Laws and agencies regulating the offer and sale of franchises

Legal definition

What is the legal definition of a franchise?

There is as of yet (June, 2020) no legal definition of a franchise in the Netherlands, as franchise has not been defined in Dutch legislation. However a legislative process is ongoing for the last couple of years and the Dutch Franchise Law is expected to become effective as per 1 January 2021.

Furthermore, the concept of franchising has been described in the EC Guidelines to Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the applicability of article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, paragraph 189, as follows:

Franchise agreements contain licences of intellectual property rights relating in particular to trademarks or signs and know-how for the use and distribution of goods or services. In addition to the licence of IPRs, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance. The licence and the assistance are integral components of the business method being franchised. The franchisor is in general paid a franchise fee by the franchisee for the use of the particular business method. Franchising may enable the franchisor to establish, with limited investments, a uniform network for the distribution of its products. In addition to the provision of the business method, franchise agreements usually contain a combination of different vertical restraints concerning the products being distributed, in particular selective distribution or noncompete, or both, or exclusive distribution or weaker forms, or both, thereof.

 

Franchise laws and agencies

Which laws and government agencies regulate the offer and sale of franchises?

Franchising is, from a civil law point of view, not at the moment specifically regulated in Dutch law. Instead, the general laws of contract apply as well as Dutch court decisions. Book 6 of the Dutch Civil Code sets out the requirements relating to the formation of contracts. These provisions must be read in conjunction with the more general rules regarding juridical acts; that is, acts intended to invoke legal consequences provided in book 3 of the Dutch Civil Code. In the Dutch legal literature and jurisprudence, certain rules of law in relation to franchise have been developed. In recent years there have been initiated actions that, so far, have resulted in a Dutch franchise code to which parties may voluntarily apply.

Dutch Franchise Act

In recent years, there have been numerous discussions about the need for a franchise law or franchise code in the Netherlands. This has resulted in the appointment by the Ministry of Economic Affairs in the beginning of 2015 of a committee that has been working on the preparation of the Dutch Franchise Code (the Code), which was finalised in February 2016. The intention of the Ministry was that franchisors and franchisees in the Netherlands would voluntarily submit to this Code; however, a large majority of the franchisors rejected the Code and did not apply the Code to their franchise contracts. The majority of the franchisors were very much opposed to the Code. The Dutch Association on Distribution, Franchise and Agency Laws presented an alternative franchise code to the Dutch franchise sector, to try to facilitate the discussions about a new franchise code.

At the end of 2016, the Ministry proposed a draft franchise bill, which would declare the Code mandatory law. This draft franchise bill was rejected by many stakeholders during the consultation phase. The newly installed Dutch government indicated in October 2017, that it wanted to introduce new legislation in the field of franchise, to enforce the position of franchisees in the pre-competitive phase.

On 12 December 2018, Mona Keijzer, the Under-Secretary of Economic Affairs and Climate, presented a new draft bill on franchise to the franchise sector for the purposes of consultation. It has become an independent Act that does not relate any more to the widely criticised Dutch Franchise Code. The draft bill focuses to a high degree on the pre-contractual information obligations, by which franchisees are protected from taking this on (too) lightly without understanding the consequences. An amended version of the draft franchise bill has been sent to the Dutch parliament. It is still not sure at this stage what the Dutch franchise act will look like.

At the time of writing the Dutch franchise act has just been adopted by the Dutch Parliament and still needs to be adopted by the Senate. The Dutch Franchise Act is expected to become effective per 1 January 2021. As soon as the Dutch Franchise Act in a definitive form has been adopted by the Dutch Senate, this (online) report will be updated so that it will comply with the then newly adopted Dutch franchise act.

Besides the civil law aspects, in franchising (as well as distribution and all other vertical agreements) competition laws play an important role and should be kept in mind. The EC Guidelines to Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the applicability of article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices is very important, as well as the EC Guidelines thereto. The Dutch Competition Authority ensures compliance with European and Dutch competition laws.

Franchisors that are members of the Dutch Franchise Association are bound by the rules in the European Code of Ethics for Franchising (Code) drawn up by the European Franchise Federation (www.eff-franchise.com).

There are currently no specific government agencies that regulate the offer and sale of franchises.

