Imposing a formula change without a budget is not allowed

In a judgment of the District Court of Amsterdam, 2 November 2022, ECLI:NL:RBAMS:2022:6242, it was ruled that a franchisor cannot demand a formula change from the franchisee if the size of the associated investments has been completely left open in advance. by the franchisor.

Prior to entering into the franchise agreement
In 2017, an aspiring franchisee wanted to take over a Blokker store. As a manager, his brother-in-law would help him with the operation because he himself had been employed by Blokker for many years, including as a store manager.

On 24 March 2017, the Blokker franchise manager gave a presentation about Blokker’s business plan to the intended franchisee and his brother-in-law. The franchise manager also stated that Blokker has developed a new concept, called ‘De Nieuwe Blokker’ (hereinafter: DNB), which requires all stores to be renovated. Afterwards, the DNB concept was abandoned and Blokker switched to the All-in-House formula (hereinafter: AiH).

Reserved formula change
The aspiring franchisee has concluded the franchise agreement with Blokker, which has been entered into with effect from 12 April 2017 for a period of five years. The franchise agreement stipulates, among other things, that the franchisee will fully furnish the retail space and warehouse in accordance with the instructions to the satisfaction of Blokker. Blokker will give instructions that are useful for the profitable functioning of the shop and the maintenance of a good reputation, which franchisee will follow.

Shortly after concluding the franchise agreement, the franchisee indicated that although the investment had been discussed, he wished to take time off to introduce the new Blokker formula at a later date. The franchisee asks Blokker to confirm the period within which the new Blokker formula should be introduced, so that this cannot cause confusion in the future

Premature termination of the franchise agreement
On May 23, 2018, the franchisee subsequently terminated the franchise agreement effective April 12, 2022. The exploitation does not offer enough to generate a profitable business, according to the franchisee.

On December 17, 2019, Blokker announced that the costs of the renovation of the store are estimated at € 80,000. On January 8, 2020, Blokker announced that the store would be renovated in mid-2020. Because the franchise agreement has been terminated, there would only be two years to recoup the investment of the renovation. Blokker has therefore offered two options:
1) Granting of the Franchise Agreement
2) Termination of the franchise agreement by mutual consent
The franchisee has rejected this letter.

Blokker has terminated the franchise agreement with effect from 30 June 2020 by letter dated 8 January 2020. This has been done because the franchisee allegedly failed to comply with the franchise agreement by refusing to renovate its store and not giving a commitment to do so before June 30, 2020. It has been agreed that the lease will be terminated on May 30, 2020 on the condition that the retail space is delivered to the lessor by the tenant on the said date, including the complete inventory.

Obligation to formula change?
The court rules that there is no obligation on the franchisee to convert the store. There is no provision expressly included in the franchise agreement that deals with this. Blokker invokes articles in the franchise agreement that state that the franchisee must follow Blokker’s instructions, but these articles are general in their wording. It had to be clear to the franchisee that this renovation would be expensive. It stands to reason that there is only reason to postpone the renovation if it involves high costs. However, there was no concrete discussion about the amount of the costs and the scope of the renovation. The court concludes that under these circumstances, the commitment of the franchisee when entering into the franchise agreement to renovate the store is insufficiently specified to be able to assume a legally enforceable obligation. For the franchisee, the scope of the renovation and the amount of the costs were not clear enough. It was also not clear to the franchisee at that time to what extent the costs of the renovation could be paid for and recouped from the operation.

The court also ruled that even if it is assumed that the franchisee was in principle obliged to renovate the store, then the appeal to that agreement is unacceptable under the circumstances according to standards of reasonableness and fairness. The operating results were so disappointing that the franchisee’s interest in not having to renovate weighs so much more heavily in these circumstances than Blokker’s interest in a converted shop, which – even if it were assumed to be an obligation to Blokker’s reliance on that obligation would be unacceptable according to standards of reasonableness and fairness.

It seems to follow from this ruling that if a franchisee undertakes to make large investments in the context of a formula change to be implemented, there must be clarity at that time about the size of those investments. It is also important whether the investments are in line with the reasonable expectations based on the franchise agreement. In that context, this ruling seems to fit in with the regulation that has since been introduced in Section 7:921 of the Dutch Civil Code. This lays down that formula changes could be prescribed by the franchisor under certain circumstances, provided that this remains below a previously agreed financial threshold.
This ruling also clarifies the importance of timely provision of sound pre-contractual information. The Franchise Act now also provides regulations on this point in Article 7:913 of the Dutch Civil Code (pre-contractual obligation to provide information) and 7:914 of the Dutch Civil Code (deliberation period).

mr. A.W. Dolphijn
Ludwig & Van Dam lawyers, franchise legal advice.
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