Standstill period protects the over-enthusiastic franchisee

By mr. M. MunnikPublished On: 04-06-2024Categories: Franchise Agreements, Franchise law, Statements & current affairs

Standstill period protects the over-enthusiastic franchisee

The standstill period in the Franchise Act means that a franchisor must provide all relevant information to a potential franchisee in a timely manner, at least four weeks prior to concluding the franchise agreement. The law specifies which information this concerns. The legal standstill period then helps to ensure that potential franchisees are given sufficient time for deliberation and research before concluding a franchise agreement. The further idea is that these potential franchisees, without feeling that they cannot go back, should be able to refrain from entering into the franchise agreement and any additional agreements and investments.

If the standstill period is not observed, this has potentially major consequences. A franchise agreement is voidable and the actions of the franchisor can also qualify as unlawful. With all the (financial) consequences that entails.

Dispute

On the basis of the legal standstill period, a (former) franchisee of a franchise formula in gyms has annulled the franchise agreement concluded between the parties. Only five days after the first meeting, the parties conclude a franchise agreement. Simultaneously with the franchise agreement, the parties conclude a letter of intent (including pre-contractual information document) and an agreement.

It is clear between the parties that the standstill period was not observed.

However, the franchisor takes the position that it was in the interest of both parties to deviate from the legal standstill period. In addition, the franchisee (based on the allonge) would still have more than one month to terminate the franchise agreement. This would not harm the interests of the franchisee. If the franchisee opted for this, the allonge would arrange for the paid entrance fee to be converted into a one-off payment for support and advice.

The dispute goes to court.

Judgment of Rotterdam court

The judgment of the Rotterdam court of May 15, 2024 ruled that the franchise agreement is indeed voidable. Now that the franchisor has acted contrary to the law, the court also concludes that the franchisor has also acted unlawfully.

In support of its judgment, the court explained that the mandatory standstill period must prevent a potential franchisee from legally or de facto committing itself to the franchisor to such an extent that it is essentially no longer an option for it to withdraw on or before the effective date of the franchise agreement. still to abandon the collaboration.

The fact that the parties had agreed that the franchisee could still cancel the franchise agreement for more than a month does not alter this opinion. It is also important that the franchisee was encouraged to furnish her gym in line with the franchise formula immediately after signing the franchise agreement and also (in consultation with the franchisor) informed her customers about her cooperation with the franchisor. In addition, the franchisee (in that context) paid various amounts that it would no longer get back. Terminating the franchise agreement was therefore no longer realistic, even though this was contractually permitted.

The fact that the franchisor was of the opinion that the franchisee had also insisted on expeditiousness does not alter this, according to the court. The legal rules on this point must be regarded as also intended to protect an overenthusiastic franchisee from himself.

According to the court, an appeal for annulment is also not unacceptable if a franchisee has also benefited (financially) from the collaboration with the franchisor. And the duration of this advantage does not immediately lead to unacceptable destruction, provided of course that the three-year limitation period is observed.

Conclusion

The ruling of the Rotterdam court confirms that it is risky for a franchisor not to observe the standstill period and instead work around it through contractual clauses. Especially if this harms the interests of the franchisee. Now that the legal standstill period has been introduced in the interests of the franchisees, any deviation from it will quickly qualify as a deviation to the detriment of the franchisee. However, this possibility does not seem to be completely ruled out. In a ruling by the Northern Netherlands District Court of February 21, 2024, it was ruled that – despite the fact that the statutory standstill period of at least 4 weeks had not been observed – the franchisee had no reasonable interest in invoking the statutory scheme.

Do you have any questions about the standstill period? Please feel free to contact our office.