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Franchise agreement

Introduction

A franchise agreement sets out how an independent entrepreneur, the franchisee, uses a proven formula, brand and method of another party, the franchisor, in return for payment. The agreement allocates a dual interest: the franchisor wishes to protect the unity and reputation of the formula, whilst the franchisee trades for its own account and risk and wishes to preserve its independence. Since the introduction of the Dutch Franchise Act (Title 7.16 DCC, Section 7:911 et seq. DCC), mandatory rules apply that protect the franchisee. Those rules cannot be contracted away, so a clause that falls below the statutory floor will not hold up to that extent.

The structure of the agreement

The agreement follows the life cycle of the collaboration: first the parties and the context, then the licence and the fee, next the reciprocal obligations during the term, and finally termination and its consequences. That order is not merely editorial; it also governs interpretation, since a provision is read against the background of the provisions that precede it. The full structure may look as follows:

  • Preamble and recitals
  • Definitions and interpretation
  • The franchise formula and licence
  • Fee and payments
  • Pre-contractual disclosure obligation
  • Obligations of the parties
  • Amendment of the formula and right of consent
  • Non-competition after the term
  • Goodwill
  • Liability
  • Term and termination
  • Confidentiality
  • Governing law and jurisdiction
  • Schedules

Preamble and recitals

The preamble states the title, the parties and the recitals. Both parties are identified fully and correctly: name, legal form, Chamber of Commerce number and authorised representative. The recitals sketch the context, namely that the franchisor has developed a formula, that the franchisee wishes to operate as an independent entrepreneur for its own account and risk, and that the parties have reached agreement on the basis of the pre-contractual information provided. Those recitals are not decorative but a basis for interpretation: in the event of a dispute, the parties' intention is established partly by reference to them.

Example recitals +

Whereas the Franchisor has developed a formula for [description of the formula], consisting of a brand, a method and know-how, and whereas the Franchisee wishes to operate an outlet in accordance with that formula for its own account and risk at [location];

and whereas the Franchisor has provided the Franchisee in good time with the information prescribed by or under the Dutch Franchise Act.

The franchisor has an interest in the recitals emphasising the franchisee's independence, in order to avoid any impression of a relationship of authority. The franchisee has an interest in the description of the formula matching what has actually been promised, because that description later determines the scope of the obligations.

Definitions and interpretation

A consistent list of definitions prevents interpretation disputes. At the very least, the Formula, the Manual, the Territory or Service Area, the Franchise Fee, the Marketing Contribution and the Confidential Information are defined. An interpretation provision governs the order of precedence between the agreement and the schedules. Because the Manual changes over the course of the term, it is advisable to provide that the Manual forms part of the agreement, but that amendments to it are subject to the rules on amending the formula. Without that link, a franchisor could unilaterally add obligations through the Manual that mandatorily require consent.

Example definitions +

In this agreement, "Manual" means: the manual provided by the Franchisor containing rules for operating the Formula, as amended from time to time in accordance with Section [amendment]. In the event of a conflict between the main text and a schedule, the main text prevails, unless expressly provided otherwise.

The franchisor wishes to retain room to update the Manual without reopening the agreement each time. The franchisee has an interest in amendments to the Manual being limited by the consultation procedure, so that the Manual is not used to circumvent the right of consent.

The franchise formula and licence

The heart of the agreement is the licence: the franchisor grants the franchisee the right, during the term and within a defined area, to use the formula, the brand and the know-how. The agreement records whether the licence is exclusive for a territory, whether the franchisee may open several outlets, and which trade mark and IP rights are licensed rather than transferred. An express provision governs that the rights revert to the franchisor after the term and that the franchisee ceases any use of signs that may be confused with the formula. A precise description of what the formula covers at the same time determines the scope of the operating obligation and of later amendments.

Example clause +

The Franchisor grants the Franchisee a non-transferable right, during the term and within the Territory, to use the Formula, the Mark and the Know-how for the operation of the outlet. This right is exclusive within the Territory. Upon the end of the agreement, the Franchisee immediately ceases any use of the Formula and of signs that may be confused with it, and returns all carriers of the Know-how.

