New Dutch Franchise Act requires immediate action

On 30 June 2020, the new Franchise Act passed the Dutch Upper house of Parliament (Senate) and is expected to enter into force on 1 January 2021. The statutory provisions concerning goodwill, non-competition and interim changes to the franchise formula will become applicable on 1 January 2023. Consequently, franchisors only have a small window of opportunity to align already existing contracts with the mandatory law provisions of the new Franchise Act. Action is particularly urgent for international practice as the new Franchise Act entitles franchisees established in the Netherlands to invoke the mandatory principles of the Act, regardless of the choice of law in the franchise agreement. It is, therefore, recommended to amend existing franchise agreements to comply with mandatory law and to reduce the potentially severe financial consequences of the new Franchise Act.

Scope of the new Franchise Act

The new Franchise Act, briefly put, governs (pre-)contractual relationships pursuant to which a franchisor grants a franchisee, in return for a fee, the right and the obligation to operate a franchise formula. A prospective franchisee and franchisor are subject to, among others, far-reaching disclosure obligations in the pre-contractual phase. Under the new Franchise Act, contracting parties are also obliged to disclose information regarding proposed amendments to the agreement, investments that the franchisor requires of the franchisee, notification of a decision to use a derived formula, including an indication of content and scope of the derived formula etc. It is also required that the franchise agreement stipulates whether any goodwill is present in the franchisee’s enterprise; if so, what the extent of such goodwill is; and to what extent such goodwill is attributable to the franchisor. This is only a limited selection of topics that are particularly pressing and demand the immediate attention of franchisors.

New Franchise Act applies regardless of the choice of law

The new Franchise Act is mandatory if the franchisee is based in the Netherlands and a contractual clause contrary to the goodwill and non-compete provisions (Article 290) is null and void, irrespective of the law governing the franchise contract. This means, in practice, that contracting parties are entitled to select another governing law, and this will be a valid choice of law. Still, when it comes to the subjects governed by the new Franchise Act, the latter prevails when the franchisee is established in the Netherlands.

If you have any questions or need further information, please feel free to contact Paula Kemp.