The New Franchise Act. Opportunities in the area of interim modification of a current franchise agreement

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 Franchise Act will go into effect as early as January 1, 2021 and 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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Part 2: Disclosure during the term of the franchise agreement and interim amendment

In this blog, we discuss the changes in the area of disclosure during the term of the franchise agreement and interim amendment of a current franchise agreement. In addition to mandatory pre-contractual disclosures, it also follows from the new Franchise Act that the franchisor must provide certain information to the franchisee in the event of proposed amendments to the franchise agreement. In addition, the franchisor is also required to provide information regarding various topics during the term of the franchise agreement.    

More specifically, the franchisor provides to the franchisee in a timely manner:

• information about proposed changes to the agreement;
  • The purpose of this provision is to ensure that the franchisee is informed of all upcoming contract changes, and that it can prepare for them and - to the extent necessary - take action accordingly, for example by adjusting its business operations or administrative processes accordingly. Whether or not the change is significant for the franchisee is irrelevant to the obligation to provide information.
• information on investments required by franchisor from franchisee;
  • Upon entering into the agreement, the franchisee should already have been informed about the investments required of him. In addition, during the term of the agreement, the franchisee should be informed about ad hoc required investments by the franchisee. With the help of this information, the franchisee can prepare for the investments in a timely manner, even if they have already been agreed upon in the franchise agreement.
• A notification of a decision to use a so-called derivative formula, a formula that relates in part to the franchise formula, by the franchisor itself or a party cooperating with it:
  • The franchisor must inform the franchisee when a derivative formula of the franchisor is launched. An example could be the franchisor selling the same products through other (possibly competing) channels. The franchisee may face competition from its own franchisor as a result of the launch of a derivative formula. Hence, it is important that the franchisee is informed of this in good time, so that he still has the opportunity to enter into consultation or make any necessary changes in his business operations.
• Other information that the franchisor knows or reasonably suspects is important in view of the franchisee's performance of the franchise agreement:
  • This last point can be seen as a so-called "residual provision. Information not covered by the aforementioned issues must also be shared with the franchisee in a timely manner. This is the case if this information should not reasonably be withheld from the franchisee in view of the execution of the franchise agreement.

Right of consent

The law also provides for a right of consent for the franchisee to certain decisions of the franchisor. This basically involves cases where the franchisor wants to implement a change in the franchise formula or operate a derivative formula, without amending the franchise agreement to implement it (in which case consent is required anyway). As a result, the franchisee may face the financial consequences described in law (think of additional investment or cost loss of sales). The right to consent referred to here is linked to a certain threshold value. For decisions in which the financial consequences are expected to exceed the threshold value, consent is required from the franchisee. How high this threshold value is will be determined contractually. The parties can also decide how to reach agreement.

Information on results achieved and mandatory annual consultation

Finally, the franchisor must inform the franchisee annually about the mark-ups and the financial performance of the franchisee. It is also important to disclose the extent to which the investments made by the franchisee cover the costs that the franchisor intended. There is also a legal obligation to hold consultations between the franchisor and franchisee at least once a year. How these consultations are structured is up to the parties themselves.

As is clear from the foregoing, amendments to the franchise agreement under the new Franchise Act are possible as long as the franchise agreement provides for them and the franchisee is properly and timely informed by the franchisor. Do you have questions about interim amendments to a current franchise agreement? Or would you like to check whether you meet the legal information requirements? If so, please contact Valerie Lipman or Joost van Dongen.