Dutch Franchise Act bill submitted to the House of Representatives

This filing follows an internet consultation at the beginning of 2019 and the opinion of the Council of State at the end of 2019. During this consultation, next to approval also quite some criticism was expressed with regard to the draft proposal for the Franchise Act.

As a result of these comments from the consultation and the opinion of the Council of State, the draft proposal has been modified on a number of points. This new (amended) version of the bill was subsequently submitted to the House of Representatives.

Below we will briefly discuss the content of the bill and the differences compared to the earlier draft proposal. At the end of this article we will explain what the next steps will be in the legislative process and the expected timing thereof.

The bill is relevant to all franchise relationships to which Dutch law applies. Dutch law may for example apply if this has been agreed in the franchise agreement or when both the franchisor and the franchisee are established in the Netherlands.

Content of legislative proposal

The basic principle of "good franchisor" and "good franchisee" remains - as in the draft proposal - at the heart of the bill. This basic principle assumes that parties will behave reasonably and carefully towards each other. In particular, the franchisor must take into account both the interests of the franchise chain and the interests of the individual franchisee.

As in the draft proposal, this basic principle has been further elaborated in the bill as follows:

• The franchisor is subject to specific information obligations, both in the pre-contractual phase and during the franchise relationship. For example, the franchisor is obliged, among other things, to provide information on:

- franchisor's financial position;

- the draft of the Franchise Agreement and proposed amendments to this Agreement;

- financial data relating to the intended location of the franchise company;

- whether and to what extent the franchisor can compete with the franchisee via a derivative module

  (such as e-commerce); and

- the manner and frequency of consultation between franchisee and franchisor.

• A compulsory standstill period of four weeks prior to the conclusion of the franchise agreement is introduced, during which the franchisee can access all information. During this period, the franchisor cannot modify the franchise agreement.

• Restrictions are imposed on the interim amendment of the franchise agreement by the franchisor. Where such changes have or may have a significant impact on the franchisee(s), the consent of the franchisee(s) will be required.

• Specific substantive conditions are imposed on the content of the franchise agreement with regard to:

- non-compete clauses;

- reimbursement of goodwill upon termination of the franchise relationship; and

- establishing periodic consultations between the franchisor and franchisee.

The Franchise Act will be included in a new title in Book 7 of the Dutch Civil Code. This title will be of mandatory law from which the franchisee may not deviate to the detriment of the franchisee. As a result, franchise agreements entered into in violation of these mandatory provisions of the Franchise Act can be nullified pursuant to Section 3:40 sub 2 of the Dutch Civil Code. Only the franchisee can invoke nullity on this ground.

Differences compared to the draft proposal

Although the basic principle of the bill has remained the same, the bill does differ on a number of points from the draft proposal submitted earlier for consultation.

Definitions

The definitions of franchise formula and franchise agreement have been adapted to better reflect the terminology used by franchisees and franchisors in practise.
In addition, the draft proposal contains a definition of handbook and a pre-contractual obligation to provide this handbook to the franchisee. This definition and pre-contractual obligation have lapsed in the bill. In doing so, the legislator is responding to criticism from franchisors filed during the consultation. Franchisors argued during this consultation that given the highly confidential nature and economic value of the handbook, it could not be shared with a potential franchisee at a pre-contractual stage.

In addition, the pre-contractual information obligation has been - to a certain extent – specified in the bill. The bill now holds more examples of information which should be provided to franchisee by franchisor. Finally, unlike the draft proposal, the obligation to provide information in the bill is limited to information that should reasonably be available.

Mandatory purchase obligation and contributions

As indicated above, the draft proposal and the new bill lay down rules on the content of the franchise agreement. The draft proposal contained, inter alia, conditions with respect to the inclusion of a mandatory purchase obligation.

In the bill, these conditions with regard to mandatory purchase clauses have been scrapped. Instead, a new information requirement has been introduced. This new information obligation obliges the franchisor to provide information to the franchisee on franchisee's contributions and the way in which such contributions compare to the related costs for the franchisor.

Goodwill and non-competition clause

The provision from the draft proposal with regard to goodwill has been further elaborated in the bill.

This provision is now limited to the situation in which the franchisor is the one who takes over the franchise company after the franchise relationship has ended. It does not matter whether the franchisor subsequently continues the acquired franchise business independently or transfers it to a new franchisee.

The provision on non-competition clauses in the draft proposal has been further supplemented in the bill in order to better reflect the provision on non-competition clauses of the Block Exemption Regulation (Regulation 330/2010).

Consent

Finally, the provision obliging the franchisor in certain situations to obtain the franchisees' consent to proposed changes to the formula has also been amended.
The draft proposal contained the obligation for the franchisor to obtain the prior consent of the franchisee(s) for all changes to the franchise agreement which will or may have 'significant effects' on the operation of the franchise formula.

The bill now explicitly stipulates that the franchisor can set limits within which he can make changes without consultation.

Applicability and legislative process

The bill is relevant to all franchise relationships to which Dutch law applies. This will, of course, be the case when the franchise agreement holds an explicit choice of law for Dutch law but may also be the case when – for example - both the franchisor and the franchisee are established in the Netherlands. The latter can play a role in so-called master franchise structures, in which the master franchisee and the sub-franchisees are both located in the Netherlands.

During the consultation a lot of criticism had been expressed to the scope of application of the Franchise Act. In particular, franchisors hade proposed that the Franchise Act should only apply to franchise agreements with small franchisees or that the Franchise Act should not be of mandatory law. This criticism has not been addressed and the bill does not contain any changes to its scope.

Timing

Now that the bill has been submitted to the House of Representatives, it will first be debated in writing and then defended in a plenary debate. The debate will be followed by a vote.

Once the bill is passed, it will go to the Senate. The Senate can either adopted or rejected the bill.

When the bill is adopted in both the House of Representatives and the Senate, it will be published and will enter into force on the date to be determined by royal decree.

Transitional law

The bill contains transitional law, applicable to franchise agreements concluded prior to the date on which the Franchise Act enters into force.

According to this transitional law, the Franchise Act will only start to apply to such franchise agreements, after two years following the date on which the Franchise Act entered into force.

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