International Commercial Agency and Distribution Agreements Case Law and Contract Clauses Series Editor AIJA Volume Editors Cristelle Albaric Marianne Dickstein Law & Business Published by: Kluwer Law International PO Box 316 2400 AH Alphen aan den Rijn The Netherlands Website: www.kluwerlaw.com Sold and distributed in North, Central and South America by: Aspen Publishers, Inc. 7201 McKinney Circle Frederick, MD 21704 United States of America Email: [email protected] Sold and distributed in all other countries by: Turpin Distribution Services Ltd. Stratton Business Park Pegasus Drive, Biggleswade Bedfordshire SG18 8TQ United Kingdom Email: [email protected] Printed on acid-free paper. ISBN 978-90-411-2625-2 # 2011 Kluwer Law International BV, The Netherlands All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher. Permission to use this content must be obtained from the copyright owner. Please apply to: Permissions Department, Wolters Kluwer Legal, 76 Ninth Avenue, 7th Floor, New York, NY 10011-5201, USA. Email: [email protected] Printed in Great Britain. Editors Cristelle Albaric Cristelle Albaric is an international lawyer practicing M&A, corporate and commercial law. Based in Paris, she was admitted to the Paris Bar in 1999, and has been with YMFL law firm since 2005. In France, she received her Doctorate in Private Law from the University of Montpellier with a thesis on ‘Master franchising’. In Germany, she got her LL.M. at the University of Heidelberg. In the US, she was a one-year Visiting Scholar at the University of California – Boalt Hall at Berkeley. Cristelle keeps writing about Business Law and serves as a lecturer on franchising topics at the University of Montpellier Law School. As a member of the International Association of Young Lawyers (AIJA), she is Co-President of the Publications & Edition Section and is a member of the Executive Committee. Marianne Dickstein Marianne Dickstein is an international lawyer based in Belgium-Brussels. She graduated from the Université Libre de Bruxelles, and is admitted to practice at the Brussels Bar. After working for Coudert Brother LLP Brussels, she launched her own law firm DicksteinLawyers & Mediators, which is fully dedicated to the practice of the commercial and corporate law. Marianne Dickstein is a mediator in civil and commercial matters, appointed by the Belgian Federal Commission for Mediation. Editors She is the author of various publications on her area of expertise. Marianne is a former member of the Legislation Commission of the Brussel’s Chamber of Commerce and Industry, and of the International Association of Young Lawyers—AIJA (Distribution Commission). vi Author Biographies Eva Bukowski Eva Bukowski, attorney-at-law, joined Koch/Christensen Law Firm in 1999 after having graduated from the University of Copenhagen (LL.M.). In 2001 Ms. Bukowski joined KromannReumert, was admitted to the Danish Bar in 2002, and in 2003 rejoined Koch/Christensen Law Firm. In 2006 Ms. Bukowski was seconded to a leading international law firm in Warsaw. As of 2010 Ms. Bukowski moved to Switzerland with her family and is not practicing law at the moment. Ms. Bukowski’s main areas of practice included corporate and commercial law, competition and intellectual property law, mergers and acquisitions and negotiations and drafting of contracts. Eva Bukowski was, until 2010, a member of the Danish Law Society and the International Association of Young Lawyers (AIJA). Jean-Louis Collart Mr. Collart graduated with a degree in Law from the University of Geneva in 1988, and was admitted to the Bar in the same year. After initially serving with the Legal Department of the Cantonal University Hospital of Geneva in 1988-1989, he worked in Radcliffes and Co., Solicitors, Westminster, London, in 1989, Mayor Balser & Heyer, Geneva, in1989-1991, Homburger, Zurich, in 1991-1992, the Legal Department of the Union Bank of Switzerland, Geneva, in 1992-1995, back to Mayor Balser & Heyer, Geneva, in 1995-1997, Cabinet Mayor, Geneva, in 1997-2002, Alves de Souza Houman Collart, Geneva, in 2003-2006, and has been with Mentha & Associés since 2007. His primary practice areas are inheritance and estate law, commercial contracts, telecommunication law, commercial and civil litigation. Author Biographies Apart from being a member of the Lawyers Supervisory Board of Geneva, he is also a member of the Geneva and Swiss Bar Associations, Association Genevoise de Droit des Affaires, Union Internationale des Avocats (UIA), the Association of International Business Lawyers, honorary member of Association Internationale des Jeunes Avocats (AIJA) and is a former Chairman of the Human and Procedural Rights and Responsibilities Commission. He has co-authored works such as Guide pratique du recouvrement des créances en Belgique et à l’étranger, under the head of Marianne Dickstein, Anthemis, 2009, Planning and Administration of Offshore and Onshore Trusts, Society of Trust and Estate Practitioners, Tolley’s, London 2001, Commercial Agency and Distribution Agreements, G. Bogaert and U. Lohmann (eds.), Kluwer Law International, London 2000, and Anti-Money Laundering Guide, CCH