The franchisor wishes to delimit the exclusive rights tightly and to make watertight the return of materials at the end. The franchisee wishes to have certainty about exclusivity within its territory, so that the franchisor cannot permit a second outlet in the same area during the term.

Fee and payments

The fee structure is exhaustive and transparent: a one-off entry fee, a recurring franchise fee as a fixed amount or a percentage of turnover, a marketing contribution and any fees for central services or purchasing. The basis, timing and method of payment are set out, together with whether and how the fee may be indexed. For the marketing contribution, it is advisable to include an obligation to account, whereby the franchisor explains how the joint marketing budget has been spent. Vague or unilaterally adjustable payments lead to disputes over what is owed and, in the event of non-payment, constitute grounds for rescission.

Example clause +

The Franchisee shall pay: (a) a one-off entry fee of EUR [amount], payable on signing;

(b) a recurring franchise fee of [percentage] of net turnover per month;

and (c) a marketing contribution of [percentage] of net turnover. The Franchisor shall account in writing each year for the spending of the marketing contribution. All amounts are payable within [number] days of the invoice date.

The franchisor wishes to have a predictable income stream and room for indexation. The franchisee has an interest in the basis of the fee being unambiguous and in the marketing contribution being demonstrably spent on joint marketing, and not on the franchisor's general business operations.

Pre-contractual disclosure obligation

The Dutch Franchise Act obliges the franchisor to provide the statutorily prescribed information at least four weeks before the agreement is concluded (Sections 7:913 and 7:914 DCC): the draft agreement, financial data, information on payments, on any derivative formulas and on the manner of consultation. During that standstill period, the franchisor may not press for signing or for investments. The franchisee, too, has its own duty to investigate and to inform itself. A statement in the agreement that these obligations have been complied with is valuable in evidential terms, but does not cure an actual breach, because the standard is mandatory law.

Example clause +

The parties declare that the Franchisor provided the Franchisee, more than four weeks before signing, with the information prescribed by or under Sections 7:913 and 7:914 DCC, and that during that period the Franchisor did not press for signing, payment or investments. The Franchisee declares that it has studied this information and, where necessary, has taken external advice.

The franchisor wishes to record by such a statement that the standstill period has been observed. The franchisee must realise that a signed statement does not automatically release it from its own duty to investigate, but nor does it cover the franchisor against an actual breach of the statutory disclosure obligation.

Obligations of the parties

The core of the collaboration consists of reciprocal obligations. The franchisor provides assistance, training and access to the formula; the franchisee operates in accordance with the Manual and protects the reputation of the formula. These obligations are worked out concretely, because general wording such as "actively operate" or "reasonable support" is difficult to apply in the event of a dispute. Measurable obligations such as opening hours, minimum purchasing and quality standards are tied to verifiable criteria. In doing so, both parties conduct themselves as a good franchisor and a good franchisee respectively (Section 7:912 DCC).

Example clause +

The Franchisor shall make available the Formula, the Mark and the Manual and shall provide the initial training and ongoing support. The Franchisee shall operate the outlet for its own account and risk in accordance with the Manual, shall observe the agreed opening hours, shall purchase the designated products and shall safeguard the quality and appearance of the Formula. The parties shall act towards each other as a good franchisor and a good franchisee respectively.

The franchisor wishes to have measurable operating standards in order to safeguard the unity of the formula. The franchisee wishes those standards to be matched by concrete counter-obligations, such as agreed training and support, so that the obligations remain reciprocal and enforceable.

Amendment of the formula and right of consent

The franchisor may develop the formula, but not unilaterally without limit. Section 7:921 DCC requires the franchisee's consent for amendments that call for investments above a threshold amount agreed in the agreement or that are expected to have a negative effect, and for operating a derivative formula. An explicit threshold value and a consultation procedure therefore belong in the agreement, together with an arrangement for the situation in which no agreement is reached. If such a threshold is absent, it is unclear when consent is required and a dispute over the amendments carried through is likely.

