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Franchising in the Netherlands: Is dedicated legislation on franchise contracts necessary?

Franchising in the Netherlands: Is dedicated legislation on franchise contracts necessary?

Franchising is a very successful trading concept, but of late a growing number of franchisees is going bankrupt. Is this a mere consequence of the economic crisis or should it give cause to strengthen the position of franchisees?

Franchising is a very successful trading concept, but of late a growing number of franchisees is going bankrupt. Is this a mere consequence of the economic crisis or should it give cause to strengthen the position of franchisees?

In the past couple of months there has been a discussion amongst scholars, legal practitioners, franchisors, franchisees, members of parliament and the Minister of Economic Affairs on the necessity of introducing legislation on franchising. On 17 December 2013 the Minister of Economic Affairs stated that in his view there are no urgent reasons to prepare a bill. Not everyone agrees (see, for example, articles by J.H. Kolenbrander and N. Slump published in Dutch newspapers: ‘Het Financieele Dagblad’ on January 2014 and ‘NRC’ on 25 February 2014).

What is the discussion all about?

As stated above, franchising is a very successful trading concept. The amount of enterprises using the franchise concept is still increasing: worldwide and also in the Netherlands. Franchise can be described – in short – as a contract under which the franchisor grants the franchisee the right to conduct a business using the franchisor’s business method and intellectual property rights, like a trade name. The purpose is to supply products. The franchisee pays for the use of these rights. (See for instance the definition in the DCFR Part. IV. E 4:101, p. 2395-2398).

The supporters of legislation on franchising are of the opinion that the franchisee needs protection as the weaker party in this type of contract (see for instance recently J.H. Kolenbrander, NJB 2013/2302). The opponents state that the franchisee is an entrepreneur, who runs a business for his own account and at his own risk (this also seemed to be the – implicit – view of the Dutch Supreme Court in its sole judgment on franchise contracts to date (Paalman/Lampenier).

Why is the franchisee considered by some to be the weaker party? Unlike the franchisor the franchisee is not a so-called repeat player. He usually has no legal expertise, so he is not able to properly evaluate the contract that is offered to him. Furthermore, the contract as a rule is not negotiable. The franchisee wants to join the franchise organisation and usually accepts the offer without asking too many questions. Apart from not fully grasping the legal consequences of the franchise contract, the average franchisee has less knowledge of the market conditions than the franchisor and has typically no knowledge of the ins and outs of the franchise format (the business method of the franchisor is classified information) or the success rate of the franchisor. There are franchisors that enter into the market with a non-proven franchise format. They merely collect entrance fees, leaving the risks entirely to the franchisees.

One of several possible solutions: disclosure requirements

Consequently, one of the main questions in the field of franchise law is which pre-contractual information duties should be imposed on the franchisor. Is the franchisor for instance obliged to provide the franchisee with a prognosis of future profits?

In several European countries, but not the Netherlands, the legislator has felt the need to protect the franchisee. In France, Spain, Italy and Belgium for instance legislation has been introduced imposing disclosure requirements on the franchisor ( France: décret no. 91-337, 4 April 1991 on art. 1 loi no. 89-1008, 31 December 1989 and art. L. 330-3 C.com; Spain: art. 3 sub d and e Real Decreto 2485/1998, 13 November 1998, based on art. 62 Ley 7/1996, of 15 January, de Ordenacion del Comercio Minorista; Italy: art. 3 and 4 L. 129/2004; Belgium: Wet van 19 december 2005 betreffende de precontractuele informatie bij commerciële samenwerkingsovereenkomsten, B.S. 18 januari 2006).

I think that also in the Netherlands some kind of protection of the franchisee is in order. Whether that should be in the form of legislation, remains to be seen. The Dutch Franchise Association (NFV) is of the opinion that the existent self-regulation is sufficient to solve any problems that might occur. Hence there is no need for legislation (see article in Dutch newspaper Het Financieele Dagblad, 14 January 2014). In my view it is important to evaluate which legislation has been introduced so far, in other European countries, but also in the rest of the world, and whether this regulation has proven effective in protecting the franchisee. Self-regulation might prove to be a good alternative for legislation, but the current self-regulation has been drafted mainly by franchisors and therefore does not necessarily safeguard the interests of the franchisees. Whatever solution is decided on, it should not be an isolated Dutch solution. There are ample examples abroad that Dutch franchisors and franchisees can both benefit from.

1 Comment

Epwk

I agree. To bad lately the Dutch Franchise Association (NFV) has published an opinion opposing legislation. See NJB http://declercq.com/images/NJB_2014_09-Reacties.pdf.

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