Editions Limited, Bicester 1999. Raimond Emde Dr. Raimond Emde is a partner at the firm of Graf von Westphalen, Hamburg www.grw.com. He studied at Hamburg, London and Wisconsin, and after serving as a research assistant at the University of Hamburg between 1991 and 1993, served as a lecturer until 1995. His main areas of focus are Mergers & Acquisitions, Distribution Law (commercial agency law and the laws governing insurance representatives, authorized dealers and franchising), Company Law and Commercial Law. He is fluent in both English and German and is a member of the GermanAmerican Lawyers’ Association, the International Bar Association (IBA), the International Association of Young Lawyers (AIJA), the Hamburg Arbitration Circle e.V. (HAC) and Überseeclub Hamburg. He is credited with numerous publications, especially on distribution and company law. Bart Van den Brande Bart Van den Brande is a Belgian lawyer admitted at the Brussels Bar. He is Assistant at the Vrije Universiteit Brussel. Mr. Bart Van den Brande currently works with Koan Law Office in Brussels. Cemile Demir Gökyayla Dr. Cemile Demir Gökyayla, partner, joined AKINCI in 2001. She graduated from Dokuz Eylul University Faculty of Law in 1998. Cemile’s main areas of practice include international arbitration, construction arbitration, investment arbitration and distribution agreements. In 2000 she published her first book on the public policy in enforcement of the foreign judgments. In 2005, Cemile obtained PhD and published her second book viii Author Biographies on the distribution agreements. Cemile is coauthor of the International Family Law published in 2010. She is author of several article published in Turkey. She has lectured international private law, international arbitration law, foreign investment law and international commercial law at Istanbul Bilgi University Faculty of Law. Cemile Demir Gökyayla is a member of the ICC National Committee in Turkey. Orsolya Görgényi Dr. Orsolya Görgényi, partner, joined Szecskay Attorneys at Law in 1998 after having received her JD, summa cum laude, from the Eötvös Loránd University. Dr. Görgényi completed postgraduate business consulting and supervision studies at the International Business School in cooperation with Oxford Brookes University in 2005. Dr. Görgényi was appointed partner of Szecskay in 2007. She has written a number of articles, speaks at various seminars and is an active member of several Hungarian and international professional organizations, such as the Budapest Bar Association, the Hungarian Mediation Association (OME) and the International Association of Young Lawyers (AIJA’s National Representative for Hungary in 2003–2007, Congress Organizer 2009 and Law Course Committee member as of 2010). Dr. Görgényi’s main areas of practice include M&A, corporate and commercial law, and she is active in business mediation utilizing the innovative techniques of supervision. She is fluent in English and German, conversational in French. Miklós Boronkay Dr. Miklós Boronkay, associate, joined Szecskay Attorneys at Law in 2007. He received his JD, cum laude, from the Pázmány Péter Catholic University in 2007. In 2004–2005, he studied at the University of Salzburg on a scholarship. During his studies, Dr. Boronkay was intern at an international law firm in Budapest and at the Hungarian Constitutional Court. He is member of the Hungarian Competition Law Association and the Competition Law Research Centre and is lecturer of civil law at the Pázmány Péter Catholic University. He specializes in dispute resolution, intellectual property and competition law and has written a number of articles on these fields. Dr. Boronkay is fluent in English and German. Isabelle Hajjar Isabelle Hajjar, graduated from the University of Grenoble (France) and was admitted to the French Bar in 1997. She started her carrier with Thieffry & Associés, before joining Oppenheimer, Wolff & Donnelly LLP in 2002. In 2007, Isabelle decided to join a client, Groupe onePoint, an IT Company, and move to Shanghai, China. She acts as the Legal Manager of the Group. She furthermore acts as off counsel for Bilalian Avocats. Isabelle’s main areas of practice include Business law, contractual practice, IT and IP law. ix Author Biographies Tanja Jussila Tanja Jussila, partner, joined Waselius & Wist in 1999 after having completed her court practice. She graduated from the University of Helsinki in 1997 (LL.M.) and was admitted to the Finnish Bar in 2002. In 2006, Ms. Jussila was seconded to a leading international law firm in London. Ms. Jussila was appointed partner of Waselius & Wist in 2009. Ms. Jussila’s main areas of practice include dispute resolution, mergers and acquisitions and corporate and commercial law. She has frequently acted as an arbitrator, is an author of various articles in international professional publications and has lectured on several fields of law including international arbitration. Tanja Jussila is a member of the Finnish Law Society, the Finnish Arbitration Association and the International Association of Young Lawyers (AIJA National Representative for Finland 2003–2006, Vice-President