Since Tuesday June 16, the initial concept of the Dutch Franchise Code has appeared, on the initiative of the Dutch Ministry of Economic Affairs. The Code intends to banish excesses and fraudulent practices in the franchise sector. This concept Code, however, falls completely short of its target. `Code` sounds pretty innocuous, as if it were a code of conduct or a set of ethical norms, with the obligation of parties to deal with each other in good faith, respecting each other´s interests. However, nothing is further from the truth. The concept Code is a detailed document, with an extensive introduction and full of broad and open-ended norms that can (and will) lead to discussion. In this concept, the protection of franchisees goes beyond that of distributors, licensees and commercial agents. The question is, how desirable is it when the protection level of these other resellers or intermediaries deviates widely from the protection level of franchisees.
The concept Code argues that extending a franchise agreement cannot be refused “on unreasonable grounds”. With this, the contractual freedom is at stake and in addition it is incompatible with the doctrine developed in judicial rulings in the Netherlands that long-term contracts can in principle always be terminated. What else then is “an unreasonable ground”? The concept Code restricts franchisors in their right to autonomously decide `major affairs` concerning the franchise formula. This is a far-reaching restriction of the autonomy of franchisors and also undesirable from a commercial point of view. After all, it may give rise to a deadlock, a formula may not be adapted or modernised and the competitive position becomes more difficult. The concept Code also stipulates that consumer data collected by the franchisors should be made available to the franchisees. This ignores the substantial investments that franchisors frequently make in loyalty- and customer programmes and the fact that approaching consumers can lead to confusing situations on the part of franchisor as well as franchisee, apart from the risk that the formula standard can suffer from this.
Given these examples, it appears that the balance between the mutual interests has not been found. The concept is in two minds. On the one hand, it wants to regulate how two professional parties have to interact in a businesslike manner – e.g. by consultation on major changes in the franchise formula – and on the other hand, to protect the franchisees by putting a far-reaching duty of care in the lap of franchisors. With this approach, it is questionable whether the sector can develop. In the international franchise world, the present Code will not lead to a thriving sector in the Netherlands. The requirement that foreign franchisors have to compose their contracts in the Dutch language or have to have them translated by a certified interpreter will, in itself, cause incomprehension and less incentive to use franchise in the Netherlands. It is remarkable that, in the current round of consultation, foreign franchise formulas operating in the Netherlands do not at all play a role, given that the concept Code has been composed in just Dutch and that the Ministry apparently does not think it necessary to involve foreign franchise formulas in the discussion.
Many question marks remain on the judicial status and enforceability of the Code. On this, the Ministry will provide further information to the branch after the summer recess, when the consultation process will already have been ended. It appears advisable to include this aspect when evaluating the Code in the consultation process.
If the Code, as it is at present, becomes effective unchanged, the relationship between the positions of franchisors and franchisees as professional partners changes dramatically. That begs the question how interesting for franchise formulas Dutch franchisees still are (or can be) as business partners. It is not far-fetched to think that in the long run it could lead to a withdrawal of (big) franchise formulas from the Dutch market. The impact on distribution relations and license agreements should also not be underestimated: is this Code similarly going to be applied to these agreements? What does this signify for the economic attractiveness of the sector?
In itself, the arrival of a franchise code in the Netherlands is to be applauded. The impact of the present Code however still requires close consultations within the branch itself. The Ministry has come up with the thought to have this discussion included in the consultation round during the summer months. That does not appear to be the most useful approach to do justice to the interest of a Code and the impact on the sector. More time should be taken to bring more clarity to the status of the Code. Franchise world, get your act together and get involved in the discussion!
Tessa de Mönnink, IDI franchising country expert for Netherlands