The franchise pre-agreement; the pre-contractual phase

It regularly happens that franchisor and franchisee conclude a pre-franchise agreement before actually entering into a franchise agreement. Such a pre-franchise agreement has many forms, which do not always do justice to its intention.

It may be useful to conclude a preliminary agreement on secrecy now and then and it may be stipulated to exchange information back and forth. Such a pre-agreement may also contain provisions on the division of the costs to be incurred by each other in the run-up to an actual franchise agreement.

The European Code of Honor Franchising 2006 regulates in article 3.4. which requirements such a pre-agreement should at least meet. The code is only directly applicable to members of the Dutch Franchise Association and franchisors who have indicated that they will apply it voluntarily. In addition to the aforementioned aspects, the franchisor must also provide the franchisee with information in advance about the purpose, scope and duration of the pre-agreement. The aim should preferably be limited to a regulation concerning the pre-contractual phase.
However, such a pre-agreement is increasingly being concluded to bind the parties to actually enter into a franchise agreement. If this is the case, the pre-agreement defeats its purpose.

After all, the pre-agreement should only provide an arrangement for the pre-contractual phase, comparable to any serious business negotiation process. If the preliminary agreement already obliges the parties to conclude a mutual franchise agreement, then in fact a franchise agreement has already been concluded, without the conditions under which this takes place usually being fully known in advance. This then often turns out to be a source of mutual claims, aimed at compensation and even compliance, if one of the parties still wishes to renounce an actual franchise relationship. In principle, it cannot be the case that implementation acts are already carried out on the basis of a pre-agreement and/or substantial investments are required from one of the parties. Under certain circumstances, it may also result in an attributable shortcoming if the pre-agreement keeps one of the parties on the line for a long time, without there being any real prospect of a franchise relationship.

The advice to franchisees is therefore also to properly assess the possible consequences of an offered pre-agreement. The advice to franchisors is to preferably limit a pre-agreement to a good and balanced arrangement in case of broken negotiations.

Ludwig & Van Dam franchise attorneys, franchise legal advice