The standstill period in a franchise agreement

There are a huge number of well-known companies working with franchises, such as McDonalds, Jumbo or Primera. Clearly, the method of franchising works. Before actually starting a franchise, by a franchisee, the terms of the franchise agreement are intensively negotiated. It follows from Section 7:914 of the Civil Code (“BW”) that no adjustments may be made to the franchise agreement four weeks prior to the conclusion of the agreement. This is the so-called standstill period. The North Holland District Court recently ruled on the observance of this standstill period. In this case, it was ruled that this standstill period should be prior to the conclusion of the franchise agreement. The fact that the franchise agreement only enters into force at a (much) later moment after signing 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 is the owner of the entire chain. He or she gives the right to the franchisee to start their own ‘business’ using the franchise formula. With a franchise formula, the franchisee uses the franchisor’s know-how, name and the same products/methods in operating her/his business. This way, a franchisee does not have to start a new business of his/her own. Besides, he also does not have to think about a customer base, method of operation and building a name, as these issues all already exist. The Franchise Act can be found in Book 7 Title 16 of the Civil Code.

The standstill period

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

• Change the draft franchise agreement, unless the change is to the benefit of the franchisee;
• Entering into the franchise agreement or any agreement to be considered inseparable from it;
• A non-disclosure agreement, or any agreement of similar effect, is excluded from this;
• Inducing the intended franchisee to make payments/investments related to the franchise agreement to be concluded.

It follows from Section 7:914(3) of the Dutch Civil Code that this standstill period does not apply if the franchise agreement is concluded between the same parties for the same franchise formula. This is the case if the same franchisee wants to start another ‘branch’ with this franchise formula. Also, if the franchise agreement is between the same franchisor (with the same franchise formula) and an affiliate of the franchisee, the standstill period does not apply. This is the case, for example, if a subsidiary of the franchisee wants to start a business with the same franchise formula.

Consequences of breaking the standstill period

Pursuant to Article 7:922 of the Civil Code, the provisions of Book 7 Title 16 of the Civil Code may not be deviated from to the detriment of the franchisee established in the Netherlands. The provision is therefore mandatory in nature. If one does deviate from the obligations during the standstill period and the franchise agreement is nevertheless concluded, the franchise agreement may be annulled on the basis of Section 3:40 of the Civil Code. Annulment has a retroactive effect. This means that if the franchise agreement is annulled, it is deemed never to have existed.

Conclusion

The District Court of Noord-Holland confirmed that the standstill period cannot be set aside just like that and that the fact that the franchise agreement does not enter into force after signing until a later moment (later than four weeks) does not alter this. The standstill period must, unless the facts and circumstances of the case would dictate otherwise (which is not easily plausible), always be enforced. If the franchisor fails to comply with this and the franchise agreement is concluded anyway, the entire franchise agreement will be subject to annulment.

Any questions?

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