Franchise agreements under Dutch law
According to the Dutch Franchise Association (NFV) franchising is:
A system for distributing products and/or services and/or exploitation of technology, founded on close and lasting cooperation between legally and economically independent businesses, the franchisor and the franchisee(s).
Essentially, setting up a franchise is a method for two or more companies to cooperate whilst maintaining their own separate legal identities. The franchisor (in Dutch: franchisegever) is the owner of the intellectual property (including goodwill) of a company. Under a franchise agreement (franchiseovereenkomst), the franchisee (franchisenemer) obtains a license to exploit the franchisor's intellectual property in consideration for payment. The franchisee may be required to act within in a strict set of guidelines and conditions intended to protect the franchisor's interests. The franchise agreement or franchise handbook will also stipulate the obligations of the franchisor, for example, commercial or technical advice and support.
What are the rules on franchising in the Netherlands?
The Dutch Franchise Act
The new Dutch Franchise Act applies as of 1 January 2021. The 11 articles of this Act have been inserted in the Burgerlijk Wetboek (Dutch Civil Code) after title 15 of Book 7.
According to article 7:911 of the Dutch Civil Code, a franchise agreement (franchiseovereenkomst) is defined as follows:
The franchise agreement is the contract by which the franchisor grants to a franchisee, for a fee, the right and obligation to operate a franchise formula in the manner designated by the franchisor for the manufacture or sale of goods or the provision of services.
The Dutch Franchise Act, furthermore, gives the following definitions:
a. a franchise formula: an operational, commercial and organizational formula for the production or sale of goods or the provision of services, which determines a uniform identity and appearance of the franchise businesses within the chain where this formula is applied, and which includes at least:b. a derived formula: an operational, commercial and organizational formula which:
- 1° a trademark, model or trade name, house style or design; and
- 2° know-how, which is a body of practical information not protected by an intellectual property right, resulting from the experience of the franchisor and the research carried out by it, which information is secret, substantial and identified;
c. a franchisor: a natural or legal person who is the owner of, or the user of, a franchise formula and who, in the course of his profession or business, grants others the right to exploit this formula;
- 1° determines a uniform identity and appearance of the companies where this formula is applied;
- 2° corresponds to a franchise formula in one or more distinguishing features known to the public; and
- 3° is used directly or through third parties by a franchisor to produce or sell goods or provide services, which are wholly or substantially the same as the goods or services to which the franchise formula referred to in 2° relates;
d. a franchisee: a natural or legal person who, in the course of his profession or business, exploits a franchise formula at his own expense and risk.
Franchise agreements that have a relevant connection with the Dutch jurisdiction should be reviewed to see whether they comply with this new Dutch legislation. The new Dutch Franchise Act may also entail that legal or operational documentation (in particular pre-contractual information documentation) will have to be drafted (or amended).
Why do international commercial contracts so often choose English law?
English law governs an estimated forty percent of international commercial contracts worldwide. Parties choose it primarily for its perceived legal certainty, its neutrality as a forum, and its long tradition of respecting contractual freedom between sophisticated parties.
Dutch law is a fully capable choice for international commercial contracts. Nevertheless, English law dominates in practice. Leading Dutch commentators note that this preference rests on several perceived advantages: English law imposes no general good-faith requirement, it gives great weight to the written text of a contract, and it offers a well-developed body of case law on commercial disputes. For international parties, predictability is often worth more than substantive legal protection.
Swiss law is another frequent choice, particularly where parties seek a neutral, non-EU governing law. However, English law remains the default in many industries, including commodities trading, shipping, and financial services. The choice of applicable law therefore has real practical consequences for how a franchise or other commercial contract is interpreted and enforced.
How does Dutch good-faith law differ from English contract law?
Dutch law applies standards of reasonableness and fairness to every stage of a contractual relationship, including pre-contractual negotiations, under Article 6:2 of the Dutch Civil Code. English law contains no equivalent general doctrine.
Article 6:2 of the Dutch Civil Code establishes that both parties to a contract must act in accordance with reasonableness and fairness. This obligation arises before a contract is concluded, during negotiations. Most civil law systems across continental Europe take a comparable approach, and several have codified it explicitly.
English law takes a sharply different position. Courts in England have consistently refused to recognise a general duty of good faith. In particular, English courts have held that imposing a duty to negotiate in good faith is both unworkable in practice and fundamentally inconsistent with the adversarial character of negotiations. Each party is free to pursue its own commercial interest, provided it avoids misrepresentation. This philosophical difference has direct consequences for anyone drafting or enforcing a franchise agreement with cross-border elements.
A degree of nuance has emerged in recent years. English courts have shown some willingness to recognise implied good-faith obligations in long-term relational contracts during their performance. However, this recognition remains limited and does not extend to the pre-contractual phase. Dutch law, in contrast, applies reasonableness and fairness both before and after contract formation.
When does the Dutch Franchise Act apply?
The Dutch Franchise Act applies if the franchisee is established in the Netherlands. The Dutch Franchise Act aims to protect the legal position of the franchisee. It is not possible to contractually deviate from the Dutch Franchise Act to the detriment of a franchisee. A contractual choice of foreign law, cannot circumvent the protection of the act. The Dutch Franchise Act also applies to franchise agreements to which Dutch law applies and which are closed with franchisees outside of the Netherlands. However, in a contract with a franchisee outside the Netherlands one can exclude the statutory regime.
What are the obligations under the Dutch Franchise Act?
Under the Dutch Franchise Act, a duty to share information before the conclusion of the franchise applies.
What are the obligations of the intended franchisee?
The intended franchisee must provide information about his financial position.
What are the obligations of the intended franchisor?
The prospective franchisor is legally held to provide:
- a draft of the franchise agreement
- an overview of the fees which will become due
- information on future consultation between the franchisor and the franchisee, and
- specific financial information regarding the franchisor.
What is the cooling-off period under Dutch franchise law?
The Dutch Franchise Act prescribes a so-called cooling-off period (standstill-periode) of four weeks between (i) the disclosure to the franchisee of all statutorily required information and (ii) the execution (conclusion) of the franchise contract. Such a cooling-off period may not apply under the Dutch Franchise Act in case of renewal or subsequent franchise agreements.
Changes to the formula, goodwill compensation, non-competition clauses and assistance
The Dutch Franchise Act furthermore introduces:
- a right of the franchisee to consent (or not) to certain changes to the agreement or the formula
- a potential right of goodwill compensation for the franchisee upon the termination of the franchise agreement
- a limitation to exclusive purchasing provisions and post-term non-competition clauses (concurrentiebedingen)
- the obligation of franchisors to provide a reasonable measure of assistance and commercial and technical support to the franchisee, and
- a two-year transition period to ensure that agreements concluded before the Dutch Franchise Act taking effect are aligned with the provisions of the act.
Franchise and other fields of Dutch law
Franchise arrangements frequently also engage other areas of law such as intellectual property law, the law of obligations, tenancy law and competition law. A notable feature of Dutch law is that extensive and directive supervision by the franchisor of the franchisee could lead to an employment agreement under Dutch law based on mandatory regulations. In the Netherlands, franchise contracts are typically entered into for a fixed period.
Matters to consider when entering into a franchise agreement
- The duration of the franchise arrangement, for example whether the agreement will contain a conditional option to renew
- Intellectual property: which intellectual property rights will the franchisee be entitled to use, under what conditions and for which purposes?
- Confidentiality
- The inclusion of a non-competition clause
- Obligations of the franchisee/franchisor respectively
- Termination of the franchise agreement, including for example, whether a serious breach of certain provisions will give rise to a right to terminate.