No accountability, no fee?

A ruling from the Midden-Nederland court of October 18, 2023 was recently published, ECLI:NL:RBMNE:2023:7737. See also this article by my office mate Alex. The franchisee was required to pay various types of fees to the franchisor under the franchise agreement. The court ruled that the franchisee did not have to pay certain fees because the franchisor had not accounted for the expenditure. What does this ruling mean in practice?

The franchisee has left invoices for fees unpaid, partly because the franchisor allegedly failed to meet its duty to provide information in this regard. The franchisor claims payment of those invoices from the court.

The franchise agreement stipulates that the franchisee owes three fees to the franchisor:

1) a fee of 5% of the achieved turnover for the granted right to exploit the formula (hereinafter: the ‘franchise fee’);

2) a fee of 2.5% of the achieved turnover for collective advertising, marketing and promotional activities (hereinafter: the ‘advertising fee’) and;

3) a fee of 1% of the achieved turnover for the automation (hereinafter: the ‘IT fee’);

Under the Franchise Act, a franchisor has an information obligation under which the franchisor must inform the franchisee annually about the extent to which the surcharges or other financial contributions – which the franchisee has paid in the previous financial year in accordance with the franchisor’s requirement – cover the costs or investments that the franchisor intends or intended to cover with these contributions. See article 7:916 paragraph 2 of the Dutch Civil Code.

The court considers that the Franchise Act was not yet applicable to this case, because the fees related to the period before the Act came into force. However, the court believes that the law offers starting points, because it follows from the law and legislative history that there is an obligation for the franchisor to provide information.

The court then considers that, prior to the Franchise Act, it followed from reasonableness and fairness that agreements on charging certain costs to the franchisee do not give the franchisor the right to retain any surpluses.

The judge then discusses the various fees.

Ad 1) With regard to the franchise fee, the franchisor has no obligation to provide information, so the franchisee owes this fee. This is also indicated in the legislative history of the Franchise Act. See House of Representatives, session year 2019–2020, 35 392, no. 6, p 36. It says the following:

“ Article 7:916, paragraph 2, of the Dutch Civil Code obliges the franchisor to account for the expenditure of certain financial contributions that he has requested from franchisees , separately from the franchise fee, in order to cover certain costs or make investments for the benefit of the franchise chain. ”

Ad 2) With regard to the advertising fee, the franchisor stated at the hearing that he had engaged a professional advertising agency. However, the franchisor has not substantiated what costs were involved and what other advertising activities he has undertaken.

Ad 3) The franchisor has also not provided insight into the costs with regard to the IT fee.

The court then rules that the franchise fee is due, because no accountability is required for this.

With regard to the advertising fee and IT fee, the court ruled that these are not due because accountability is required for these and the franchisor has failed to do so.

However, it is not clear from the ruling what exactly is the basis for the court’s judgment. After all, it is clear that the Franchise Act did not yet apply to the franchise relationship in question. The court presumably bases its judgment on previous case law to which the court appears to refer. This concerns the HappyNurse ruling in which it was considered that an agreement on the passing on of costs does not automatically mean that the franchisor is free to pass on excessive costs that are higher than the costs actually incurred. It would have been up to the court to elaborate on this further and also refer to a legal basis.

In short, the relevance of this statement for practice is, in my view, limited. However, in connection with the Franchise Act, it is very important to carefully consider the various fees charged to franchisees and to consider the consequences thereof when establishing a system of conditions. The question arises, for example, how the court would have ruled in this case if there had only been a franchise fee of (5% + 2.5% + 1% =) 8.5%, where the same collective advertising and automation would have been provided to the franchisee.

Are you unsure about setting up a condition system and its consequences? Please feel free to contact one of our franchise specialists.

Remy Albers – Franchise lawyer

Also published on Franchiseplus