What are the consequences of not complying with the Dutch Franchise Act?

Failure to comply with the Franchise Act can have significant consequences for your organization. Deviations from the provisions of the Franchise Act are prohibited unless they are in the franchisee's best interest. Deviating from these provisions can have significant consequences for your franchise formula. Consider, for example:

• failing to provide all the information prescribed by law, or failing to provide it in a timely manner
• failing to observe the standstill period
• imposing a down payment before or during the standstill period, as was customary in the past in preliminary agreements
• Including an overly broad non-competition clause, for example, one that extends beyond the franchisee's territory or extends beyond one year after the end of the partnership
• incorrect or missing provisions in the franchise agreement regarding the allocation of goodwill

Mandatory law

Article 7:920 of the Dutch Civil Code of the Franchise Act (goodwill and non-competition clauses) is governed by mandatory law. Mandatory law refers to statutory provisions that cannot be deviated from by the parties. This means that the franchisor may not make agreements with the franchisee through the franchise agreement that would be less favorable to the franchisee than prescribed by law.

Article 7:922, paragraph 2, of the Dutch Civil Code currently states: A clause that conflicts with Article 7:920 of the Dutch Civil Code is null and void. There can sometimes be confusion about the terms "null and void" and "voidable." A voidable decision is valid until it is annulled, while a void decision has never been legally valid.

Null and void: Article 2:14 of the Dutch Civil Code states that a decision is null and void if:

1. the decision was taken in violation of the law or the articles of association, unless the law provides otherwise; or
2. the decision was taken despite the absence of a prior act or notification prescribed by law or the articles of association to a person other than the body that took the decision.

For example, has a non-competition clause for two years been agreed upon in the franchise agreement? In that case, this article in the franchise agreement is void, and the franchisor cannot invoke any non-competition clause.

Voidable: Article 2:15 of the Dutch Civil Code states that a decision is voidable if:

1. it is contrary to the law or the articles of association;
2. it is contrary to reasonableness and fairness (Article 2:8 of the Dutch Civil Code);
3. it is contrary to regulations;
4. it is voidable.

In some cases, this will be limited to a specific article in the franchise agreement. In other cases, it may also apply to the entire franchise agreement.

Consequences may last for three years.

Only the franchisee can invoke the voidability of Article 7:914 of the Dutch Civil Code (standstill period). However, a legal action expires three years after the franchisee acquired the right to invoke it. Therefore, the franchisee has three years to file a claim for full or partial annulment of the franchise agreement in the event of a violation of Article 7:914 of the Dutch Civil Code. This does not alter the franchisee's responsibility to clearly notify the franchisor of any alleged violation and any claim for annulment within a reasonable time after discovering the alleged violation.

So, no mandatory law applies to the other articles in the Franchise Act?

The law refers to a legal act and a de facto act. But what is the difference between them?

Legal act: This involves performing an act to activate the right. For example, signing the franchise agreement or verbally concluding a purchase agreement.

De facto act: In a de facto act, the intention is not to activate the right, but this can be the case. For example, if someone commits a criminal offense. Regardless of the perpetrator's intention, a legal consequence occurs: they become liable for prosecution and may be subject to a lawsuit or fine, for example.

The obligations to provide certain information during the term (Articles 7:913 and 7:916) and, for example, the prohibition on inducing payments or investments during the standstill period (Article 7:914, paragraph 2, subsection c) often do not concern entering into a legal act, but are often viewed as a factual act. A factual act that violates the Franchise Act is more likely to constitute mistake, deceit, or acquisition fraud. Although this is legally different, the practical consequences can be just as serious. Therefore, avoid:

Don't take the Franchise Act too lightly!

As you have read, non-compliance with the Franchise Act can have significant consequences. Certain aspects, such as goodwill compensation, non-competition, and the right of consent, have been subject to a A two-year transition period for franchisees to negotiate a new franchise agreement or additional addenda. This transition period did not apply to the entire Franchise Act. Since January 1, 2021, you were already required to provide all new franchisees with the correct pre-contractual information (for example, through a Pre-contractual Information Document) and observe the standstill period. Have your processes and contracts not yet been updated to reflect the Franchise Act? We are happy to help you implement the necessary adjustments within your organization.