Franchising

Update: New rules for franchise contracts in Belgium became applicable in 2024 Read all about the new rules here.

GENERAL

Franchising is doing business with the support of an existing concept. Many independent entrepreneurs want to start their own business with a franchise formula in order to enjoy the image, know-how and permanent assistance of an established company. In this case, the entrepreneur will become a franchisee based on a franchise contract with a franchisor.

Both franchisees and franchisors often face legal questions about franchising. Below we answer the following questions:

Franchising requires a specialized attorney. We have particular expertise in franchising law. Read here more about our franchising services and do not hesitate to contact with us.


IS THERE ANY SPECIFIC LEGISLATION APPLICABLE TO FRANCHISING?

There is no specific law related to franchising in Belgium. However, at the pre-contractual stage, the franchisor must take into account Title 2 (pre-contractual information in the context of commercial cooperation agreements) of Book X of the Code of Economic Law  (see below)

In addition, there does exist a European Code of Ethics of franchising. to which case law sometimes refers (Bergen April 26, 2007; Arb. Brussels March 10, 2000).

One point of discussion is whether the Exclusive sales law of July 27, 1961  may apply to franchise agreements that qualify as a sales concession. Indeed, the Exclusive Sales Law contains a compensation scheme at the end of certain sales concessions that is favorable to the concessionaire. In case law, there are three strains:

  1. The Exclusive Sales Law may apply in the case of distribution franchising (Ghent Oct. 12, 1994; Kh. Liege Sept. 15, 1995)
  2. The Exclusive Sales Law never applies to franchise agreements (the theory of exclusivity) (Antwerp Sept. 20, 2004; Liège March 19, 1998)
  3. The Exclusive Sales Law may apply if the right to purchase and resell products constitutes the main element of the agreement. If the provision of know-how and license plates as well as the obligation to cooperate intensively is an essential obligation, then the Exclusive Sales Law does not apply (the absorption theory) (Liège Jan. 9, 2009)


WHAT OBLIGATIONS SHOULD THE FRANCHISOR OBSERVE IN THE PRE-CONTRACTUAL PHASE?

At the pre-contractual stage, the provisions of Title 2 (pre-contractual information in the context of commercial cooperation agreements) of Book X of the Code of Economic Law. Indeed, these provisions also apply to franchise agreements.

According to this law, the franchisor must submit certain documents to the future franchisee at least one month prior to the conclusion of the contract. Thus, the franchisor must provide a draft franchise agreement as well as a separate document in which certain important information must be included (Article X.27). The latter separate document must include the important contractual provisions (art. X.28 §1, 1°), insofar as they are provided for in the franchise agreement, as well as a number of details that are important for the correct assessment of the franchise agreement (art. X.28 §1, 2°). The law provides for a severe penalty for the franchisor if this is not complied with (art. X.30). Furthermore, the law also includes a duty of confidentiality (art. X.31) as a rule of interpretation, namely that in case of doubt as to the meaning of a contractual term, it must be interpreted in favor of the person acquiring the right (art. X.32).

It was already mentioned above that non-compliance with the provisions of Article X.27 of the Act, is severely sanctioned towards the franchisor. More specifically, the franchisee may, within two years from the conclusion of the franchise agreement, invoke the nullity of the franchise agreement if a draft franchise agreement and/or the separate document were not submitted to him one month prior to the conclusion of the contract (Article X.30, first paragraph). If these documents were submitted, but the separate document does not contain certain important contractual provisions, the franchisee may invoke the nullity of the relevant provisions of the franchise agreement.

Thus, the franchisee can (but should not) invoke the nullity of the franchise agreement. In that case, the court will declare the nullity of the franchise agreement. The consequence will be that the franchisor will have to repay the entry fee to the franchisee, as well as the royalties paid by the franchisee, unless the franchisor can prove that it has effectively provided counter-performance for this.

WHEN IS THERE A FRANCHISE AGREEMENT?

A franchise agreement must meet four essential requirements:

  • The franchisor grants the franchisee a right to use its business formula
  • The parties are independent of each other
  • The parties are obliged to cooperate intensively
  • The franchise agreement must have been entered into for consideration

Right to use a business formula

The franchisor must make an original method of exploitation available to the franchisee. Thus, the franchisee acquires the right to obtain a uniform business formula from the franchisor (which applies to the entire franchise chain). This business formula consists at least of a brand, trade name or signboard on the one hand, and know-how on the other.

Independence of the parties

The franchisee acts in his own name and for his own account. Thus, he is legally independent from the franchisor. Whether the franchisee himself bears any economic risk is irrelevant. Thus, there is also a franchise agreement if the franchisee bears no risk with respect to inventory and default sales, since the franchisor invoices him for the goods only after invoicing the customers (Antwerp Sept. 20, 2004).
If the franchisee is actually acting in the name and on behalf of the franchisor, it will qualify as a commercial agent. This will be the case, for example, when (i) the "franchisor" did not transfer ownership of the goods made available to the "franchisee" but only on consignment, (ii) the "franchisee" sold the goods in the name and on behalf of the "franchisor" which itself imposed the sales prices and whose name appeared on the cabinet ticket and the signboard, (iii) the 'franchisee' had to pay the proceeds of the sales into an account of the 'franchisor' and was remunerated by a commission, (iv) the 'franchisor' took back the unsold goods. (Brussels April 12, 2005).

