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.