Principal franchise requirements

Describe the relevant requirements of these laws and agencies.

As per June 2020 franchise agreements are not yet specifically regulated in the Netherlands, such agreements are primarily governed by the freedom of contract principle; respective rights and obligations are defined by the will of the parties, as set out in the agreement.

All contracts concluded under Dutch law are subject to the general requirements of reasonableness and fairness.

 

Exemptions

What are the exemptions and exclusions from any franchise laws and regulations?

There are currently no specific franchise laws or regulations in the Netherlands.

Franchisor eligibility

Does any law or regulation create a requirement that must be met before a franchisor may offer franchises?

As there are currently no specific franchise laws or regulations in the Netherlands, there are no specific requirements to be met before a franchisor may offer franchises.

Franchisee and supplier selection

Are there any laws, regulations or government policies that restrict the manner in which a franchisor recruits franchisees or selects its or its franchisees’ suppliers?

No, such restrictions are not applicable in the Netherlands. However, all contracts are subject to the general requirements of reasonableness and fairness.

Pre-contractual disclosure

What is the compliance procedure for making pre-contractual disclosure in your country? How often must the disclosures be updated?

Pre-contractual disclosure requirements stem from unwritten law and case law, which dictate the duty to inform (on the part of the franchisor) and the duty to investigate (on the part of the franchisee). Parties are entitled to rely on the accuracy of each other’s information and must always bear in mind each other’s reasonable expectations.

Pre-sale disclosure to sub-franchisees

In the case of a sub-franchising structure, who must make pre-sale disclosures to sub-franchisees? If the sub-franchisor must provide disclosure, what must be disclosed concerning the franchisor and the contractual or other relationship between the franchisor and the sub-franchisor?

The allocation of respective responsibilities between the franchisor and the sub-franchisor towards a (prospective) sub-franchisee will depend on what has been agreed between them. This is not specifically regulated by Dutch law. If nothing has been agreed, in principle, the sub-franchisor (assuming that this will be the contracting party of the sub-franchisee) shall be responsible for presale disclosures towards the sub-franchisee.

Due diligence

What due diligence should the parties undertake before entering a franchise relationship?

There are no specific due diligence obligations as of yet. 

Pre-contractual disclosure requirements stem from unwritten law and case law, which dictate the duty to inform (on the part of the franchisor) and the duty to investigate (on the part of the franchisee). Parties are entitled to rely on the accuracy of each other’s information and must always bear in mind each other’s reasonable expectations.

What must be disclosed

What information must the disclosure document contain?

Consistent case law indicates that when a franchisor presents a prognosis regarding the expected success of a new franchise location to a franchisee, the franchisor is liable if at a later stage such prognosis turns out to be faulty. Therefore, a franchisor should be very careful when submitting any prognosis to a (potential) franchisee. It is not mandatory to provide a franchisee with a prognosis, but the franchisor will need to make available the terms of the licence and financial obligations under which the franchisee will operate. In the Netherlands, a franchisor will typically have a handbook containing know-how, instructions on the use of intellectual property, the look and feel of the franchise and other information relating to the franchise chain, which will be given to the franchisee before or upon conclusion of the contract.

Continuing disclosure

Is there any obligation for continuing disclosure?

The obligation for continuing disclosure will mainly depend on what has been agreed in the contract between the franchisor and franchisee. Case law indicates that the franchisor has a duty of care, which means that if a franchisee does not reach the forecast turnover, the franchisor may have the continuing obligation to provide the franchisee with advice and assistance. Parties will have to reach a situation that is as far as possible in accordance with the spirit and purport of the franchise agreement, meaning that the franchisor and franchisee both benefit from the franchise.

Disclosure requirements – enforcement

How do the relevant government agencies enforce the disclosure requirements?

Not applicable.

Disclosure violations – relief for franchisees

What actions can franchisees take to obtain relief for violations of disclosure requirements? What are the legal remedies for such violations? How are damages calculated? If the franchisee can cancel or rescind the franchise contract, is the franchisee also entitled to reimbursement or damages?

The actions and legal remedies available to franchisees for violations of disclosure requirements vary as set out below.

