Common features and contractual requirements
What are the common elements of franchise agreements in your jurisdiction? Do any requirements or restrictions on contractual provisions apply?
Franchise agreements in the Netherlands typically contain a description of the formula and the know-how made available to the franchisees. Franchise agreements also provide for licence rights in respect of:
- trade names;
- domain names;
- copyrightable works; and
- other IP rights.
A franchisor and its franchisees are independent entrepreneurs, meaning that the franchisees act on their own account and at their own risk. Other common provisions concern:
- the duration of the agreement;
- franchise fees;
- franchise rules, as set out in a handbook;
- exclusivity and non-compete obligations;
- minimum purchase requirements;
- marketing activities;
- online sales;
- audit rights; and
- the franchisor’s obligations to support its franchisees.
Are parties to a franchise agreement subject to an implied or explicit duty of good faith?
The prevailing principles of Dutch contract law are reasonableness and fairness, particularly the derogatory effect of reasonableness and fairness. Under Dutch law, a rule which is binding on the parties to a contract does not apply to the extent that, in the given circumstances, this would be unacceptable according to the standards of reasonableness and fairness (Article 6:248(2) of the Civil Code). Given the use of the word ‘unacceptable’, the threshold for invoking such a claim successfully is high. This principle is defined by case law.
There is also a vast body of case law stipulating that a franchisor has a duty of care to provide advice and guidance to underperforming franchisees.
Are franchise agreements subject to any formal or documentary requirements, including registration?
Franchise agreements are form free and subject to no formal or documentary requirements. As such, the registration of a franchise agreement is not a prerequisite for its validity.
What due diligence should both parties undertake before entering into a franchising agreement?
Franchisors typically tend to investigate the liquidity and solvency of prospective franchisees. Under the Franchise Code of Conduct, franchisors may also perform due diligence to ascertain whether prospective franchisees possess the relevant capabilities, training, personal qualities and financial resources to operate a business in line with the franchise formula in a healthy and responsible manner. Further, franchisors usually research the competitive position of their brand in a particular area before appointing a franchisee to operate in that area.
Franchisees should investigate whether it will be feasible to operate their business. They should verify the information received from the franchisor and the criteria and assumptions on which it is based for financial correctness and feasibility. In this respect, franchisees should reach out to other franchisees to seek information on their experiences in exploiting the formula.
Are franchisors subject to pre-contractual disclosure requirements? If so, do any exemptions apply? What remedies are available to franchisees in the event of breach of these requirements?
There are no statutory provisions that impose pre-contractual disclosure requirements on franchisors. Based on the general principles of contract law, a franchisor is not obliged to provide information to its franchisees. In turn, franchisees must investigate franchisors (which is again based on the principles of general contract law). As a general rule, a franchisor’s duty to inform prevails over a franchisee’s duty to investigate its franchisor.
In a landmark case, the Supreme Court ruled that franchisors are liable if they knew that a prognosis or forecast of profits prepared by a third party at their request contained serious flaws (Paalman v Lampenier, ECLI:NL:HR:2002:AD7329). Further, the Supreme Court recently reiterated that the Paalmanruling applies only when a sales forecast is prepared by a third party (Street One, ECLI:NL:HR:2017:311). In Street One, the Supreme Court clarified that a franchisor can be held liable if the prognosis or forecast of profits that it prepares is inaccurate.
A franchise agreement entered into on the basis of an error (ie, an incorrect prognosis or forecasts of profits furnished by the franchisor) which would not have been concluded by the franchisee if it had had a correct view of the situation is voidable. In certain circumstances, the franchisee can also seek damages and termination for breach instead of voiding the agreement.
Under the Franchise Code of Conduct, a franchisor must provide the franchisee with written, complete and accurate information within a reasonable period before the agreement’s conclusion.
Choice of law
May the parties freely choose the governing law of the franchise agreement?
Yes, parties are free to choose the laws governing their agreements.
What fees are typically charged under a franchise agreement?
The following fees are typically charged under a franchise agreement:
- a subscription fee;
- royalty or franchise fees;
- marketing fees;
- sales prices for products procured from the franchisor; and
- lease fees if the franchisor leases the property to the franchisee.
Do franchisees have a right of renewal?
Dutch law provides no statutory right to renew a franchise agreement. As such, agreements terminate by operation of law when their term expires. Some legal scholars have argued that an agreement is extended for an indefinite term if the parties continue to work together after the term’s expiry. Some lower court rulings support this position; however, no case law has been established to this effect.
On what grounds may a franchisor refuse to renew?
Based on the general principle of freedom of contract, a franchisor can refuse a renewal at its discretion. However, this may not be the case if the franchisee had a justified expectation that the agreement would be renewed.
The Franchise Code of Conduct stipulates that a franchisor and its franchisee must observe the principles of reasonableness and fairness when making decisions regarding the renewal or termination of the franchise agreement. The code also stipulates that the franchise agreement should set out the grounds for renewal and termination.
How are renewals of franchise agreements usually effected? Do any formal or substantive requirements apply?
As is the case with the conclusion of a franchise agreement, an agreement on its renewal is also form free. In general, parties tend to record their renewal agreement in a written instrument, such as an addendum.
On what grounds may a franchisor terminate a franchise agreement? Are any remedies available to franchisees in this regard?
In the absence of express contractual termination for breach provisions, both fixed-term and non-fixed term agreements can generally be terminated where the other party commits a breach of contract, unless the breach does not justify the agreement’s termination given its special nature or minor significance.
If a contract includes no express termination for convenience provision, either party may terminate it for convenience on reasonable notice. Fixed-term contracts cannot be terminated early for convenience without the other contracting party’s consent, unless continuation of the agreement is unacceptable due to unforeseen circumstances.
In case of unlawful termination by one of the parties, the other party may demand specific performance and bring an action for damages.
Ongoing franchisor/franchisee relationship
What mechanisms (formal and informal) are commonly used by franchisors to ensure franchisee compliance with the operational terms and standards of the agreement?
Franchisors usually demand formal audit rights which allow them to inspect whether the franchisee is acting in compliance with the agreement. Franchise managers also frequently visit franchisees informally to keep up to date.
Amendment of operational terms
Can the franchisor unilaterally change operational terms and standards during the course of the agreement?
As a contract requires an offer and the acceptance thereof, a contract which includes operational terms and standards generally cannot be varied unilaterally. However, the right to vary the contract may be contractually agreed. Clauses in an agreement allowing franchisors to change their franchise manual or handbooks are fairly common in the Netherlands. In addition, although seldom successful, a party may request the court to vary or terminate a contract in the event of unforeseen circumstances of such a nature that the other party could not reasonably expect the agreement to be upheld in the original form.
Do any specific laws affect the ongoing franchisor/franchisee relationship after they enter into the franchise agreement?
No statutory provisions impose ongoing disclosure requirements on franchisors.
Do any ongoing disclosure requirements apply during the course of the agreement?
Based on the general principles of contract law, a franchisor has no obligation to provide relevant information to its franchisees during the course of the franchise agreement.
According to the Franchise Code of Conduct, a franchisor should provide its franchisees with written, objective and correct information within a reasonable period before making any changes to an agreement that is in force or being renewed.
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