Franchise contracts - in the Netherlands

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, settingup 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, 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.

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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 Dutch Civil Code after title 15 of Book 7.

According to article 911 of the Dutch Civil Code, a franchise agreement 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:

• 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;

b. a derived formula: an operational, commercial and organizational formula which:

• 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;

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;

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).

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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, can't 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.

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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.

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What are the obligations of the intended franchisee?

The intended franchisee must provide information about his financial position.

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What are the obligations of the intended franchisor?

The prospective franchisor is legally held to provide:

1. a draft of the franchise agreement
2. an overview of the fees which will become due
3. information on future consultation between the franchisor and the franchisee, and
4. specific financial information regarding the franchisor.

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What is the cooling-off period under Dutch franchise law?

The Dutch Franchise Act prescribes a so-called cooling-off period 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.

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Changes to the formula, goodwill compensation, non-competition clauses and assistance

The Dutch Franchise Act furthermore introduces:

1. a right of the franchisee to consent (or not) to certain changes to the agreement or the formula
2. a potential right of goodwill compensation for the franchisee upon the termination of the franchise agreement
3. a limitation to exclusive purchasing provisions and post-term, non-competition clauses
4. the obligation of franchisors to provide a reasonable measure of assistance and commercial and technical support to the franchisee, and
5. 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.

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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.

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Some of the matters to consider when entering into a franchise agreement:

1. The duration of the franchise arrangement, for example whether the agreement will contain a conditional option to renew
2. Intellectual property: which intellectual property rights will the franchisee be entitled to use, under what conditions and for which purposes?
3. Confidentiality
4. The inclusion of a non-competition clause
5. Obligations of the franchisee/franchisor respectively
6. Termination of the franchise agreement, including for example, whether a serious breach of certain provisions will give rise to a right to terminate.