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Clear, concise and complete – a lesson in drafting contracts

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Netherlands

The relationship between franchisees and their franchisor is not always an easy one.

A franchise is a business relationship governed by a contract or franchise agreement. The franchisor owns the trademark(s) and the operating system for the franchise. The licensed franchisee uses both the trademark and the operating system according to the terms and conditions set forth in the franchise agreement. The success of the business depends on both the franchisor and franchisee fulfilling their obligations under the contract.

Due to their dependent status though, there has been increased attention recently on the position of franchisee.

In July 2019, a draft Franchise Act was presented for advice to the Council of State, which, when enacted, will form part of Book 7 of the Dutch Civil Code.

The draft contains more obligations for the parties to exchange information and to consult each other and among other provisions it contains a limitation of non-competition clauses in franchise agreements and of the franchisor's right to unilaterally amend the franchise agreement.

However, the proposed act does not prescribe the content of the financial provisions and applicable standards in the franchise agreement.

A recent dispute between Albert Heijn Franchising B.V. and the Association of Albert Heijn Franchisees, in the Amsterdam Court of Appeal makes it clear that this recent enhanced attention for the interests of franchisees, does not imply that the criterion to be applied has changed when interpreting a (standard) franchise agreement.

The dispute centred around the financial settlement of certain prices, logistics and distribution costs and undivided margin as mentioned in the franchise agreement. In their argument, the franchisees stressed the imbalance of the franchisees' dependency of the franchisor.

The Court of Appeal holds that, in fact, the question whether, and if so to what extent, franchise relationships are characterized by inequality, is irrelevant for the assessment of the dispute.

The court in first instance rightly pointed out that the franchisees and Albert Heijn Franchising are independent companies. In the opinion of the Court of Appeal, this means that there will only be room for the distribution of revenues achieved by Albert Heijn Franchising to the extent that this has been agreed. In principle, a franchise agreement must be interpreted based on the "Haviltex standard".

According to this standard (named after a ruling of the Dutch Supreme Court), it is not the text of the contract that is decisive, but the meaning that the parties could have reasonably attached to the provisions of the contract in the particular circumstances at hand and what they could reasonably have expected.

The Court of Appeal sees no reason to apply a more objective standard of interpretation such as the CAO (collective bargaining agreement) standard, in which the specific wording of the contractual provision, in principle, is decisive for interpretation. That does not mean that the intentions of the parties are irrelevant when interpreting contracts governed by the CAO standard, but that these intentions are relevant only to the extent that third parties could have known them.

Further, the Court states that, when interpreting a franchise agreement, account must be taken of the fact that a franchise agreement is a continuing performance contract. For that reason, changes may occur in the commercial playing field within which the agreement has its effect and which have an effect on the content of the legal relationship between the parties and the rights arising from it.

Once again, the Court of Appeal's judgment underlines the importance for either party to a contract of careful drafting and of including clearly and unequivocally the intentions of the parties.

The clearer those intentions appear from the text of the contract, the less the chance that the court will come to an interpretation that one of the parties may not have envisaged and might come as a complete and unpleasant surprise.