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Legislation

Introduction of the Franchise Act does not produce a rosy future for franchise formulas

dinsdag 23 mei 2017

I have written about the Netherlands Franchise Code (NFC) before and explained its contents. In that context, I noted briefly that Minister Kamp sent a white paper for the Franchise Act to the Dutch House of Representatives. The white paper concerns special regulations for a franchise agreement and is open for consultation up to 25 May 2017, inviting stakeholders and interested parties to express their opinion.

A few of the questions that could arise in the context of the white paper include: What is the purpose of the white paper? What does it include exactly? What are the objections to introducing the white paper?

Purpose

The purpose of the white paper is to strengthen the position of the franchisee to ensure that prior and after concluding a franchise agreement there is a greater balance between the interests of the franchiser and those of the franchisee/prospective franchisee. There is a group of people who believe that the franchisee generally has a weaker position than the franchiser. This legislation is set to change this.

Content

By adding two Sections, Sections 7:399f and 7:399g, to the Netherlands Civil Code, “a code of conduct or part thereof”, in other words the NFC, is declared applicable to franchisers and franchisees.

With Section 7:399F of the Netherlands Civil Code, the white paper includes a definition of the franchise formula, the franchiser, the franchisee, the franchise agreement and the preliminary agreement.

The second Section 7:399g of the Netherlands Civil Code refers to a general order in council that can adopt a code of conduct. Despite the fact that the NFC is not mentioned explicitly in the aforementioned Section, the comprehensive explanatory notes make it abundantly clear that this order in council will come and that it will include the NFC. 

It is striking that the explanatory notes observe that most chains are characterised by good cooperation between franchisers and franchisees and that both parties benefit. On the other hand, it notes that there are persistent problems in the sector that must be solved or prevented by means of legislation.

The starting point of the code of conduct is that it must be applied in principle. In the event the franchiser and the franchisee decide together to exclude the code of conduct or to deviate from it, they must agree this explicitly and substantiate this thoroughly. This is known as the so-called ‘comply or explain’ principle. The explanatory notes say that it should be explained why a certain requirement or element from the code of conduct is not workable in a specific situation or sector. In order to leave as much room as possible for business, the rules of the code of conduct are not enshrined in law, but a code of conduct is designated that should be applied in principle. That should give the parties the opportunity to record their rules along the lines of the code of conduct.

In the event the franchiser does not comply with the code of conduct and the franchise agreement does not contain a clause stating that the code of conduct is not adopted in full, the franchiser is in breach of the new regulation. This also applies if the corresponding motivation does not comply with Section 7:399g(2) of the Netherlands Civil Code. This could concern breach of contract on the part of the franchiser, following which the franchisee may force the application of the code of conduct by going to court. Any damage due to not applying the code of conduct can be recovered from the franchiser in this way.

Objections

In my view, the actual implementation of the white paper would prejudice contractual freedom between two professional parties. Furthermore, the NFC does not fit well within the existing regulations in Dutch law and case law for distributors and agents.

The white paper provides too much protection for franchisees, which begs the question as to what happened to business practice. In practice, the 'comply or explain’ principle will cause legal uncertainty. The NFC also includes restrictions in respect of termination options by the franchiser that go beyond those developed in case law. It is equally unclear how the white paper relates to choice of jurisdiction or choice for foreign law in a franchise agreement.

Conclusion

In view of the aforementioned, the introduction of the white paper does not offer a rosy prospect for franchise formulas. I hope that interested parties will express their opinion before 25 May 2017 to ensure that self-regulation is given a chance.

Information

For more information about the white paper and its possible consequences, please contact Sabriye Ort.

Peter de Graaf

insolvencies and reorganisation

+31 (0)10 209 27 52 degraaf@lvh-advocaten.nl
Peter Verheijden

commercial cooperations, mergers and acquisitions, employment law and employer representation 

+31 (0)10 209 27 75 verheijden@lvh-advocaten.nl

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