The importance of a statutory franchise arrangement

The franchise contract is not regulated by law. It is a so-called “unnamed agreement”. Other forms of cooperation are often regulated by law, such as the employment contract and agency. These are so-called “named agreements”. As a result, there are no specific rules that franchisors and franchisees must adhere to, except general contract law and where the mixed legal form overlaps other areas of law, such as tenancy law and competition law.

In practice, this means that, with the exception of a European Code of Honor on Franchising that is not applicable in all cases, which only applies if the franchisor is a member of the Dutch Franchise Association and which only contains a very broad regulation, only the case law itself offers any guidance as a frame of reference for the resolution of disputes.

The franchise agreement is an indispensable social phenomenon that is still gaining popularity. The dividing line between employee and/or agent on the one hand and franchisee on the other can be thin and all are in a similar dependent position. One is excellently, if not, over-protected in relation to foreign countries, the other is outlawed. There is no legal or social justification for this, while contract law is based on the equality of parties, this is rarely the case with franchise in practice.

Judges who are used to assessing the case submitted on the basis of that equivalence may therefore be reluctant to accommodate the franchisee in the event of a failed franchise relationship. This is arranged differently in Belgium, France and Spain, as well as the United States. In these countries, legal rules have been drawn up that regulate in particular the pre-contractual phase, ie the manner in which a franchise agreement may be entered into. Because it is precisely in this phase that agreements are made on the basis of which irreversible decisions are taken that deeply affect the position of both the franchisor and the (prospective) franchisee, these arrangements help to prevent disputes afterwards.

At the very least, a good legal arrangement could limit the number of debt restructurings and therefore also serve society as a whole. In the Netherlands, too, many disputes between franchisors and franchisees can ultimately be traced back to the start-up phase. However, we make do with a repressive review by the court when the calf has already drowned. That is, if that review is still possible because in some cases a costly arbitration arrangement appears to have been concluded that makes going to court impossible.

It is striking how little legal attention is paid to the content of the franchise agreement, not only by the aspiring franchisee, but sometimes also, for example, an association of franchisees. The submitted agreement is often accepted uncritically without being able to properly oversee its scope. It is not uncommon for the agreement to be drawn up rather unilaterally and insufficient account is taken of the initial situation.

After all, competition clauses and obligations of the company to offer should look different in the case of entrepreneurs with their own location, than for entrepreneurs who rent from the franchisor. The bank still asks (too) little about it and the legal expenses insurer still states in its policy that advice on the purchase of a company is excluded. It seems that everyone keeps their eyes closed in the most essential phase of decision-making.

Fortunately, aspiring franchisees are increasingly reporting in practice who have a franchise offer tested in advance for the (legal) risks, sometimes supported by their bank, accountant or an active board of an Association of Franchisees, who make it their statutory should consider it a duty to also look after the interests of aspiring colleagues. Franchisors also have an interest in a statutory regulation and, in the absence thereof, a balanced contractual relationship. In both cases, this prevents disputes afterwards.

In view of the fact that franchise is eminently suitable for cross-border business, I think it is regrettable that in the Netherlands and in a European context (too) little attention is still being paid to a (European) statutory franchise regulation. This also creates a barrier for foreign companies that want to establish themselves in the Netherlands and can roll out wonderful new concepts here, from which franchisees can then benefit. Until then, it certainly pays to not take any chances when concluding a franchise agreement.

Ludwig & Van Dam franchise attorneys, franchise legal advice