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Update: Dutch Franchise Act

Manish Bahl
30/06/2020

Locations

Netherlands

On 30 June 2020, the Dutch Franchise Act ("Wet franchise") was passed by the upper house of the Dutch Parliament (after being passed by the lower house on 16 June 2020). This allows the Dutch government to obtain royal assent and arrange publication in the Bulletin of Acts and Decrees (Staatsblad), with the Act expected to enter into force in January 2021.

Currently, the Dutch Civil Code ("DCC") does not include any franchise-specific provisions. Please find below an outline of the most important aspects of the Act.

As mentioned in our previous blog last year, the Dutch Franchise Act ("DFA"), which will introduce specific rules concerning franchising agreements, has been a long time in the making. On 12 December 2018, the Ministry of Economic Affairs and Climate Policy and the Ministry of Justice and Security published the jointly drafted Dutch Franchising Bill for public consultation. All stakeholders had the opportunity to submit their input on the draft DFA by 31 January 2019. To accompany the draft DFA, the Ministries also published an Explanatory Note (Memorie van Toelichting). The Explanatory Note gives insight into the content of each article of the DFA. On 10 February 2020, the State Secretary of Economic Affairs and Climate and the Minister for Legal Protection sent the draft DFA to the lower house of the Dutch Parliament. On 16 June 2020, the draft DFA was passed by the lower house and on 30 June 2020 by the upper house of the Dutch Parliament.

The main objective of the DFA is to strengthen the position of franchisees in the so-called "pre-competitive phase". This concerns four areas of cooperation between franchisors and franchisees which are crucial for more balanced franchise relationships:

  • pre-contractual exchange of information,
  • interim modification of an ongoing franchise agreement,
  • termination of the franchise cooperation, and
  • consultation between the franchisor and his franchisees.

New statutory protections for franchisees

A few focus points of the DFA are:

  • Mandatory franchise law

Deviations from the DFA to the detriment of franchisees established in the Netherlands are prohibited. Such deviating clauses will be invalid. Deviating clauses in breach of Article 920 DFA regarding goodwill and non-compete clauses are null and void. This applies even if the franchise agreement is governed by a foreign law.

The goal is to protect franchisees operating in the Netherlands in situations where the dominance of the franchisor may lead to unreasonable and undesirable situations for the franchisees.

  •  The pre-contractual exchange of information and "cooling off period"

There will be an obligation to disclose in a timely manner all information which may be reasonably relevant for the other party. For example, the franchisor is required to provide detailed financial information based on careful and thorough location survey. Further, the franchisor is also obliged to perform due diligence on the franchisee with regard to their entrepreneurial qualities and resources.

"Cooling off period": Prior to concluding the franchise agreement, the franchisor will have to give the franchisee a period of at least 4 weeks in which the franchisee will be able to review all relevant information and assess its the obligations and risks. During the "cooling off period" the terms of the agreement may not be changed, unless the changes favour the franchisee.

  •  Termination of a franchise relationship

Value of goodwill: The DFA creates a goodwill obligation towards the franchisee. The franchise agreement must include a provision relating to goodwill. This goodwill arrangement should be clear on how the value of goodwill is determined and how it is remunerated.

Non-competition clauses will be limited to one year after termination and their scope may only cover the geographic territory where the franchisee was allowed to operate its business during the franchise relationship.

  •  Interim modification of an ongoing agreement and threshold

The DFA requires prior consent of a majority of the franchisees established in the Netherlands for certain actions by the franchisor, which may significantly affect the franchisees, such as material changes to the franchise formula and policies and which costs or loss of turnover associated with such a change exceeds the threshold as agreed between the parties in the agreement.

  •  Consultations between franchisors and franchisees

The franchisor must provide an annual report to the franchisee on how it has spent franchisee contributions to central marketing and other share services. The consultation between franchisor and franchisee will take place at least once per year.

Consequences for your business

The DFA is expected to enter into force on 1 January 2021.

Existing franchise agreements are subject to a transitional period with regard to specific provisions, such as the right of consent, goodwill and the non-competition clause. As of 1 January 2023, all franchise agreements must fully comply with the DFA. Therefore, franchisors will have to align their franchise agreements with Dutch franchisees with the (mandatory) provisions of the DFA in a relatively short period of time.

If, as is expected, the DFA becomes binding, the Netherlands will join many other countries which have statutory franchise-specific rules in place. Clearly, the DFA addresses the concern that the franchisee is the weaker party in a franchise relationship and tries to solve this by putting into place certain statutory safeguards.

The DFA speaks of the principle of a "good franchisor" and a "good franchisee". However, this concept is arguably not entirely novel, since the DCC already includes a provision according to which parties have to treat each other reasonably and fairly.

Franchisors will, however, have to be more cautious when providing (or omitting to provide) information to the (prospective) franchise and take into account the mandatory franchise law protecting franchisees established in the Netherlands, especially the possible goodwill compensation. The DFA tries to make the position of the franchisee stronger without unduly discouraging franchisors from entering into such relationships or serving to stifle innovation.

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