Termination of the franchise agreement due to the introduction of the Franchise Act
On 28 February 2023, the Court of Appeal of ‘s-Hertogenbosch, ECLI:NL:GHSHE:2023:658, rendered a decision in a dispute regarding the termination of a franchise agreement between Leen Bakker and its franchisee due to the introduction of the Franchise Act. Although the termination was legally valid, the franchisee is entitled to compensation.
Legal cancellation
There has been a franchise agreement since 1995. Leen Bakker had terminated the franchise agreement with a franchisee on July 28, 2020 by December 31, 2022. The franchise agreement stipulates that the franchisor is only entitled to terminate it “if it cannot reasonably be required to allow this agreement to continue”.
The main reason for Leen Bakker to cancel is that Leen Bakker wants to stop the franchise formula altogether and to focus exclusively on operating its own stores. Leen Bakker motivated her choice, among other things, by stating that the introduction of the Franchise Act gave Leen Bakker reason to reflect on the position of the franchisees within her organization. The fact that Leen Bakker viewed the introduction of the Franchise Act, and in particular the right of consent from her position, as an increase in the burden, is a commercial reason for the cancellation. It is important here that the franchisees form a small group within the total number of Leen Bakker stores. Leen Bakker has argued in this regard that a change in the franchise formula with financial consequences for the franchisees, which according to Leen Bakker will soon be the case, will result in the franchisees obtaining a right of consent. This increases the difference between its own branches and the franchisees, which does not fit in with Leen Bakker’s plans for the future. This (strategic) choice is a choice that Leen Bakker is allowed to make as an entrepreneur and therefore carries weight for Leen Bakker.
The Court thus ruled that Leen Bakker, as franchisor, had the right to terminate the franchise agreement with the franchisee on the basis of a strategic choice on commercial grounds. The franchisor could therefore not reasonably be required to allow the present agreement to continue.
Damages
The circumstance that the franchisee cannot be blamed for the termination and the dependent relationship in which the franchisee finds itself, the court deems the termination without accompanying it with a (suitable) offer to pay (damage) compensation in accordance with standards of reasonableness. and fairness unacceptable.
With regard to the compensation, the Court of Appeal ruled that Leen Bakker should have accompanied the cancellation with a (suitable) offer to pay (damage) compensation according to standards of reasonableness and fairness. Leen Bakker talks about 1.9 million euros per year, as extra turnover to add to her own company. It has not become apparent that Leen Bakker offered compensation at any time.
This judgment means that Leen Bakker has failed to act towards the franchisee in connection with the termination of the franchise agreement. Based on this shortcoming, the franchisee can claim a certain amount of (damage) compensation from Leen Bakker. The court will grant the declaratory judgment claimed by the franchisee in the alternative and refer the case to the damage statement.
Conclusion
This ruling shows that the Franchise Act is sometimes the deciding factor for franchisors to stop franchising. In particular, the right of consent that can accrue to franchisees in the event of formula changes is seen as an obstacle to being able to operate decisively. This is all the more pressing if the number of franchisees is limited compared to the number of “own” branches of the franchisor.
It is also striking that the Court of Appeal does not say a single word about Article 7:920 of the Dutch Civil Code when awarding the compensation. This provision of the Franchise Act took effect on 1 January 2023, i.e. after the (legally valid) cancellation by the franchisor. See article 209 Transitional Act New Civil Code. Nevertheless, the Court of Appeal could have derived anticipatory arguments from the statutory goodwill regulation for determining the liability of the franchisor for the continuation of the franchisee’s business after (legally) termination of the franchise relationship.
Ludwig & Van Dam lawyers, franchise legal advice.
Do you want to respond? Then email to dolphijn@ludwigvandam.nl
Other messages
Franchise Law
Franchise Law
Reducing the risk of fictitious employment
Recently, the new Minister of Social Affairs, De Geus, made the choice that he wants to put an end once and for all to the discussion whether there is self-employment or a
Bound by non-compete clause after expiration of the
The vast majority of franchise agreements contain a so-called post-contractual non-compete clause (hereinafter referred to as “non-competition clause” for brevity).
Severance schemes in the event of (premature) termination of the
Retirement schemes Franchise agreements and comparable cooperation agreements regularly include a regulation to the effect that the rights under that agreement
Delivery obligation?
Many buyers, including franchisees, are of the opinion that there is a delivery obligation in the Netherlands, meaning that suppliers are obliged to deliver goods if a potential
Internet in franchise relationships
If, in the context of a franchise relationship, internet and e-commerce are discussed in order to sell the goods/services of the franchise organization digitally