The phenomenon of master franchising is increasingly making its appearance in the Netherlands. In short, this means that a foreign franchise organization develops activities in other countries through master franchisees, who then recruit franchisees themselves in the countries concerned, and thus, as it were, between the franchisees “in the field” and the main organization. Such an instrument, when used properly, offers an excellent opportunity to achieve international expansion. In practice, American organizations sometimes use this instrument.
It is important that such a construction is designed carefully. First, there is the issue of liabilities, particularly in relation to the master franchisee. After all, it has a contractual relationship with the master franchisor, as well as with its own franchisees. Rights and obligations must, of course, be adequately defined. Furthermore, it is generally reasonable to establish a clear boundary, both in legal and in fact terms, between the national franchise portion and the relationship with the master franchisor. An important question in this context is the law of which country the various agreements are concluded. The master franchisor sometimes stipulates that this must be done in accordance with the law of the country of origin, for example American law. On the other hand, the master franchisee, in the Netherlands, for example, will almost always contract with his franchisees under Dutch law. It is important to make an adequate and detailed inventory of the possible consequences of the choice for these two different legal systems. It is also the case that American (master) franchise agreements often have content that is not always in line with, for example, Dutch legal practice. This can, in some cases, lead to situations that no one thinks of so quickly in advance.
The title of this piece is therefore an urgent piece of advice, especially to (potential) master franchisees: make sure that you know exactly where you stand with regard to the aforementioned and various other (legal) questions. Franchisees of a master franchisee are also well advised to ensure in advance that the organization has been built up in a responsible manner.
Ludwig & Van Dam franchise attorneys, franchise legal advice