A franchising agreement
The franchising legislation defines a franchising agreement as a ‘contract pursuant to which a franchiser grants a franchisee a right in return for payment and imposes a duty to commercially exploit a franchise in a manner stipulated by the franchiser for the production or sale of goods or the provision of services’. Supermarkets, fast food restaurants and fashion outlets often constitute part of a franchise. Franchising is also a common type of contract in the case of service providers, such as funeral parlours and mortgage advisers.
When entering into a franchising relationship, a great deal more is involved than merely drawing up a franchising agreement. For instance, aspects of tenancy law frequently play a role when searching for a location, intellectual property rights are important for the commercial exploitation of a franchise and competition law may constitute an obstacle to specific franchising arrangements which significantly restrict competition.
The franchising legislation
With the promulgation of the franchising legislation on 1 January 2021, a franchising agreement has become a so-called ‘defined contract’. This means that the law (Article 7:911 BW et seq.) defines the nature of a franchising agreement in a number of respects.
In accordance with the franchising legislation a franchise comprises two core components:
- a trademark, name or house style; and
- know-how, which often consists of practical knowledge concerning the sale, structure and business operations which are typical of a franchiser’s business.
The franchising legislation mandatorily regulates the following matters covered by a franchising agreement:
- the duty to provide information;
- goodwill;
- restraint-of-trade clauses;
- variations of a franchise.
Precontractual duties (to provide information)
Both the potential franchiser and franchisee are subject to precontractual duties (to provide information). For instance, a potential franchisee has a duty to provide the franchiser with timely information about their financial position. A franchiser in turn has a duty to give a potential franchisee timely notice of:
- the subject of the relevant franchising agreement, including any annexes;
- an overview of the financial obligation to which the franchisee will be subject, such as fees, surcharges or any other contributions to the franchiser;
- a breakdown of the investments required of the franchisee;
- information about the manner in and frequency with which consultations will be held between the franchiser and the franchisee, and the contact details of the relevant franchisee representative body (if one exists);
- information about the extent to and the manner in which the franchiser may compete with the franchisee, whether based on a derivative formula or not;
- information about the extent to and manner in which the franchisee may obtain access to sales-related data concerning them or which could be important for their business operations;
- any other information which the franchiser knows or could reasonably suspect is important for the purposes of the execution of the franchising agreement.
Where available and relevant, a franchiser also has a duty to provide information about their financial position and any historical financial data concerning the envisaged location of the franchising business. Should such historical information not be available, the franchiser is required to provide financial data concerning any franchising business which they deem to be similar or their own branch.
Standstill period
A franchiser has a duty to schedule a standstill period of no less than four weeks between the time when information is provided and the conclusion of the franchising agreement. This means that a franchising agreement may not be concluded during this period. In addition, during this period the franchiser is not permitted to amend any information provided to the disadvantage of the potential franchisee. Neither may the franchiser induce the potential franchisee to proceed with any payment or investment which is directly or indirectly related to the franchising agreement that is still to be concluded. The only exception to this is the conclusion of a non-disclosure agreement, because a franchiser often has a duty to provide confidential information to a potential franchisee before the standstill period commences.
Duty to provide information during the term of a franchising agreement
A franchiser also has certain obligations during the term of a franchising agreement, such as the issue of:
- information concerning a proposed amendment of the franchising agreement;
- information about any investments which the franchiser requires of the franchisee;
- a notice of a decision to use an derivative formula; and
- any other information which the franchiser knows or could reasonably suspect is important for the purposes of the execution of the franchising agreement.
Goodwill provision
Upon the termination of a franchise the franchiser may be owed compensation for the acquisition of any goodwill which the franchisee has built up. As such, the franchiser only has a duty to pay compensation in the event that they take over the franchising business. It follows from the law that a franchising agreement must stipulate the manner in which it is determined:
- whether any goodwill is present in the franchising business;
- what the value is of such goodwill (for example, by including a method of calculation or a procedure for the appointment of an expert); and
- to what extent such goodwill may be attributed to the franchiser.
Restraint of trade
A franchising agreement may contain a restraint-of-trade clause, which prohibits the franchisee from entering into a contract with the franchiser’s competitors while the franchising agreement is in effect or after it ceases to apply. The law imposes restrictions on such a restraint-of-trade clause with regard to its duration, the applicable territory and the nature of the products and/or services which it covers.
Consent to amend the franchise
The franchising legislation requires the franchisee’s consent for an amendment of the franchise or the introduction of a derivative formula if it actually has financial implications for the franchisee (for example, because investments or contributions are required). The right of consent does not apply where the financial implications remain below a threshold stipulated beforehand in the franchising agreement. Such a threshold may not be so high that actual consent is never required.
Conclusion
A franchising agreement is a defined contract. This is to say that the franchising legislation stipulates what a franchising agreement should look like in a number of respects. Our franchise lawyers specialise in legal issues concerning franchises. They can provide you with appropriate, solution-oriented advice in the case of any dispute, problem or issue pertaining to a franchising agreement. You may contact one of our specialists free of obligation for more information or an introduction.