A misinformed franchisee can base a claim for nullification on error if the franchisee can prove that the contract has been entered into under the influence of an error and would not have been concluded had there been a correct understanding of the facts. Such a claim for nullification will only succeed where the misinformation is of a sufficiently serious nature. An alternative would be to base a claim on deceit, but in this instance the franchisee would have to prove intent on the part of the franchisor, which is generally very difficult to prove. Nullification has a retroactive effect. If the actions or omissions of the franchisor also qualify as a civil tort, the franchisor is obliged to compensate all of the franchisee’s damages. On the basis of error, the contract may, upon request, be modified by a judge (for example, the franchisee’s contract price may be reduced).

An alternative course of action is to base a claim for (partial) rescission or specific performance on breach of contract if the franchisee can prove that the franchisor has failed in the performance of an obligation. In the case of rescission for breach of contract, the defaulting party may be required to compensate the damages that the other party suffers as a result, unless the failure is not attributable to the defaulting party. If the franchisee can prove that the franchisor, by misinforming the franchisee, has committed a breach of contract, it can claim either rescission, alternative compensation or specific performance, all combined with losses because of delay.

In the case of breach of contract or tort, the franchisor has an obligation to compensate all damages of the franchisee. These damages include both losses and lost profits. The main principle is that the breaching party should bring the franchisee into the position it would have been in had the civil tort or breach of contract not been committed. The burden of proof regarding damages is on the franchisee. If damages cannot be assessed precisely, the Dutch court may estimate the amount of damages according to the general principles of reasonableness and fairness. In doing so, the Dutch courts have a large margin of discretion. The damages awarded will depend on the circumstances of the individual case.

Disclosure violations – apportionment of liability

In the case of sub-franchising, how is liability for disclosure violations shared between franchisor and sub-franchisor? Are individual officers, directors and employees of the franchisor or the sub-franchisor exposed to liability? If so, what liability?

The potential liability of the franchisor or sub-franchisor will depend on what has been contractually agreed regarding responsibilities towards sub-franchisees. If nothing has been agreed, in principle the sub-franchisor (assuming that this will be the contracting party of the sub-franchisee) will be liable to the sub-franchisee. However, the franchisor may be liable to the sub-franchisor if the franchisor, in its turn, has neglected its obligations.

Under Dutch law, the private company with limited liability and the public company limited by shares both have legal personality. In principle, therefore, liability rests with the business and not with individual officers, directors or employees. Individual officers or directors will only be exposed to liability in the event of improper management on their part that amounts to personal culpability of the directors. The burden of proof will rest on the franchisee.

General rules on offer and sale

In addition to any laws or government agencies that specifically regulate offering and selling franchises, what are the general principles of law that affect the offer and sale of franchises? What other regulations or government agencies or industry codes of conduct may affect the offer and sale of franchises?

Not applicable at the moment.

General rules on pre-sale disclosure

Other than franchise-specific rules on what disclosures a franchisor should make to a potential franchisee or a franchisee should make to a sub-franchisee regarding predecessors, litigation, trademarks, fees, etc, are there any general rules on pre-sale disclosure that might apply to such transactions?

No, except the duty to inform and the duty to investigate.

Fraudulent sale

What actions may franchisees take if a franchisor engages in fraudulent or deceptive practices in connection with the offer and sale of franchises? How does this protection differ from the protection provided under franchise sales disclosure laws?

If a franchisor engages in fraudulent or deceptive practices, the franchisee may base a claim for annulment of the contract against the franchisor on the basis of deceit or error (misrepresentation). If the actions or omissions of the franchisor also qualify as a civil tort, which is always accepted in case of deceit, the franchisor has an obligation to compensate all of the franchisee’s damages. 

The obligation for continuing disclosure will mainly depend on what has been agreed in the contract between the franchisor and franchisee. Case law indicates that the franchisor has a duty of care, which means that if a franchisee does not reach the forecast turnover, the franchisor may have the continuing obligation to provide the franchisee with advice and assistance. Parties will have to reach a situation that is as far as possible in accordance with the spirit and purport of the franchise agreement, meaning that the franchisor and franchisee both benefit from the franchise.

There is no distinct difference in legal protection when the franchisor has violated its disclosure obligations.

Law stated date

Correct on

Give the date on which the above content is accurate.

16 June 2020