The main changes brought to the Disclosure Act are: (1) a broader scope of application; (2) the introduction of a new duty to provide a “simplified” Disclosure Document in cases where it was not previously required; (3) an extended disclosure of the remuneration paid to the franchisor; and (4) the limited possibility for the franchisee to waive the legal protection.
1. Broadening of the scope of application of the Disclosure Act
The 2014 Disclosure Act applies to ‘commercial cooperation agreements’, defined as ‘agreements, concluded between several persons, by which one of these persons grants to other the right to use, in the course of the sale of products or of the provision of services, a business process, under one or several of the following elements: (i) a common brand; (ii) a common commercial denomination; (iii) a transfer of know-how; or (iv) technical or commercial assistance’ (Article I.11, 2° CBL).
The scope of application was widened as compared to the 2005 initial Disclosure Act, which originally required (i) the “commercial cooperation agreements” to be entered by (at least) two parties each acting in their own name and on their own behalf, which had been construed as excluding commercial agency agreements (as an agent acts on behalf of the other party, the principal), and (ii) the right to use of business process to be granted in consideration of a remuneration, which was construed as excluding agreements where the grantor of the right did not receive from the other party any specific remuneration in addition to the price of the products sold by the former to the latter. These two limitations to the scope of the Disclosure Act have now been removed from the amended definition of the commercial cooperation agreements. Therefore the Act will apply to commercial agency agreements or distributorship agreements, even where the grantor does not receive any specific remuneration from the other party for granting it the right to use its business process.
Of course, the Disclosure Act will only apply to commercial cooperation agreements under which the right to use a business process is actually granted; thus, a mere distribution agreement where the manufacturer only grants to the distributor the right to resell under its own name the manufacturer’s goods in a defined territory, with no specific assistance being provided or know-how being transferred will in principle escape the application of the Disclosure Act.
On the other hand, there is no question that the (Amended) Disclosure Act applies to franchise agreements, as these always contain at least: the use of a common brand, or of a common commercial denomination, or the transfer of a specific know-how, or the provision of technical or commercial assistance.
2. The new duty to provide a “simplified” Disclosure Document
Under the 2005 Disclosure Act, the party granting to another the right to use a business process (which we will designate as the ‘franchisor’, even if, as just said, the scope of the Disclosure Act goes much farther than franchise agreements) had to provide the prospective franchisee, at least one month before entering into the agreement, a Draft Agreement and a Disclosure Document setting out a number of information, relating to the contractual obligations, the business process and the franchisor and its network. A failure to do so would expose the franchisor to a risk of having the franchisee invoking the nullity of the agreement, a right to be exercised within two years from the date of the agreement.
Article X.27 of the 2014 Amended Disclosure Act now provides for an additional disclosure duty on the franchisor, requiring it to provide the franchisee, in addition to the initial Draft Agreement and Disclosure Document, with a ‘Simplified’ Disclosure Document, in the following instances:
- – amendment made to the initial Draft Agreement during the negotiations, unless such amendment was requested in writing by the franchisee;
- – renewal of a franchise agreement entered into for a definite period;
- – entering into a new franchise agreement between the same parties;
- – modification of a franchise agreement of at least two years of age, unless such modification was requested in writing by the franchisee.
In all these cases, the Simplified Disclosure Document must set out only the elements of the agreement and/or of the business process, the franchisor and/or its network, that have changed from what was stated in the initial Disclosure Document.
Furthermore, in all these instances, a new cooling-off period of one month from the communication of the Simplified Disclosure Document must be observed. Thus, for instance, if the franchisor decides to amend the Draft Agreement 28 days after it submitted it to the prospective franchisee, the franchisor will have to give to the latter a Simplified Disclosure Document stating the amendment(s) and wait for an additional month before actually entering into the franchise agreement!
3. The disclosure of the remuneration paid to the franchisor
The content of the “full” Disclosure Document has not been modified by the 2014 Amended Disclosure Act, except for the description of the remuneration.
While under the 2005 Disclosure Act, the franchisor had a duty to disclose “the calculation formula of any remuneration payable by the Franchisee to the Franchisor, as well as the method of revision of such remuneration during the course of the agreement or upon its renewal’, Article 28, §1, (d) CBL now states that disclosure must be made of ‘the direct remuneration that the [franchisee] will have to pay to the [franchisor] and the method of calculation of indirect remuneration that the [franchisor] will receive, as well as, as the case may be, of the revision thereof during the course of the agreement and upon its renewal’.
The required disclosure is thus broader than before as it also points to any remuneration received by the franchisor from others than the franchisee (the ‘indirect’ remuneration).
According to the preparatory works, an indirect remuneration can take the form of (non-exhaustive list): a profit margin paid to the franchisor when it supplies the products to the franchisee; a year-end rebate paid to the franchisor by approved suppliers to whom the franchisee must order products; a profit margin received by the franchisor for putting premises where the franchises activity will be carried out at the disposal of the franchisee.
The existence of any indirect remuneration must be disclosed as well as its calculation method. However, the preparatory works add, not without ambiguity, that if the franchisee must not directly pay a remuneration to the franchisor, the amount of the indirect remuneration must not be disclosed and stress that usually such amount is covered by confidentiality as a ‘business secret’. But the manner under which an indirect remuneration will be paid to the franchisor must be disclosed (for instance: rebates by suppliers or margin on the products or on the rent). What is important is that the franchisee receives sufficient information to allow it to prepare its business plan and to determine what its own profit margin should be in case of correct operation of the franchised business. The disclosure of the existence of an indirect remuneration should allow the franchisee to verify that the business model is feasible and that any indirect remuneration will not absorb the profit margin that can be expected to be made by the franchisee (which could be the case if, for instance, the franchisee is obliged to buy products to approved suppliers at prices that are notably above market prices, because of the existence of an indirect remuneration).
4. The possibility for the franchisee to waive the legal protection
A controversy had arisen among legal scholars and also in the case law as to the extent to which a franchisee could waive the legal protection established in its favor by the Disclosure Act. No specific provision of the Disclosure Act dealt with that issue, but in line with the general principle of civil law, the view was expressed that, in principle, since the Act aimed at the protection of a private party, the franchisee, such party should be entitled to waive it. Some concerns were raised, however, that such interpretation would undermine the whole disclosure system, as it would be tempting for franchisors to exert pressure on franchisees to have them waiving the legal protection in case the Disclosure Act had not been complied with.
The 2014 Amended Disclosure Act now expressly deals with the issue and Article X.30 CBL now states that the franchisee may waive the legal protection, but only after the expiry of a one-month period following the date of entering into the agreement, and provided that the waiver is expressed in writing and states the ground(s) for nullity which the franchisee agrees to waive.
Pascal Hollander, IDI franchising country expert for Belgium