Example clause +

For amendments to the Formula or the Manual that call for an investment by the Franchisee of more than EUR [threshold amount], or that may reasonably be expected to have a negative effect on turnover, as well as for operating a derivative formula, the prior consent of the Franchisee is required. The parties shall enter into consultation on this;

if no agreement is reached within [number] weeks, the procedure of Section [disputes] applies.

The franchisor wishes the threshold to be broad enough to be able to develop the formula further without seeking permission each time. The franchisee wishes the threshold to be low enough to keep far-reaching or costly amendments genuinely subject to its consent, such as the introduction of an online channel alongside the physical outlet.

Non-competition after the term

A post-contractual non-competition clause is valid only if it satisfies the cumulative requirements of Section 7:920(2) DCC: the clause is recorded in writing, limited to goods or services that compete with the formula, indispensable to protect the know-how, limited to the area in which the franchisee operated, and applies for no more than one year after the term. A clause that is broader than the law permits is void to that extent. The clause is therefore tested line by line against these five conditions; broad non-dealing clauses fall in preliminary relief proceedings.

Example clause +

For one year after the end of the agreement, the Franchisee shall refrain, within the Territory in which it operated the outlet, from offering goods or services that compete with the Formula, in so far as this restriction is indispensable to protect the know-how transferred by the Franchisor. For the remainder, this clause does not apply.

The franchisor wishes to protect the know-how and the customer base of the formula after departure, but must keep the clause strictly within the limits of Section 7:920 DCC. The franchisee retains, after the term, the freedom to continue working as an independent entrepreneur and can successfully have an overly broad clause suspended for the part that exceeds the statutory limits.

Goodwill

Section 7:920(3) DCC prescribes that the agreement contain an arrangement on the manner in which it is established whether goodwill is present in the franchisee's business, how high it is and to what extent it accrues to the franchisee upon a takeover by the franchisor or a succeeding franchisee. An indeterminate or absent goodwill arrangement is contrary to the law and, upon transfer or termination, almost always leads to a dispute over the valuation. A concrete method, such as a turnover- or profit-related multiple or a valuation by an independent expert, with a fixed reference date and payment term, prevents this.

Example clause +

Upon a takeover of the business by the Franchisor or a succeeding franchisee, the goodwill is established at [method, for example: a factor of [x] times the normalised EBITDA over the last [number] financial years], as at the reference date [date]. If the parties do not reach agreement, the goodwill is established with binding effect by an independent expert. The consideration accrues to the Franchisee and is paid within [number] days of it being established.

The franchisor wishes to have a predictable and bounded valuation method, so that the takeover costs remain manageable. The franchisee wishes the goodwill it has built up to be genuinely paid for and the method not to be structured so that in practice no goodwill ever remains.

Liability

Liability on both sides is limited in a balanced and legally tenable way. It is customary to exclude indirect and consequential loss, to have a cap related to the fees paid over a given period, and to have an exception for intent and wilful recklessness. The interplay with the mandatory protection of the franchisee deserves attention: an exclusion of liability that releases the franchisor from its statutory disclosure or assistance obligations will not hold up. Liability towards each other is also distinguished from liability towards third parties, with an indemnity where the operation takes place for the franchisee's own account and risk.

Example clause +

The liability of each party towards the other is limited to direct loss and to a maximum of the amount of the franchise fee paid by the Franchisee over the preceding twelve months. This limitation does not apply in the event of intent or wilful recklessness, nor to the performance of the mandatory obligations under Title 7.16 DCC. The Franchisee indemnifies the Franchisor against claims by third parties arising from the operation of its outlet.

The franchisor wishes to limit its exposure, in particular for consequential loss from disappointing operations. The franchisee has an interest in the cap not being so low that a shortcoming on the part of the franchisor essentially remains without consequence, and in the statutory protection being kept outside the exclusion of liability.

