Court decisions on the new Franchise Act

As announced and explained in newsletter no. 23, the new Dutch Franchise Act (the “Act”) has come into effect on 1 January 2021. As from that date, all franchise formulas falling within the scope of applicability must comply with the provisions referred to in the Act. The Act has been a much-discussed topic, but due to its novelty, case law on the Act is still (and logically) scarce. But still, in already two court decisions, courts referred or (implicitly) applied the Act. Remarkably, the law did not actually find direct application in either case. The first case was decided upon before the Act came into effect. The second case involved an agency agreement, not a franchise agreement. This article describes the content of these court decisions in a concise manner. 

District court Amsterdam

On 30 September 2020 the district court of Amsterdam delivered a judgement in preliminary relief proceedings. As said the Act did not come into force yet, but the district court anticipates the Act. The relevant facts in the judgement are as follows. The franchisor is a retail chain specialised in household items. At a given moment the franchisor decided to alter its franchise formula and took the position that the franchisees were obliged to adapt the corporate identity of the stores in keeping with the new formula. Since the associated costs were at the expense of the franchisees, at least one franchisee refused to alter the corporate identity of its store as desired by the franchisor. As a consequence, the franchisor terminated the franchise agreement. The franchisee in question took the position that the franchisor was not entitled to do so and, therefore, that the franchisee was entitled to compensation.

The district court stated that the franchise agreement did not contain provisions on the basis of which the franchisee was obliged to adapt the corporate identity of its store. Based on the franchise agreement the franchisor, nonetheless, held the authority to issue instructions. However, the district court ruled that this authority to issue instructions was insufficient to demand the franchisee to adapt the corporate identity of its store and to incur substantial costs. Furthermore, the district court stated that it was the franchisor’s obligation to ensure that an obligation for the franchisee to adapt the corporate identity of its store was laid down in the franchise agreement. For this reason, the judge in preliminary relief proceedings ruled that it was sufficiently plausible that the court, hearing the case on the merits, would rule that the franchisor was not entitled to terminate the agreement. As a consequence, the franchisor had to compensate franchisee for the damage it suffered as a result of the irregular termination of the franchise agreement.

Noteworthy is that, despite the fact that the Act did not yet come into effect at the time of the judgement, the district court ruled that parties to a franchise agreement have a duty of care towards each other. This means that the franchisor should behave as a good franchisor towards the franchisee and vice versa. This is presently stipulated in article 7:912 of the Act (implemented in the Dutch Civil Code). Therefore, the judgement is already supported by article 7:912 of the Dutch Civil Code. Furthermore, this judgment also proves the importance of article 7:921 of the Dutch Civil Code, which deals with the intention on the part of the franchisor to alter the franchise formula. In the event such alterations require an investment of franchisee, article 7:921 of the Dutch Civil Code stipulates that the franchisor needs to obtain the prior consent from the franchisee to implement such alterations. Although the district court did not explicitly refer to this article, the judgment demonstrates that the district court did consider this provision in its assessment.

District court Noord-Nederland (North-Netherlands)

On 11 February 2021 the district court of Noord-Nederland rendered a judgement, in which the court applied the Act to an agency agreement. This case centres on the question as to whether a non-compete clause in the agency agreement is acceptable according to the standards of reasonableness and fairness.

Although the district court did rule that the agency agreement does not fall within the scope of the Act, the district court did refer to article 7:920 paragraph 2 of the Dutch Civil Code. This article stipulates that a non-compete clause is legally valid if (among others) it does not exceed a period of one year after the end of the franchise agreement. The non-compete clause in the agency agreement is, nonetheless, concluded for a period of two years after the agency agreements ends. With reference to the Act, the district court decided to release the agent from his obligations under the non-compete clause, since a period of one year had expired after the agency agreement ended.

In short, this judgment proves the importance of the Act; even for agreements that do not fall within the scope of the Act.