After the entry into force of the Dutch Franchise Act on 1 January 2021, the first case law is now starting to appear

Introduction

Pursuant to the Dutch Franchise Act, a precontractual disclosure obligation exists. This relates to, inter alia, fees payable, arrangements on consultations between franchisor and franchisee, as well provision of the draft franchise agreement (Article 7:913 of the Dutch Civil Code). This information must be provided at least four (4) weeks before entering into the franchise agreement. This four-week period is also referred to as the stand-still period. During the stand-still period the draft franchisee agreement may not be amended unless this is to the benefit of the prospective franchisee.

In the case at hand the question arose as to the validity of a reservation made in the precontractual disclosure document. The precontractual disclosure document included an "Important Notice" and this contained the following provision:

"The provision of the PID [precontractual disclosure document], as well as any subsequent provision of information, in no way obliges the parties to enter into a franchise agreement with each other."

The franchisor argued that the potential franchisee had accepted this clause by signing for the precontractual disclosure document and that the franchisor was, therefore, not bound to the franchisee. However, the court considered that the franchisor could not rely on this statement and that the franchisor was obliged to offer a franchise agreement to the potential franchisee.

Case

In this case a potential franchisee was in negotiations with the franchisor (Domino’s Pizza) about entering into a franchise relationship.

In the first stage of the discussions, the potential franchisee joined the selection process and entered into an agreement with the title ‘Confirmation of Franchise Intent/Training Agreement’. In this agreement, it was stated, among other things, that the franchisor intends to grant a franchise to the potential franchisee in accordance with the current standard franchise agreement. Subsequently, the pre-contractual information document was provided, which included the sentence:

‘The provision of the PID, as well as any subsequent provision of information, shall in no way obligate the parties to enter into a franchise agreement with each other. As long as no franchise agreement has been concluded, there shall be no agreement that is binding on Domino’s (…) Any form of pre-contractual liability is excluded.’

The same day after sending the precontractual disclosure document , the franchisor also sent a draft of the revised standard franchise agreement, as well as a request for the potential franchisee to sign for receiving the pre-contractual information document.

In subsequent email correspondence the potential franchisee voiced its concerns over the franchise agreement. The franchisor then decided to terminate the discussions and stated that it would not grant a franchise to the potential franchisee. The latter then stated that it was willing to sign the revised standard franchise agreement after all, but the franchisor did not wish to conclude a franchise agreement anymore, stating that it had lost trust.
The question arose whether the franchisor’s withdrawal of its offer was lawful.

Assessment of the court:

In the ‘Confirmation of Franchise Intent/Training Agreement’, a line was included stating that if the franchisee has fulfilled all conditions for granting the franchise, a franchise will be offered. Therefore, in opinion of the court, the franchisor has an obligation to offer a franchise agreement considering that the applicant has completed all conditions and had also otherwise been granted approval by the franchisor’s management and Board of Directors. By sending the pre-contractual information, the franchisor did in fact fulfil its obligation to make an offer.

According to the court, the franchisor was, however, not permitted to withdraw this offer. First of all, the parties were still within the stand-still period. The offer needs to be unconditional within this period. The reservation in the precontractual disclosure document (“…does not in any way obligate the parties to enter into a franchise agreement with each other….”) does not hold up. The provision is contrary to the standards of reasonableness and fairness in the given circumstances. The franchisor had asked the applicant to sign the precontractual disclosure document for receipt, in the light of time pressure to open the relevant location. It did not specify that the 400-page document contained the reservation. The court considered that the reservation should have been presented more clearly, and generally that these types of reservations do not belong in a precontractual disclosure document, precisely because the precontractual disclosure document is, inter alia, intended to provide an offer to conclude a franchise agreement. The court also considered that signing for receipt (and under time pressure) is not the same as agreeing to the precontractual disclosure document. Finally, the court considered that the reservation in the precontractual disclosure document is at odds with the ‘Confirmation of Franchise Intent/Training Agreement’ which includes an obligation to offer a franchise agreement. The criticisms raised by the possible franchisee were also not sufficient to withdraw.

Therefore, the court ruled that the franchisor should honour its offer and enter into a franchise relationship on the basis of the draft revised standard franchise agreement, as well as paying the costs of the proceedings.

Take away

The case shows the importance of careful structuring and drafting of documentation as well as management of relationships with prospective franchisees. Reservations made must be presented clearly and should not only be provided in (often) lengthy and complex documents. Also, the fact that discussion arise on the draft franchise agreement may not be sufficient to withdraw an offer.