Term and termination

The agreement governs the term for a fixed or indefinite period, renewal, interim termination and rescission. For fixed-term agreements, tacit renewal and the notice period for non-renewal are important; for indefinite-term agreements, the notice period and any grounds for termination. The consequences of the end are worked out: ceasing use of the formula, returning materials, winding up stock, the goodwill arrangement and non-competition. Insufficiently careful termination, without a reasonable period or ground, leads to liability for loss.

Example clause +

The agreement is entered into for [number] years and is thereafter renewed each time by [number] years, unless a party gives written notice at least [number] months before the end. Upon the end, the Franchisee ceases use of the Formula, returns all materials, winds up the stock in accordance with Section [stock], and the goodwill arrangement and the non-competition clause take effect.

The franchisor wishes to have clear notice periods and a watertight winding-up of the formula at the end. The franchisee wishes to be protected against abrupt termination, with a reasonable period and, where the investments warrant it, a fair settlement of goodwill and stock.

Confidentiality

The franchisee gains access to know-how, the Manual, supplier terms and customer data that form the core of the formula. A confidentiality clause protects this information during and after the term. It describes what counts as confidential, which exceptions exist, such as information already public or a statutory duty to provide it, and how long the obligation continues after the term. The clause is tied to a penalty or damages arrangement and aligned with the non-competition clause: confidentiality protects the know-how even where the non-competition clause is limited in time or area on account of Section 7:920 DCC.

Example clause +

The Franchisee shall keep confidential all Confidential Information, including the Know-how, the Manual and the supplier terms, during the term and for up to [number] years after the end of the agreement. This obligation does not apply to information that is already public or must be provided under the law. In the event of a breach, the Franchisee forfeits a penalty of EUR [amount] per breach, without prejudice to the right to full damages.

The franchisor wishes the know-how to remain protected after the term as well, for longer than the non-competition clause may last. The franchisee wishes the scope of the confidentiality to be limited to genuinely confidential information, so that it is not denied ordinary entrepreneurial skills after departure.

Governing law and jurisdiction

The agreement closes with the applicability of Dutch law and a choice of the competent court. In this regard, the protection of Title 7.16 DCC is mandatory law and cannot be contracted away. A dispute-resolution arrangement with mandatory prior consultation or mediation suits the long-term relationship and lowers the threshold to escalation. Restraint is called for with arbitration or a choice of forum outside the Netherlands where the operation takes place here, because this may hinder access to the mandatory protection.

Example clause +

This agreement is governed by Dutch law. The parties shall endeavour to resolve disputes first through consultation and, if that does not succeed, to submit them to mediation. If even then no solution is reached, disputes are submitted to the competent court of the district court of [location].

The franchisor wishes to have a predictable forum, preferably its own place of business. The franchisee has an interest in the forum being in the Netherlands and in a consultation or mediation phase preceding recourse to the courts, so that the mandatory protection remains accessible at a low threshold.

Schedules

The schedules make the agreement complete and concrete. It is customary to include the Manual or a reference with version control, the pre-contractually provided information and financial data, a map or description of the territory, the overview of fees and payments, the licensed trade mark and IP rights, and the goodwill arrangement or valuation method. For each schedule, its status and order of precedence relative to the main text are governed, and amendments remain traceable. Schedules that are mentioned in the text but are missing are a recurring source of interpretation disputes.

Example schedules +

The following schedules form an inseparable part of this agreement: Schedule 1 (Manual, version [number]), Schedule 2 (pre-contractually provided information), Schedule 3 (map and description of the Territory), Schedule 4 (overview of fees and payments), Schedule 5 (licensed trade mark and IP rights) and Schedule 6 (goodwill arrangement). In the event of a conflict, the main text prevails.

The franchisor wishes the Manual to be included as a schedule with version control, so that updates are traceable. The franchisee has an interest in the schedules actually being attached at signing, because it is precisely missing schedules that later lead to interpretation disputes.

See also