How does the new Dutch Franchise Act impact franchise agreements?

Briefing

The new Dutch Franchise Act (the Act), which came into effect on 1 January 2021, presents potentially drastic consequences for franchise agreements. If your agreements are not compliant, the court may set aside a part of your contract; this is a serious restriction of freedom of contract. Parties who concluded, or are about to conclude, a franchise agreement governed by Dutch law, or governed by foreign law but with a franchisee domiciled or located in the Netherlands, should exercise great caution.

What is the Act intended to do?

The Act aims to establish a more well-balanced legal relationship between franchisors and franchisees, meaning that it imposes certain specific obligations on franchisors. The franchisor is first and foremost bound by pre-contractual disclosure obligations: it must provide the franchisee with the (draft) agreement including all annexes. Furthermore, the franchisor should disclose all information regarding payment obligations and inform the franchisee of:

the frequency of meetings and possible franchisee representation
any competition between franchisor and franchisee, and
the extent, frequency of and manner in which turnover related information relevant to the franchisee will be shared.

In certain circumstances, the franchisor may also be required to provide information regarding its financial position. This will allow the franchisee to assess the franchisor’s continuity and financial information regarding the location of the franchise branch or (where appropriate) comparable branches. All information should be provided at least 28 days prior to the closing of the agreement. During this standstill period the franchisor should refrain from certain actions like amending the draft franchise agreement.

What information will you need to disclose?

The Act also requires disclosure of information during the term of the agreement. The rationale behind this is that any intended action taken by the franchisor or any development may have consequences for the franchisee. Disclosure of information can help the franchisee to prepare itself sufficiently.

The desire to protect franchisees finds expression in the Act in several further substantive conditions that franchisors must satisfy. One of the key focus areas of the Act is termination of franchise agreements. In this context, the Act obliges franchisors to include provisions relating to goodwill compensation for franchisees into their franchise agreements. The rationale behind this mandatory goodwill compensation is to strengthen the franchisee’s position towards the end of the franchise agreement.

While negotiating a new franchise agreement, the franchisor might try to negotiate better conditions, while the franchisee might not feel free to do the same. The Dutch legislator has envisaged that the franchisee's entitlement to goodwill compensation will restore this balance between franchisor and franchisee.

How are non-compete clauses affected?

Another mandatory provision concerning termination of franchise agreements is the limitation of non-compete clauses. The limitation of competition by a franchisee is usually necessary to protect the franchisor’s knowhow. The Act imposes restrictions on such protection, however, so a non-compete clause:

should be in writing
should not exceed a period of one year after termination of the agreement, and
should meet the requirements of proportionality.

Under the Act, franchisors will also face restrictions when using the contractual power to change the franchise formula or to start exploiting a derived formula. If franchisor's decision has financial consequences for the franchisee, the franchisor will require the franchisee’s prior consent.

While all franchise formulas falling within the scope of applicability of the Act must comply with the provisions of the Act, a two-year transition period applies to agreements concluded before 1 January 2021. In light of the above, we recommend reviewing your existing contracts and templates.