The standstill period in a franchise agreement

There are a huge number of well-known companies that operate through franchises, such as McDonald’s, Jumbo and Primera. It is clear that the franchise model works. Before a franchisee actually launches a franchise, there are intensive negotiations regarding the terms of the franchise agreement. It follows from Article 7:914 of the Civil Code (“BW”) that no amendments may be made to the franchise agreement during the four weeks prior to the conclusion of the agreement. This is known as the standstill period. The District Court of North Holland recently handed down a judgement regarding compliance with this standstill period. In this case, it was ruled that this standstill period must precede the conclusion of the franchise agreement. The fact that the franchise agreement only comes into force at a (much) later date following signature does not alter this. In this article, I will discuss this standstill period.

What exactly is a franchise?

A franchise is a partnership between a franchisor and a franchisee. The franchisor owns the entire chain. They grant the franchisee the right to set up their own ‘business’ using the franchise formula. Under a franchise formula, the franchisee uses the franchisor’s know-how, brand name and the same products and operating methods when running their business. In this way, a franchisee does not need to set up a new business from scratch. Furthermore, they do not need to worry about building up a customer base, establishing working methods or building a brand, as these elements are all already in place. The Franchise Act can be found in Book 7, Title 16 of the Dutch Civil Code.

The standstill period

Article 7:914(1) of the Dutch Civil Code therefore stipulates that no changes may be made during a period of four weeks prior to the conclusion of the agreement. As soon as the franchisee receives the information, a four-week period commences. If, within this period, the franchisor makes changes to the information provided to the franchisee or provides new information, the four-week period starts afresh. This allows the franchisee to gather information, study the documents, ask questions and seek expert advice in order to make an informed decision on whether or not to sign the franchise agreement. The legislator therefore protects the franchisee. It follows from Article 7:914(2) of the Dutch Civil Code that, during this period, the franchisor may not:

1. Amending the draft franchise agreement, unless the amendment is to the franchisee’s advantage;
2. Concluding the franchise agreement or any agreement deemed to be inextricably linked to it;
3. A confidentiality agreement, or an agreement of a similar nature, is exempt from this;
4. Inducing the prospective franchisee to make payments or investments relating to the franchise agreement to be concluded.

Article 7:914(3) of the Dutch Civil Code states that the standstill period does not apply if the same parties enter into a new franchise agreement for the same franchise formula. This is the case if the same franchisee wishes to open another ‘branch’ under this franchise formula. Similarly, the standstill period does not apply in the case of a franchise agreement with the same franchisor (under the same franchise formula) and an affiliated company of the franchisee. This is the case, for example, if a subsidiary of the franchisee wishes to set up a business under the same franchise formula.

Consequences of breaching the standstill period

Under Article 7:922 of the Dutch Civil Code, it is not permitted to deviate from the provisions of Book 7, Title 16 of the Dutch Civil Code to the detriment of a franchisee established in the Netherlands. The provision is therefore mandatory in nature. If the obligations during the standstill period are nevertheless breached and the franchise agreement is concluded anyway, the franchise agreement may be set aside pursuant to Article 3:40 of the Dutch Civil Code. Such setting aside has retroactive effect. This means that, if the franchise agreement is set aside, it is deemed never to have existed.

Conclusion

The District Court of North Holland has confirmed that it is not straightforward to set aside the standstill period. Furthermore, the fact that the franchise agreement only comes into force at a later date (more than four weeks after signing) does not alter this. The standstill period must always be observed, unless the facts and circumstances of the case dictate otherwise – which is unlikely. If the franchisor fails to comply with this and the franchise agreement is concluded nonetheless, the entire franchise agreement may be declared null and void.

Any questions?

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