The franchisee must not be in a subordinate relationship to the franchisor. Otherwise, it is not a franchise agreement but an employment contract. Therefore, this does not mean that the franchisor should not give guidelines to franchisees to maintain uniformity within the franchise chain. Also, a franchisor may be a minority shareholder in a franchisee-owned company as long as the former does not have decisive decision-making power.
Case law has held that there was no subordinate relationship between the parties, even though there were:

  • obligations regarding the purchase of products designated by the franchisor, a monitoring of sales results, equipment obligations, an obligation to work full time, an obligation to use certain advertising and promotional materials, etc. (Arb. Brussels March 10, 2000)
  • obligations to exclusively purchase products from the franchisor, use prescribed packaging, have a full range of products, participate in the franchisor's advertising campaigns, meet delivery deadlines, plan vacations with the franchisor, attend meetings planned by the franchisor, keep a customer register, etc. (Arb. Bergen Jan. 22, 2010)
  • an exclusive purchase obligation (Arb. Charleroi May 14, 2004)
  • a requirement to use an accountant approved by the franchisor (Bergen Jan. 13, 2003)

Whether or not a franchisor is under the authority of the franchisor must be judged on the basis of The Labor Relations Act as included in the Program Act of December 27, 2006. A "working relationship" is defined in this law as "the professional collaboration concerning the performance of labor by a party in the capacity of either employee or self-employed person" (art. 328,5°). Without being able to violate public order, morals and mandatory laws, the parties freely choose the nature of their working relationship. This will be based not so much on the legal qualification given to their relationship by the parties, but on the actual exercise. If the exercise of the employment relationship brings out enough elements that are incompatible with the qualification given to the employment relationship by the parties, a re-qualification of the employment relationship occurs (art. 332). These elements are assessed on the basis of a number of general criteria (art. 333) and specific criteria specific to a particular sector or profession that may or may not indicate the existence of authority (art. 334).

Commitment to intensive cooperation

Although the parties are independent, a franchisor and a franchisee must work closely together in a special relationship of trust (Liege Dec. 6, 2007; Antwerp Sept. 20, 2004). This cooperation is more intense than in a franchise agreement (Liège Jan. 9, 2010).
For example, a franchisor will not act in good faith if it converts an invoice debt of a franchisee corporation into a loan guaranteed by the business manager without this loan providing a future for the franchisee (Liege Dec. 6, 2007).
This duty to cooperate means that the franchisor can impose certain guidelines regarding the uniformity of the image, operation and layout of the business (Arb. Charleroi May 14, 2004; Arb. Brussels March 10, 2000).
In this context, the franchisor is obliged to provide for the training and assistance of the franchisee, especially in the franchisee's start-up phase (Brussels June 2, 2003). On the other hand, the franchisor should not provide assistance to franchisees in difficulty, e.g., by waiving royalties (Brussels February 7, 2007).

On the other hand, if the franchisor provides excessive assistance or interferes too much in the franchisee's affairs, there is a risk that the franchisor may be qualified as a de facto director of the franchisee company. In case of the franchisee's bankruptcy, he could be held liable, if he committed a manifestly gross error that contributed to the bankruptcy (art. 530 Companies Code). Thus, the franchisor, when intervening, must ensure that it does not commit positive acts of management with respect to the franchisee company, and its interference is the normal consequence of the execution of the franchise agreement (Bergen Jan. 13, 2003)

For a fee

There is only franchising if the franchise agreement is concluded for valuable consideration. This means that the franchisee pays a fee (Antwerp Sept. 20, 2004)


CAN THE FRANCHISE AGREEMENT BE TERMINATED (EARLY)?

If a franchise agreement would be covered by the Exclusive Sales Law (see above), the question arises whether the franchise agreement can be judicially terminated (on the basis of art. 1184 B.C.), and more specifically whether or not article 2 of the Exclusive Sales Law implies an extrajudicial method of termination. Franchise agreements not covered by the Exclusive Sales Law can always be dissolved on the basis of art. 1184 B.W. A resolutive condition is also always valid in a franchise agreement.

The court may judicially terminate a franchise agreement if a franchisor or franchisee has committed contractual defaults of sufficient gravity (Bergen April 26, 2007). This will be the case, for example, when the franchisor suddenly unilaterally imposes on the franchisee the obligation to commercialize in its range only products that the franchisor approves, or when the franchisor fails in its obligation to supply necessary goods (Bergen April 26, 2007).


WHAT ARE THE CONSEQUENCES OF TERMINATING THE FRANCHISE AGREEMENT?

Upon termination of the franchise agreement, the franchisee must return the movable and immovable property provided to him by the franchisor.

The franchisee must also stop using the franchisor's business formula and brand, trade name and know-how. Otherwise, the franchisee is guilty of an unfair market practice and/or infringement of the franchisor's intellectual property rights.
A franchisor will be able to oppose a faithful and slavish copying of the essential, concrete and verifiable elements that characterize the originality of the commercial strategy of franchised establishments, when that is of the nature to create ambiguity among the public as to whether or not the establishment belongs to the distribution system and detracts from the image and integrity of the distribution chain (Brussels January 23, 2004). For example, a franchisor could not object to the fact that a former franchisee had started a competing bread store within the same sales area, since there were certain differences that gave the new store its own character that had the effect of preventing people from being under the delusion that this store was part of the franchise chain (such as a different name, menu, decoration, etc.).

Contact

Questions? Need advice?
Contact Attorney Joris Deene.

Phone: 09/280.20.68
E-mail: joris.deene@everest-law.be

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