News

Upcoming New Rules on Franchising

April 2019 – by Annelies van Zoest en Tessa de Mönnink

On 12 December 2018, the Rutte III government presented a Bill for a franchising Act to the industry for the purposes of consultation. So far, there was no specific franchising act in the Netherlands. However, these last years the development of rules on franchising has been worked on. This has occupied many minds in the world of franchise in the recent years.

In 2016, the drafting of self-regulatory rules of conduct in the field of franchising has been done to promote equality of franchisor and franchisee. These rules of conduct have been developed by a writing committee with representatives on behalf of franchisors and franchisees. This resulted into the Dutch Franchising Code (NFC), a code that has certainly not come about without a struggle.

In April 2017, a preliminary draft of an Act aiming at anchoring the NFC was brought up for consultation but did not result into formal legislation. Franchisors and franchisees disagreed too much on the content of the NFC.

The Explanatory Memorandum to the recent new Bill says that the NFC has actually been written out of it, seeing that the industry did not succeed in implementing it voluntarily.

The Franchising Bill

The Bill was mainly written for the improvement of the position of franchisees. In this, four elements are stressed:

Precontractual exchange of information.
Interim change of an effective franchise agreement.
Termination of franchise cooperation.
Consultation between franchisor and his franchisees.

The Bill is mainly to the benefit of franchisees. After the Bill had been presented for consultation franchisors and their advisers have fiercely criticized it.

Some Critical Notes

Also on behalf of Parker Advocaten an extensive critical comment was given on the Bill. Our full comment can be found in our letter of 30 January 2019 to the Ministry of Economic Affairs and Climate.

Our major objections are briefly listed below:

The purport of the Explanatory Memorandum to the Bill is rather pessimistic on franchise and the malpractices that allegedly exist, whereas this is not substantiated by objective investigation. On the contrary, it appears upon close reading of the Explanatory Memorandum that actually no structural malpractices have been identified;
The Bill is not well-balanced and not consistent. On the one hand, franchisees will get control (as well) of the formula and policy of franchisors, whereat the responsibility of the success of the franchisee and the financial risks are imposed for the largest part on the franchisor, on the other hand.
In the Bill leading case law (inter alia of the Supreme Court) is derogated from without stating reasons, such as in respect of prognoses and goodwill;
A lot of open standards and general phrasing is used which are not clear. This may lead to interpretation problems and disputes and involves a high degree of legal uncertainty;
The Bill restricts franchise formulas in their innovation and business opportunities. This is bad for effectiveness and development of franchise formulas, and consequently bad for both franchisors and franchisees, who all depend on the success of the formula;
The entire Bill is mandatory law, while it imposes stricter rules. The parties are not allowed to reach any different understandings. This is not only undesirable but also unnecessary;
By implementing this Act a – much – stricter system will apply in the Netherlands than in the surrounding countries. This may have a negative impact on the arrival of international formulas and the growth of franchising in the Netherlands.

What Next?

In the legal sector there are major concerns on the content and desirability of the Bill and from various directions fierce criticism was expressed towards the Ministry of Economic Affairs and Climate. The consultation phase has meanwhile been completed and the ball is now in the court of the Ministry. It is expected that it will take several months before all the submitted reactions have been processed by the Ministry. We wait with anxiety whether eventually this will lead to improvement of the Bill and relaxation of the rules. To be continued….

Het Financieele Dagblad

Read also the article published on 16 January 2019 in the FD: https://parkeradvocaten.nl/artikel-fd-vetorecht-franchisenemer-maakt-het-franchiseorganisaties-lastig-om-slagvaardig-te-innoveren/” .

Het Financieële Dagblad translation:

Veto right franchisee makes it hard on franchise organizations to effectively innovate

Tessa de Mönnink is attorney / partner at Parker Advocaten.

In the Franchise Bill the franchisor is impeded in the control of his own company, for the veto right of the franchisee is not limited to exceptional situations. This puts at risk one of the core duties of the franchisor, i.e. monitoring and developing the formula.

Furthermore, the tone of the explanatory memorandum to the Bill is very pessimistic on franchise, without any specific substantiation. The suggested ‘malpractices’ whereat small entrepreneurs allegedly lose from big powerful franchisors seem to be inspired by meetings with persons involved and advisers in the market without any thorough investigation and rebuttal.

The Act does not match the current trend of less rules and freedom of enterprise either. Nothing wrong with offering starting franchisees some protection, but offering a high level of protection to one kind of entrepreneur, whereas any other independent worker has to run its business without any form of protection is really very arbitrary. In any case, it would be logical to make a distinction between big professional franchisees (for whom protective legislation does not have any justification) and small franchisees.

If the Bill is adopted without any further clauses, franchise organizations will be put in shackles by the veto rights of franchisors. One could wonder whether this is legitimate, certainly within the current fast changing market where companies like V&D, Miss Etam, Perry Sport, MS Mode and Witteveen that had to give in to more innovative competitors. The era of digital and omnichannel has no mercy for retailers who cannot innovate effectively and end up missing the boat.

Franchise