Update Dutch Franchise Act: Franchise Act passed by the Lower House of Parliament

By Roelien van Neck, Lisette den Butter, Laura Scheffer

06-2020

On June 16, 2020, the Franchise Act was passed by the Lower House of Parliament, including amendments and motions tabled. A specific amendment has a potentially significant impact on international franchise businesses. The vote in the Lower House of Parliament comes after the parliamentary debate on June 9, 2020. In this contribution, we will discuss the debate and the relevant amendments.

Debate

On Tuesday, June 9, 2020, a debate took place in the Lower House of Parliament on the Franchise Act (35392). In this debate, the State Secretary of Economic Affairs and Climate Policy - Mona Keijzer - answered critical questions from party members about this bill. Below we will discuss a number of topics from the debate.

I. Entry into force date

The State Secretary argued that it is necessary to take action and strengthen the position of franchisees, and thus to keep (and make) the concept of franchising attractive to businesses. The State Secretary clarified that the aim is, therefore, that the Dutch Franchise Act will enter into force on 1 January 2021.

II. Aim of the Franchise Act

The State Secretary further emphasised in the debate that the aim of the Dutch Franchise Act is promoting the relationship and cooperation between franchisors and franchisees. The Dutch Franchise Act provides rules to create a balance between the interests of franchisors and franchisees. This is, inter alia, stated in draft Section 7:912 of the Dutch Civil Code: "The franchisor and the franchisee behave towards each other as a good franchisor and a good franchisee".

III. Critical input from franchisors

In reply to the draft Dutch Franchise Act, Franchisors have expressed their concerns regarding the implementation of the Dutch Franchise Act, in particular with regard to their business models and the opportunity to innovate. The State Secretary explained that the concerns of franchisors, that have been put forward during the internet consultation, have been addressed in the bill. These concerns have contributed to, what the State Secretary believes to be, an optimal formulation of the implementation. The State Secretary further stated that the Dutch Franchise Act offers opportunities to give structure and meaning to cooperation and to innovate in consultation with each other.

The following specific questions about the implementation of the Dutch Franchise Act bill were addressed during the debate:

  1. The pre-contractual exchange of information
    The bill contains information obligations for the franchisor and a duty of investigation for the franchisee. In the parliamentary debate, the question was raised as to how these obligations relate to each other. According to the State Secretary, on the one hand the franchisor should not withhold any information that should reasonably be understood as to be of interest to the franchisee, on the other hand the franchisee may be expected to carry out a certain amount of research. Non-compliance with said research obligation will be at the account and risk of the franchisee. In practice, the interpretation of these obligations will depend on the relevant circumstances, such as the nature of the franchise formula and the size of the franchisor and franchisee

  2. Interim modification of a current franchise agreement
    Under the new Dutch Franchise Act, franchise agreements should contain a threshold as from when the consent of the franchisee is required for amendments of the franchise agreement during the term of the agreement. It was noted in the parliamentary debate that franchisors are concerned that the right of consent may block important innovations. The relevant question was how to proceed when the franchisee(s) refuse(s) the threshold values proposed by the franchisor. The State Secretary explained that innovations in the franchise formula are also in the interest of the franchisee, since a franchise formula will likely improve as a result of innovations. In addition, she stressed that the franchisee and the franchisor must behave as good franchisee and good franchisor respectively. The proposal on the threshold must, therefore, be reasonable and fair. According to the State Secretary, under certain circumstances the refusal of a franchisee to agree on the proposed threshold values may be considered unreasonable. It can, however, not be determined in advance when exactly it would be unreasonable to refuse. This will depend on the relevant circumstances. The State Secretary recommended entering into mutual consultation and to determine in advance how the formula can be developed in the best possible way.
Amendments

Evaluation period (Amendment 13)

Amendment n ° 13 proposes to evaluate the law after a period of five years, paying particular attention to the effects of this law on practice and in particular the growth of the franchise sector, the scope for innovation and cooperation within the sector.

No option to derogate from Dutch Franchise Act if franchisees established in the Netherlands (Amendment no. 11)

In addition, amendment 11 was been tabled. This amendment (if fully maintained) brings major changes in practice.

The amendment states that with regard to franchisees established in the Netherlands, the provisions of this Title (i.e. the Franchise Act) cannot be deviated from to their disadvantage and that a clause contrary to Article 920 (the provision on goodwill) is void, regardless of the law that governs the franchise agreement.

The interpretation of this amendment is already subject to debate. It can be read that the amendment proposes that the law may not be deviated from to the detriment of franchisees based in the Netherlands irrespective of the law governing the franchise agreement. In other words, regardless of the choice of law in the franchise agreement, the Dutch Franchise Act always applies to franchisees established in the Netherlands. This would have a huge impact on international franchise contracts between a foreign franchisor and a franchisee established in the Netherlands, which are often governed by laws other than Dutch law. Such contracts must then be amended in accordance with the Franchise Act. This has not been discussed earlier in the legislative process. Partly for this reason, the question is whether this is really the correct interpretation. The State Secretary has already been requested to provide clarity on this (letter DFA 11 June 2020). Perhaps the legislative process in the Upper House of Parliament will provide more information.

It will in any event mean that international franchise businesses need to be aware of the required changes to cover the mandatory rules on goodwill at the end of the franchise agreement, even if the agreement is not governed by Dutch law. Additional changes may also be required depending on further clarity on amendment 11.

The explanation of the amendment also makes it clear that a derogation is possible with regard to franchisees operating outside the Netherlands. A choice of law for Dutch law therefore does not preclude deviating agreements with regard to franchisees operating outside the Netherlands.

Motion

Finally, a motion was proposed asking the government to bring representatives of franchisors and franchisees together in a periodic consultative body and to encourage them to come to model agreements and model agreements on the implementation of the open standards from the Franchise Act.

Voting

The bill, including the amendments tabled and the motion, were voted on Tuesday, 16 June 2020. The vote resulted in the adoption of both the bill, the amendments tabled and the motion. The bill and amendment 13 were even adopted unanimously.