Belgium Implements New Franchise Disclosure Law

The tide of franchising regulation continued to sweep across Europe as Belgium brought its new franchise disclosure law into effect.

After several years of contemplating a wide variety of proposals ' some bordering upon the bizarre ' the Belgian Parliament decided to follow the lead of France and Spain by requiring franchisors to make formal pre-contractual disclosure to their potential franchisees 1 month before entering into the franchise agreement. The new franchise law came into force on Oct. 18, with retrospective effect from Sept. 1, 2005.

The new law requires franchisors to deliver a formal disclosure document to potential franchisees 1 month before the franchise is signed. Failure to do so will potentially render the franchise agreement unenforceable. The law sidesteps the problems posed by attempting to define franchising by referring to “commercial partnerships” instead. These are defined as “agreements made between two persons, each of whom is acting in his/her own name on his/her own behalf, by which one person grants to the other, in return for a consideration of any nature whatsoever, whether directly or indirectly, the use of one or more commercial formulae for the sale of goods or the provision of services in one or more of the following forms: a common sign; a common trade name; the transfer of know-how; commercial or technical assistance.” One wonders whether this means that franchise agreements with third-party guarantors will fall outside of this definition. If so, this is quite a loophole. One assumes that it means “at least two people.”

The new rule also requires that a franchisor must provide potential franchisees with a disclosure document at least 1 month before closing and stipulates that, “No undertaking may be given, and no consideration, sum of money or deposit may be paid or required prior to the expiry of a period of one month following the issue of the [disclosure] document.”

The main terms of the agreement are detailed in the law as: “reference to whether or not the commercial partnership agreement is made in consideration of the person; the obligations; the consequences of failure to comply with the obligations; the method of calculation of the remuneration paid by the recipient of the right, and the method of any review during the course of the contract period and upon renewal of the contract; non-competition clauses, including their duration and conditions; the duration of the commercial partnership agreement; the conditions of renewal; notice provisions and provisions for termination of the agreement, in particular in relation to charges and investments; the right of pre-emption or the purchase option in favour of the grantor of the right and the rules governing the valuation of the business when such a right or option is exercised and terms of exclusivity reserved for the grantor of the right.”

The information relating to the correct evaluation of the franchisor includes:

• “name or denomination of the grantor of the right, together with details of his address, contact numbers”;
• natural person acting as its authorized representative, if relevant;
• the intellectual property rights being granted, and prior commercial experience related to it;
• 3 years of financial statements, where appropriate;
• market sector and commercial information;
• size of franchise network in Belgium and internationally;
• 3 years of data about franchise agreements signed and terminated; and
• required initial and ongoing investment.

The disclosure document must comprise two separate sections. The first summarizes the main terms of the franchise agreement, and the second details “information relating to the correct evaluation of the commercial partnership agreement.”

In the event that the franchisor fails to comply with the disclosure requirements, the franchisee may choose to have the agreement become null and void within a period of 2 years of the date that the agreement came into force. If the disclosure document fails to properly summarize the terms of the franchise agreement, those terms will not be enforceable.

Both parties are placed under a duty of confidentiality as regards information that they obtain “with a view to entering into a [franchise] agreement, and may not use the information, either directly or indirectly, other than for the purposes of the commercial partnership agreement to be entered into.”

Work in Progress

The law expressly states that the law is a work in progress by providing that next year there will be an evaluation report issued by the government examining the extent to which the pre-contractual disclosure has “contributed to the integrity, the clarity and the balance of commercial partnership agreements.”

Moreover, there is a suggestion that the new law may not be the Belgian Parliament's final initiative to regulate franchising, as the 2006 government report will also identify any terms in agreements which it believes “clearly create an imbalance between the parties, inter alia, non-competition clauses and clauses which determine the re-sale value, the rescission and termination clauses, and the obligations to achieve a result.” This should make interesting reading. It suggests that if an “imbalance” is found, Parliament may well wind up considering another draft to redress the imbalance. In view of some of the previous draft bills placed before the Belgian Parliament and the extremely protective provisions of the Belgian agency and distribution laws, it is likely that next year's report will find “imbalances” in the franchise agreement. If that is the case, then it is likely that we may see more franchise legislation in Belgium in the mid-term.

With France, Spain, Italy, and Belgium now having franchise-specific disclosure laws, it seems highly likely that in due course other EU member states will follow the same route. It is therefore important that national franchise associations such as the British Franchise Association and the Deutscher Franchise-Verband ensure that they are ready for that discussion when it arises. The need for formal pre-contractual disclosure is well established, and some 20 countries around the globe have adopted such a law. By and large, the results have been positive, and franchising has certainly not suffered. It may be that a single European franchise regulation would be more appropriate than a catalogue of similar but different member state regulations. To date, there is no suggestion that such a regulation is on the EU's agenda despite the potential of franchising to help increase the penetration of the Single Market by small- and medium-sized companies; yet perhaps it is something that should be considered in due course.

