The new Franchise Act
Introduction
Franchisors (and franchisees) pay attention! The new Dutch Franchise Act (hereupon: the “Act”) shall come into force on 1 January 2021. For reasons described in this article it is important to review and perhaps even modify your agreements timely in accordance with the Act. This article aims to describe in broad outline the impact of the Act and in which cases the Act is applicable. Furthermore, this article briefly touches upon the consequences of the Act for existing and new agreements. For more detailed information regarding new obligations the Act imposes on (mostly) franchisors we refer to our more elaborate brochure on the Act, which will be made available as a separate document.
Entry into force
As of the date of entry into force (1 January 2021), all franchise formulas falling within the scope of applicability must comply with the provisions referred to in the Act. To agreements concluded before 1 January 2021 a transition period of two years applies. During this transition period the contracting parties have to adapt their agreement in conformity with articles 920 and 921 of the Act. These articles regulate which topics must be included in the franchise agreement. As explained below, these articles are in principle of mandatory law. If an agreement concluded before 1 January 2021 does not comply with the Act after the transition period, the agreement is (partially) void and/or subject to nullification. Superfluously, the transition period of two years does not apply to agreements concluded as from 1 January 2021.
Mandatory nature
As of 1 January 2021 the Act will apply to: i) all agreements governed by Dutch law and ii) to all agreements governed by foreign law whereby the franchisee is domiciled or located in the Netherlands. It must be noted that the Act is of mandatory law in case the franchisee is domiciled or located in the Netherlands. The fact that the Act is mandatory in case the franchisee is domiciled or located in the Netherlands was added by members of the House of Representatives who tabled two amendments to the original (draft) Act. The amendments were agreed to by the House of Representatives, after which the Act was unanimously approved on 30 June 2020 by the Senate.
In conformity with the amendments, article 922 of the Act reads as follows:
“With regard to franchisees established in the Netherlands, the provisions of this Title cannot be deviated to their disadvantage (…), regardless of the law that governs the franchise agreement.”
This starting principle also applies if the franchise agreement is not governed by Dutch law but by foreign law. Like Dutch Franchisors, franchisors domiciled or located outside the Netherlands and entering into an agreement with franchisees domiciled or located in the Netherland, must therefore exercise adequate caution. Regardless whether the agreement is governed by Dutch law or foreign law, the provisions of the Act are applicable to their agreement and (more importantly) are of mandatory law. Contractual terms that breach mandatory law, are legally ineffective.
In case the agreement is governed by Dutch law, but the franchisee is domiciled outside the Netherlands, the Act in principle applies to the agreement, but the contracting parties may by contract deviate from the Act.
Statutory definition of franchise agreements
The Act defines the ‘franchise agreement’ and ‘franchise formula’ in a broad manner. A franchise agreement under the Franchise Act is: any agreement under which a franchisee, against payment of a fee, has the right and the obligation to exploit a franchise formula for the manufacturing or sale of goods or performance of services in a manner determined by the franchisor. Pursuant to the Act, franchise involves a uniform formula, in any case including i) a trademark, tradename, model or corporate identity and ii) knowledge stemming from the franchisor’s experience. Therefore, all kinds of collaboration forms may fall within the scope of the definitions, even if the contracting parties did not intend to conclude a franchise agreement, or characterized the agreement differently, eg a commercial cooperation agreement or licensing agreement.
New obligations imposed by the Act
First and foremost, any franchisor intending to close a franchise agreement with a franchisee must abide by new rules pertaining to pre-contractual disclosure. In short, the franchisor is obliged to provide the franchisee with a disclosure document at least 28 days prior to the conclusion of the agreement.
Besides that, and within the limits set by the Act, agreements must contain the following contractual terms after 1 January 2021 (for new agreements) or after the transition period (for existing agreements):
- a goodwill clause on the basis of which the proportion of the goodwill can be determined and can be attributed to the franchisor and/or the franchisee;
- if the agreement contains a noncompetition clause that restricts the franchisee after the end of the agreement to work in a certain way, the clause must be in accordance with the Act;
- furthermore, under circumstances the agreement should stipulate in which cases the franchisor requires consent from the franchisee, for instance when the franchisor intends to change the franchise formula or if the franchisor requires an additional investment from the franchisee.
