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

Failing to comply with the Dutch Franchise Act can have significant consequences for your organization. Deviations from the provisions in the Franchise Act are not allowed unless they are in favor of the franchisee. Deviating from these provisions can have major consequences for your franchise formula, such as:

• failing to provide all information as prescribed by law in a timely manner
• not observing the stand-still period
• imposing a deposit before or during the stand-still period, as was customary in the past with a pre-agreement
• including an overly broad non-compete clause, for instance, larger than the franchisee's territory or longer than one year after the end of the collaboration
• incorrect or missing provisions in the franchise agreement regarding the allocation of goodwill

Mandatory law

Article 7:920 BW of the Franchise Act (goodwill & non-compete clause) is subject to mandatory law. Mandatory law consists of legal provisions that parties cannot deviate from. This means that the franchisor cannot make agreements with the franchisee in the franchise agreement that are less favorable to the franchisee than prescribed by law.

Article 7:922 BW Section 2 states: A clause that conflicts with Article 7:920 BW is null and void. There can often be confusion between ‘void’ and ‘voidable’. A voidable decision is valid until it is annulled, while a void decision has never been valid legally.

Void: Article 2:14 of the BW states that a decision is void if:

1. it is made in violation of the law or the statutes, unless otherwise stipulated by law; or
2. it is made despite the absence of a legally or statutorily required prior action or notice to another party than the body making the decision.

For example, if a non-compete clause is agreed in the franchise agreement for 2 years, then this section of the agreement is void, and the franchisor cannot rely on any non-compete clause.

Voidable: Article 2:15 of the BW states that a decision is voidable if:

1. it violates the law or statutes;
2. it breaches reasonableness and fairness (art. 2:8 BW);
3. it contradicts a regulation,
4. is voidable.

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

Consequence can last for three years

Only the franchisee can rely on the voidability of article 7:914 BW (stand-still period). However, legal action prescribes three years after the franchisee has acquired the right to invoke this. Therefore, the franchisee has three years to make a claim for the total or partial annulment of the franchise agreement if there is a violation of article 7:914 BW. This doesn’t negate the franchisee’s own responsibility to clearly notify the franchisor of an alleged violation and a claim for annulment within a reasonable time after discovering the supposed infringement.

So is mandatory law not applicable to other articles in the Dutch Franchise Act?

The law differentiates between a legal act and a factual act. But what is the difference between these?

Legal Act: This involves an action to bring the law into effect, such as signing the franchise agreement or orally entering into a purchase agreement.

Factual Act: A factual act is not intended to activate a legal right, but this can happen. For instance, if someone commits a criminal act, regardless of intent, legal consequences ensue: they become liable to a lawsuit or fine.

The obligations to provide certain information during the term (articles 7:913 and 7:916) and, for instance, the prohibition of encouraging payments or investments during the stand-still period (article 7:914, second section, part c) often concern a factual act, not entering into a legal act. A factual act that violates the Franchise Act is more likely to involve error, fraud, or acquisition fraud, but the practical repercussions can be just as significant. Therefore, prevent this:

Do not underestimate the Dutch Franchise Act!

As you’ve read, not adhering to the Dutch Franchise Act can have significant ramifications. For certain elements, such as goodwill compensation, non-competition, and consent rights, there was a two-year transitional period from January 1, 2021, for franchisors to negotiate new franchise agreements or additional addenda with their franchisees. This transition was not applicable to the entire Franchise Act. From January 1, 2021, you were already required to provide all new franchisees with the proper pre-contractual information (for instance, via a Pre-contractual Information Document) and observe the stand-still period. Are your processes and contracts not yet updated to the Franchise Act? We are happy to assist with implementing the necessary adjustments within your organization.