The New Franchise Act. Sweeping changes to pre-contractual exchange of information

Earlier, my colleague Valerie Lipman and I wrote about the upcoming changes in the franchise field due to the introduction of the new Franchise Act. As it looks now, the law will take effect as early as January 1, 2021, and the Franchise Act will have far-reaching implications for franchisors and franchisees. For a general overview of the changes, please refer to our earlier blog.

In this series, we discuss the main changes in the field of franchising through four sections:
1. The pre-contractual exchange of information
2. The interim amendment of a current franchise agreement
3. The termination of franchise cooperation
4. The consultation between franchisor and franchisee(s)
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Precontractual exchange of information

In this blog, we cover the changes in the area of pre-contractual exchange of information. The Franchise Act contains obligations for franchisors and franchisees regarding the information and documentation they must provide each other in a timely manner prior to the intended conclusion of a franchise agreement.

The statutory enshrinement of pre-contractual information provision serves in particular to protect the interests of the franchisee, who may be seen as a weaker party in the relationship with the franchisor. In this regard, it is important that the franchisee has the correct information prior to the conclusion of the franchise agreement. Indeed, a franchisee must be prevented from agreeing to an agreement of which he cannot properly assess in advance what the possible risks and obligations will be. 

What obligations apply during the pre-contractual phase?

The Franchise Act provides a number of rules that specifically address the information that must be provided by franchisor and franchisee prior to the conclusion of the agreement, with a focus on the provision of information by the franchisor.

First, the prospective franchisee must provide the franchisor with timely information about its financial position in the pre-contractual phase. In this way, it is clear to the franchisor whether the prospective franchisee has sufficient financial resources to enter into the franchise relationship.

The franchisor is required to provide a draft franchise agreement in a timely manner, so that the franchisee can review this agreement (or have it reviewed) by an expert and identify his rights and obligations. In addition, it is important for the franchisor to provide insight on the regulations regarding the fees to be paid by the prospective franchisee and the investments required from him.

The franchisor must also provide the franchisee with information on various other topics such as:

• How and when consultation takes place between franchisor and franchisee(s);
• presence of franchisee representation;
• The possibility for the establishment of derivative formulas by the franchisor;
• To what extent the franchisor has access in terms of franchisee sales data;
• Information on the financial position of the franchisor (if available);
• financial data regarding the intended location of the franchise business (if available). When the franchisee itself determines the location, because of the (general) duty of inquiry, more emphasis is placed on the franchisee's own research.

Finally, the franchisor has a general duty to provide information to the franchisee. All information that it can reasonably suspect is relevant to the conclusion of the franchise agreement must be provided.

Incidentally, it is notable that the Franchise Act does not require the franchisor to provide sales forecasts to the franchisee. It is precisely these turnover projections that often lead to discussions in retrospect. The Franchise Act does include an obligation to provide historical financial location data to the extent reasonably available.

Deadlines and standstill period

According to the Franchise Act, the aforementioned information must be provided at least four weeks prior to the conclusion of the franchise agreement. During this period (also known as stand-still) - with exceptions - the franchisor does not proceed:

• modification of the draft franchise agreement (except if it is to the benefit of franchisee);
• the conclusion with the franchisee of the franchise agreement or inseparable agreements (think, for example, a lease), with the exception of a confidentiality agreement;
• inducing the prospective franchisee to make payments or investments associated with the pending franchise agreement.

As the above shows, the pre-contractual phase is full of information requirements with a strong focus on disclosure by the franchisor.

Want to make sure you are taking the right steps in the pre-contractual phase and that you, as a franchisor, are meeting your information obligations? Then contact Valerie Lipman or Joost van Dongen.