Other obligations additionally imposed by the Act include the following:
- a franchisor and franchisee should confer at least once a year. According to the explanatory memorandum of the legislator this primarily relates to coordination of activities between the franchisor and the franchisee, as they operate the market together. In addition, these talks can form a prelude to agreement by the franchisee if the franchisor intends to amend the franchise agreement;
- at the franchisee’s request the franchisor is required to offer commercial and technical support, if such support is relevant for continuation of the franchise formula.
Conclusion
In short: the changes, which we only touched upon briefly in this article, can have rather drastic consequences. Various forms of collaboration now fall under the scope of a statutory regulations and the statutory provisions must be complied with. If your agreements are not compliant, you will have to take into account the possibility that a court of law may set aside (a part of) the contract. This is a serious restriction of freedom of contract and caution should be exercised.
Consequences of COVID-19 for contracts
Introduction
The COVID-19 pandemic has (or better said: the measures taken to prevent spreading of the virus have) undeniably grave economic consequences. Since the start of the outbreak the world has had to deal with a wide range of challenges, forcing all involved to find ways to cope with the new situation. As so many countries are (about to be) hit by a second wave, it may be beneficial to look back on the lessons learned during the first wave. In the legal field we can already draw on some COVID-19 cases. This article is aimed to provide some insight on whether or not contractual obligations are upheld by Dutch Courts.
Force Majeure
Tools used by parties, seeking to release themselves from a contractual obligation, are force majeure (article 6:75 Dutch Civil Code ‘overmacht’) and unforeseen circumstances (article 6:258 Dutch Civil Code ‘onvoorziene omstandigheden’).
A force majeure under Dutch law means that the non-performance cannot be attributed to the party in breach because he is not to blame for it nor accountable for it by virtue of law, a juridical act or generally accepted principles. An appeal to force majeure has not been very successful as (preliminary relief) judges held that financial inability of the debtor as a result of the COVID-19 crisis should be attributed to the debtor.
Unforeseen circumstances
If compliance is not impossible, but more or less inconvenient, there can be no question of force majeure. However, the debtor may then invoke article 6:258 Dutch Civil Code due to unforeseen circumstances of such a nature that the opposite party, according to the standards of reasonableness and fairness, may not expect an unchanged continuation of the agreement. As a result, the debtor may request the court to change the legal effects of an agreement or to dissolve the agreement in full or in part. The court shall however not change or dissolve the agreement as far as the unforeseen circumstances, in view of the nature of the agreement or of common opinion, should remain for account of the party who appeals to these circumstances.
An unforeseen circumstance is a circumstance that is not explicitly or implicitly included or discounted in the agreement. Not decisive is whether the circumstance was actually foreseeable at the time of the conclusion of the agreement. The unforeseen circumstances should furthermore be of such nature that unaltered maintenance of the agreement may not be expected due to requirements of reasonableness and fairness. The provision of article 6:258 Dutch Civil Code is a lex specialist of the general article 6:248 paragraph 2 Dutch Civil Code (limiting effects of reasonableness and fairness) and designed for an extreme case. Consequently, a judge deciding on an appeal to article 6:258 Dutch Civil Code will exercise the same restraint as applicable to article 6:248 paragraph 2 Dutch Civil Code. Lastly, an appeal to unforeseen circumstances can only succeed if such circumstances are not at the expense of the party invoking this remedy.
The foregoing applies (among others) if the circumstances are explicitly or implicitly included in the agreement. Lease agreements pertaining to real estate, for example, sometimes contain contractual terms on the basis of which the lessee is obliged to pay a base rent and a rent depending on the revenue of the lessee. If the revenue of lessee decreases as a result of COVID-19, the lessee can request to alter the rent based on unforeseen circumstances. In this case, the lessor can argue that the unforeseen circumstances are included in the agreement considering the revenue depending rent.
Dutch case law in general accepts that the COVID-19 crisis qualifies as an unforeseen circumstance, as parties did not take into account the consequences of the pandemic and/or the measures taken in conjunction with that. Although contracts must generally be enforced as agreed, the COVID-19 crisis has proven to be an extreme case, prompting (mostly preliminary relief) judges to accept that unaltered maintenance of some agreements may not be reasonable.
