The new Franchise Act: consultation between franchisor and franchisee(s)

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 most important changes in the franchise area 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).

Part 4: consultation between franchisor and franchisee(s)

In this blog, we cover the changes in the area of consultation between franchisor and franchisee(s). Indeed, the new Franchise Act introduces specific statutory consultation obligations. Two newly introduced sections of the law (Section 7:916(3) and 7:921 of the Civil Code) include the consultation obligations. Good consultation is crucial for the relationship between franchisor and franchisee and actually starts before an agreement is concluded at all. Staying in discussion with each other is not only important for the cooperation between franchisor and franchisee, but is also seen by the legislator as a prelude to consent. Consent of the franchisee(s) is in fact required if the franchisor intends to make changes to the franchise formula or envisages a derived formula with possible financial consequences (depending on threshold values) for the existing franchisee(s).

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Requirement for consultation and introduction of threshold values for consent

Franchisor and franchisee are required under the new Franchise Act to consult with each other at least once a year. The manner in which this consultation takes place is up to the parties themselves. More frequent consultations may be desirable, but they are not mandatory. According to the legislator, the franchise industry is so diverse that parties themselves must find a consultation mode, based on the circumstances of the case. For example, with a new franchise formula, it may be desirable to consult with each other more often, as both franchisor and franchisee may encounter problems. In larger franchise chains, consultation may also take place through the use of franchise representation (through an association). The representatives then feed back to the constituency.  

As we discussed in our blog on interim modification of a current franchise agreement , the law also provides for a right of consent for the franchisee to certain decisions of the franchisor. This basically refers to 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). The franchise agreement should contain threshold values for such situations. The moment the financial consequences of decisions intended by the franchisor are expected to exceed the threshold values, franchisees' consent is required. Franchisor and franchisee should consider together where possible financial risks lie and how they might be reduced or mitigated. Consultation prior to consent is thus crucial.

Importance of negotiating threshold values

From the franchisor's perspective, this means that if the agreed threshold values are not exceeded, consultation with (and thus consent of) franchisees is not initially required. It is important to note that the franchisor is often the one drafting the franchise agreement. Thus, the franchisor has far-reaching control over the level of threshold values and the scope of the obligation to consult and consent. The franchisee should be mindful that during the pre-contractual phase he should negotiate, where necessary, the freedom given to the franchisor to implement changes and derivative formulas without consultation and consent. If the franchisee fails to do so, he may be faced with the fact that changes can be made without consultation and consent. 

Do you have questions about the new Franchise Act or want advice on drafting franchise agreements? If so, please contact Valerie Lipman or Joost van Dongen.