Franchising in the Netherlands; legislation up ahead

Background 

At present, no franchising-specific laws exist in the Netherlands. Instead, franchising is governed by the general principles of contract law as set out in the Civil Code and other laws not specific for franchising such as competition, IP, employment and privacy laws.

In 2015, the Minister of Economic Affairs encouraged franchisors and franchisees to implement a code of conduct through self-regulation. The Franchise Code of Conduct was subsequently adopted in 2016. However, there was great reluctance, specifically on the part of franchisors, to declare the Franchise Code of Conduct voluntarily applicable. 

Hence, in April 2017, the outgoing Minister of Economic Affairs submitted legislation regulating franchise agreements to Parliament. This legislation incorporated parts of the Franchise Code of Conduct into the Civil Code. Following a public consultation, it became apparent that there was substantial criticism regarding this proposed legislation, particular from franchisors. Consequently, this initial draft legislation was withdrawn and a new (second) draft Franchise Act was published on 12 December 2018. 

This new draft Franchise Act was highly debated during a consultation period early 2019, and is expected to be sent (changed or unchanged) to Parliament in the final quarter of 2019.

During the consultation period, more than 400 individual franchisees provided their – predominantly positive – input to the draft Franchise Act. Approximately 100 franchisors submitted their – predominantly sceptic – input to the draft Franchise Act. 

New Draft Franchise Act

New requirements

The new draft Franchise Act aims to strengthen franchisees position, primarily by:

• Establishing information requirements, related to the pre-contractual period as well as to the term of the franchise agreement;
  
  
• Introducing a "cooling off period" of 4 weeks between the moment on which franchisee received all required information and the moment of signing the franchise agreement;
  
  
• Setting conditions for making amendments to the franchise agreement which could have substantial consequences for the franchisee; and
  
  
• Providing instructions as to the content of the franchise agreement, including:
  
  
  • Limiting non-competition restrictions to a maximum of 1 year following the termination or expiry of the franchise agreement and the territory of operation of the franchise formula by franchisee;
    
    
  • Setting conditions for the validity of exclusive purchase obligations of franchisee; 
    
    
  • Requiring parties to capture in the franchise agreement the right of franchisee to receive reasonable goodwill following the termination of the franchise agreement; and
    
    
  • Requiring parties to include in the franchise agreement that parties shall at least on a yearly basis consult each other. 

In addition, the new draft Franchise Act states that its provisions have a mandatory character, meaning that the franchisor and franchisee cannot agree to deviate from its provisions in a way disadvantageous to the franchisee. As a consequence, franchise agreements concluded in breach of the provisions of the new Franchise Act may be annulled by franchisee within 3 years of conclusion.

Applicability

• Retro-active effect
  Although the new draft Franchise Act will apply to all franchise agreements concluded after the date the Franchise Act will become effective, franchise agreements concluded prior to the effective date of the new Franchise Act will may also be affected, following a yet to be decided period.
  
  
• International context
  If franchisee and franchisor are both located in the Netherlands, the draft act will in any event apply. It is not yet completely clear how this would work out if the franchise agreement is international in nature and is subject to foreign (i.e. non-Dutch) law.

Action

• Timeline
  Since the draft Franchise Act is still pending, it remains uncertain what the content of the final version of the new Franchise Act will be and when the new Franchise Act will become effective. Nevertheless, we can expect the new Franchise Act to be effective sometime in 2020 or 2021, introducing new requirements and obligations for franchisors and rights for franchisees.
  
  
• Next steps
  Existing franchise agreements which include a choice for Dutch law will likely have to be amended following the effective date of the Franchise Act, to ensure compliance with all requirements set forth in the new Franchise Act.