of the law governing the franchise agreement. This means that the Franchise Act has a compelling effect for franchisees that are established in the Netherlands, while the Franchise Act can be excluded if the franchisees are established outside the Netherlands. The exact interpretation of this provision is still unclear

Please contact the authors for more information about the Franchise Act.