Posted on: 19-05-2020

Franchise Act

Written by:

Hein Kernkamp

The Dutch Franchise Act 2020

On February 11, 2020, the bill for the new Dutch Franchise Act was submitted to the House of Representatives and some four months later the bill has passed both Chambers. The now adopted bill aims to create a healthier balance of power in the more than 30,000 franchise companies in the Netherlands. According to the legislator there should be more transparency when concluding the franchise agreement and franchisees should be better informed about developments surrounding the franchise formula. In addition, there will be more control for franchisees, because the consent of the majority is required.

What is franchising?

According to the draft of article 7: 911 DCC, the franchise agreement is the agreement whereby the franchisor grants a franchisee the right to and imposes an obligation to operate a franchise formula in the manner designated by the franchisor for the production or sale of goods or providing services.

Franchise Act

This definition covers a large number of very different agreements. Franchise formulas and the agreements concluded are very diverse, and vary from what is referred to as a soft franchise to a hard franchise.

Soft franchise

With soft franchise, the franchisee has a lot of freedom within the franchise formula to fill in his activities himself (for example by making his own selection from a wide range of products or services that is available within the formula. An advantage of soft franchise is that the franchisee has greater freedom to make use of the franchise formula for his own benefit and that of his customers.

Hard franchise

In a hard franchise, everything the franchisee does or should do is stipulated in the contract without the possibility of deviation, so the franchisee loses a much larger part of the freedom of movement in his entrepreneurship. An advantage of the hard franchise is that the customer experience will be much more identical.

Whether it is a soft franchise or a hard franchise, the franchise agreement will be subject to the new Franchise Act, as long as the agreement fits within the legal definition of article 7: 911 DCC.

The current legal framework

To date, there are no specific regulations for franchise relationships in the Netherlands. The franchise agreement is, not unlike any other agreement, an agreement within the meaning of Article 6: 213 paragraph 1 of the Dutch Civil Code. This means that general contract law applies to the franchise relationship. The agreements must, of course, also comply with Dutch and European competition law, including the prohibition of cartels under Article 6 of the Competition Act and the Decree on exemptions from retail cooperation agreements. Under the cartel prohibition, price agreements between companies, market definitions and compulsory purchasing obligations are not, or only permitted in special cases, because they almost always restrict competition.

Franchisee is vulnerable

The franchisee is an independent entrepreneur who voluntarily enters into a relationship with the franchisor, but in practice he is relatively dependent on the franchisor, because the franchisor is the determining factor with regard to the franchise formula and the further price determination. Initially, the intention was that the industry would take the edge off this by means of self-regulation. This has resulted in the Dutch Franchise Code, but the implementation thereof stayed. This stalemate prompted the Dutch government to prepare a bill for the Franchise Act.

Provision of information

An important part of the bill is to strengthen the information position of the franchisee prior to and during the term of the franchise agreement. The proposal contains a list of various subjects on which the franchisee must in any case be informed in a timely and specific manner.

The franchisee also has an obligation to provide information and must, for example, provide information about his financial situation, so that the franchisor can estimate whether he will be able to make the necessary investments.

Goodwill

In addition to the mandatory provision of information, the bill contains a regulation on compensation for goodwill upon termination of the franchise relationship. The purpose of this is to prevent the franchisor from being forced to return the goodwill he has built up at the end of the agreement or to transfer it to a successor to be designated by the franchisor at an unrealistic price. The basic principle of the bill is that the franchise agreement must contain an arrangement with regard to the compensation of accrued goodwill, insofar as this can reasonably be attributed to the franchisee.

Non-competition

The non-competition clauses restricting the franchisee from pursuing certain activities after the franchise relationship has ended ones are currently very broadly worded. According to the government, the terms are formulated in a much broader way than is necessary to protect the know-how within the franchise formula. The bill limits the scope of the non-competition clause to:

  • what is necessary to protect know-how, competing goods or services,
  • one year after the expiry of the franchise agreement, and
  • the geographical area in which the franchisee was allowed to operate the formula.

Consultation and agreement

The bill also regulates the manner of consultation between the franchisor and the franchisees. On the one hand, this relates to the coordination of activities between franchisor and franchisee, in the day to day operation. Furthermore, these consultations are the prelude to approval by the franchisees when the franchisor aims for changes in the franchise formula or the introduction of a derivative formula that have or may have certain financial consequences for a franchisee.

Imperative law and choice of law

Pursuant to Section 7: 922 DCC, various provisions are mandatory law and cannot be deviated from to the disadvantage of the franchisee. But it is possible to deviate for the benefit of the franchisee. The attribution of this mandatory law is in line with the UNIDROIT franchise model legislation. In international agreements, a choice of law may also choose the law of another country, such as the law of the place of residence of the franchisor.

If both the franchisee and the franchisor are Dutch parties and the franchise agreement is exclusively linked to the Netherlands, they will not be able to derogate from the mandatory law by virtue of Article 3, paragraph 3, of Regulation Rome I.

Introduction of the franchise law

The new Franchise Act is expected to be introduced and will have effect as per January 1st, 2021.

Ask your question today

Would you like to know more about franchise agreements and the introduction of the Franchise Act? Do you want to have your agreement assessed against the new Netherlands legislation? Ask us today without obligation what we can do for you in your case. We are happy to help you. It is not without reason that our motto is: "Your problem, our concern."

More information?

Hein Kernkamp will gladly help you further.

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