The tide of franchising regulation continued to sweep across Europe as Belgium brought its new franchise disclosure law into effect.

After several years of contemplating a wide variety of proposals ' some bordering upon the bizarre ' the Belgian Parliament decided to follow the lead of France and Spain by requiring franchisors to make formal pre-contractual disclosure to their potential franchisees 1 month before entering into the franchise agreement. The new franchise law came into force on Oct. 18, with retrospective effect from Sept. 1, 2005.

The new law requires franchisors to deliver a formal disclosure document to potential franchisees 1 month before the franchise is signed. Failure to do so will potentially render the franchise agreement unenforceable. The law sidesteps the problems posed by attempting to define franchising by referring to “commercial partnerships” instead. These are defined as “agreements made between two persons, each of whom is acting in his/her own name on his/her own behalf, by which one person grants to the other, in return for a consideration of any nature whatsoever, whether directly or indirectly, the use of one or more commercial formulae for the sale of goods or the provision of services in one or more of the following forms: a common sign; a common trade name; the transfer of know-how; commercial or technical assistance.” One wonders whether this means that franchise agreements with third-party guarantors will fall outside of this definition. If so, this is quite a loophole. One assumes that it means “at least two people.”

The new rule also requires that a franchisor must provide potential franchisees with a disclosure document at least 1 month before closing and stipulates that, “No undertaking may be given, and no consideration, sum of money or deposit may be paid or required prior to the expiry of a period of one month following the issue of the [disclosure] document.”

The main terms of the agreement are detailed in the law as: “reference to whether or not the commercial partnership agreement is made in consideration of the person; the obligations; the consequences of failure to comply with the obligations; the method of calculation of the remuneration paid by the recipient of the right, and the method of any review during the course of the contract period and upon renewal of the contract; non-competition clauses, including their duration and conditions; the duration of the commercial partnership agreement; the conditions of renewal; notice provisions and provisions for termination of the agreement, in particular in relation to charges and investments; the right of pre-emption or the purchase option in favour of the grantor of the right and the rules governing the valuation of the business when such a right or option is exercised and terms of exclusivity reserved for the grantor of the right.”

The information relating to the correct evaluation of the franchisor includes:

• “name or denomination of the grantor of the right, together with details of his address, contact numbers”;
• natural person acting as its authorized representative, if relevant;
• the intellectual property rights being granted, and prior commercial experience related to it;
• 3 years of financial statements, where appropriate;
• market sector and commercial information;
• size of franchise network in Belgium and internationally;
• 3 years of data about franchise agreements signed and terminated; and
• required initial and ongoing investment.

The disclosure document must comprise two separate sections. The first summarizes the main terms of the franchise agreement, and the second details “information relating to the correct evaluation of the commercial partnership agreement.”

In the event that the franchisor fails to comply with the disclosure requirements, the franchisee may choose to have the agreement become null and void within a period of 2 years of the date that the agreement came into force. If the disclosure document fails to properly summarize the terms of the franchise agreement, those terms will not be enforceable.

Both parties are placed under a duty of confidentiality as regards information that they obtain “with a view to entering into a [franchise] agreement, and may not use the information, either directly or indirectly, other than for the purposes of the commercial partnership agreement to be entered into.”

Work in Progress

The law expressly states that the law is a work in progress by providing that next year there will be an evaluation report issued by the government examining the extent to which the pre-contractual disclosure has “contributed to the integrity, the clarity and the balance of commercial partnership agreements.”

Moreover, there is a suggestion that the new law may not be the Belgian Parliament's final initiative to regulate franchising, as the 2006 government report will also identify any terms in agreements which it believes “clearly create an imbalance between the parties, inter alia, non-competition clauses and clauses which determine the re-sale value, the rescission and termination clauses, and the obligations to achieve a result.” This should make interesting reading. It suggests that if an “imbalance” is found, Parliament may well wind up considering another draft to redress the imbalance. In view of some of the previous draft bills placed before the Belgian Parliament and the extremely protective provisions of the Belgian agency and distribution laws, it is likely that next year's report will find “imbalances” in the franchise agreement. If that is the case, then it is likely that we may see more franchise legislation in Belgium in the mid-term.

With France, Spain, Italy, and Belgium now having franchise-specific disclosure laws, it seems highly likely that in due course other EU member states will follow the same route. It is therefore important that national franchise associations such as the British Franchise Association and the Deutscher Franchise-Verband ensure that they are ready for that discussion when it arises. The need for formal pre-contractual disclosure is well established, and some 20 countries around the globe have adopted such a law. By and large, the results have been positive, and franchising has certainly not suffered. It may be that a single European franchise regulation would be more appropriate than a catalogue of similar but different member state regulations. To date, there is no suggestion that such a regulation is on the EU's agenda despite the potential of franchising to help increase the penetration of the Single Market by small- and medium-sized companies; yet perhaps it is something that should be considered in due course.