for the Litigation Commission 2005–2008, President for the Litigation Commission 2008–2010 and First Vice-President 2010–2011). Mikko Peltoniemi Mikko Peltoniemi joined Waselius & Wist in 2006 after having obtained his LL.M. from the University of Turku in the same year. His main areas of practise include Mergers and Acquisitions, Corporate and Commercial law and he also regularly advises corporate clients in the field of Labor law. Suzan Lap Suzan Lap has been working as a lawyer since 2000. From her original practice in competition law, she developed a specialization in distribution issues. She advises clients on various distribution methods, such as exclusive and selective distribution, franchise, consignment and agency. She helps in assessing and drawing up contracts and supports businesses in terminating and amending such agreements. In addition, Ms. Lap continues her practice in competition law. She helps companies to structure their business practices and joint ventures in such a way that they are in line with national and European competition rules and assists in the notification of mergers and acquisitions with the Netherlands Competition Authority and at the European Commission. In all these areas, Ms. Lap represents enterprises in proceedings before the competition authorities and the civil courts. Ms. Lap is the author of various articles on the subject of commercial contracts and teaches this subject at the Kluwer course for experienced in house lawyers. Chhabra, Manoj K. Manoj K. Chhabra is a fully qualified Lawyer (Advocat) and is admitted in India to the Bar Council of India. Mr. Manoj Chhabra currently works with Astra Law Office in Dehli. x Author Biographies Elena Marangoni Graduated at the Law school of Bologna-Italy and specialized in IP and Entertainment Law; managing partner of a major IP and legal office in Venice area Italy FINPATENT SRL until 2005 she actually runs her own legal office in Padua- Italy. IP Expert for the Court of Venice, for the Chamber of Commerce of Venice and Padua and for the Venice Industry Association. She has been Member of the IP Group at Confindustria—Rome, the National Industry Federation with consultation functions in IP issues both for the Italian Government and the Industry Federation. Member of the following IP and legal Associations as LES, AIJA, IDI. Avv. Ms. Marangoni teaches and writes on IP law for various Italian institutions and specialization schools as CONVEY, CUOA, SIVE FORMAZIONE. She relates with a network of specialized professionals worldwide and speaks fluently four languages- English, French and Spanish and Italian, the mother language. Michael Meyenburg Dr. Michael Meyenburg, is partner of Sladek & Meyenburg, Vienna. He graduated from University of Graz (Doctor of Jurisprudence,) in 1980, from New York University School of Law (MCJ) in 1982 and was admitted to the Vienna Bar in 1987. Dr. Meyenburg’s main areas of practice include Commercial Law, IP and Unfair Competition, Labour Law, and Agency. He acted as President of the UIA Labour Law Commission, 2003–2005 and as Representative of the UIA from 2005–2010. He was member of the Board of ÖV (‘‘Österreichische Vereinigung für gewerblichen Rechtschutz und Urheber-recht’’ Association for IP-Protection and Copyright-Law) from 2007 to 2010 and since then acts as President of ÖV. Marita Dargallo Nieto Studied at the University of Barcelona and obtained a Diploma on EC Law at the College of Europe (Brugges, Belgium). Worked at the EC Commission in Brussels and in two law firms Based in Brussels practising EC Law for a period of four years. She joined the Barcelona Bar Association in 1985. She has been practising in Barcelona since 1989 mostly dealing with international clients. Joined the law firm of SOL MUNTAÑOLA & ASOCIADOS on January 2001 and became partner in 2005. Specializes in International Business Law, Competition, EC law, distribution and IP related matters. Member of the EC and International Law Commission of the Barcelona Bar where she taught for five years the section on ‘‘Merger Control’’ as part of the Competition Law Course taught at the Barcelona Bar. Previously taught the section on State Aids also in a course organized by the Barcelona Bar Association for three consecutive years. Currently teaches a class on IP and Publishing as part of the masters course organized by the University of Barcelona ‘‘Assessorament lingüı́stic Gestió del multilingüisme Serveis editorials.’’ National Vice-President for Spain of the Association International de Jeunes Avocats (AIJA). She has co-organized a seminar on Community Trademarks in xi Author Biographies Alicante in 1996 and another on ‘‘Intellectual Property rights in Labour Relations and Service Provisión’’ in Madrid October 2004, both within AIJA. She has given conferences on trademarks, franchising and distribution and has published articles and contributed to books on competition law, such as ‘‘Antitrust and the New Media,’’ ‘‘Transporte marı́timo y Derecho comunitario: Normas de competenciay prácticas de tarifas desleales,’’ en Anuario de Derecho Marı́timo, volume VII (1989), franchising ‘‘Los contratos de franquicia y el Derecho Comunitario’’ in Revista Jurı́dica de Catalunya 1987, and enforcement of trademarks abroad. Philip Nolan Mr. Nolan is a partner and head of the Commercial Department at Mason HayesþCurran Solicitors, Dublin. Having studied at University College Dublin, De Paul University, Chicago and at the University of Oxford, Mr. Nolan joined Mason HayesþCurran where he completed his training. Mr. Nolan advises both public and private clients in relation to communications, information technology, intellectual property and competition law. He has also developed a focused regulatory advisory practice which includes public procurement law, data protection law and energy law. Anne-Marie Jenkinson Anne-Marie is a solicitor in the Commercial Department at Mason HayesþCurran Solicitors, Dublin. Ms. Jenkinson studied at University College Dublin and University of Westminster, London. Having completed her training at a leading London law firm, Ms. Jenkinson joined Mason HayesþCurran in January 2010. Guillermo Jaime Nudenberg Guillermo Nudenberg is a founding partner of the law firm HLB Raguza Nudenberg. Mr. Nudenberg focuses his practice in business and commercial law. He also has extensive experience in the drafting and negotiation of civil and commercial contracts, contractual conflict resolution, and mergers and acquisitions. Harry Stamelos Harry Stamelos, LLM (Essex University, UK) in EU law and a PhD (Athens University, Greece) in EU law. He practices law in various areas of EU, civil, public and commercial law (company law, banking law, aviation law, securities). He teaches civil, public and criminal law in various institutions and universities (Police Academy, Fire Academy, Nomiki Bibliothiki). He is the author and coauthor of various books (including the Commentary of Greek Civil Code) (1. English Legal Terminology, Nomiki Bibliothiki, 2006, 2. After the collision, abandon the ship, A comparative study of UK and Hellenic Marine Insurance Law, Peter Lang, 2007) and articles in law periodicals (in Greek xii Author Biographies and in English) (1. Les Essais Nucléaires par la Corée du Nord et le Droit International, Revue Hellénique de Droit International (Hellenic Review of International Law) 2007, 371, 2. Both to blame: legal issues of comparative fault and shared liability in the Hellenic Republic, the UK, and the USA, Review of Maritime Law (in Greek) 2007, 273, 3. Developments of competition law in the USA and the EU after 2005, in specific the USA-Russia Memorandum of Understanding and the criminalization of the competition law in Ireland (in Greek), Law of Enterprises and Companies, 2010, 156. Dr. Stamelos currently runs his own law office. Athena Moraiti Ms. Moraiti is a lawyer in Athens, Greece, since 2006. She practices law in various areas of public, civil and commercial law. She has the right to appear and she tries cases as a lawyer before the Greek courts. She teaches public and civil law in institutions and universities (such as the Police Academy, and Centers of Vocational Training). She holds an LLM in public law (Aix Marseille III University, France) and she is a PhD candidate (Athens University, Greece) in public law. She is the author and coauthor of various books (including the Commentary of Greek Civil Code) and articles in law periodicals (in Greek and in French). xiii Table of Contents Editors v Author Biographies vii Note to the Reader xv Themes Part I. Argentina by Guillermo Jaime Nudenberg xxiii 1 Chapter 1: Commercial Agency Agreement under Argentine Law Chapter 2: Exclusive Distribution Agreement under Argentine Law Chapter 3: Franchising Agreement under Argentine Law 1 16 29 Part II. Austria by Michael Meyenburg 49 Chapter 4: Commercial Agency Agreement under Austrian Law Chapter 5: Exclusive Distribution Agreement under Austrian Law Chapter 6: Franchising Agreements under Austrian Law 49 79 109 Part III. Belgium by Marianne Dickstein & Bart Van den Brande 143 Chapter 7: Commercial Agency Agreement under Belgian Law Chapter 8: Exclusive Distribution Agreement under Belgian Law Chapter 9: Franchising Agreement under Belgian Law 143 161 182 Table of Contents Part IV. China by Isabelle Hajjar 199 Chapter 10: Commercial Agency Agreement under Chinese Law Chapter 11: Exclusive Distribution Agreement under Chinese Law Chapter 12: Franchising Agreement under Chinese Law 199 208 216 Part V. Denmark by Eva Bukowski 229 Chapter 13: Commercial Agency Agreement under Danish Law Chapter 14: Exclusive Distribution Agreement under Danish Law Chapter 15: Franchising Agreement under Danish Law 229 242 258 Part VI. Finland by Tanja Jussila & Mikko Peltoniemi 281 Chapter 16: Commercial Agency Agreement under Finnish Law Chapter 17: Exclusive Distribution Agreement under Finnish Law Chapter 18: Franchising Agreement under Finnish Law 281 301 323 Part VII. France by Cristelle Albaric 347 Chapter 19: Commercial Agency Agreement under French Law Chapter 20: Exclusive Distribution Agreement under French Law Chapter 21: Franchising Agreement under French Law 347 370 395 Part VIII. Germany by Raimond Emde 429 Chapter 22: Commercial Agency Agreement under German Law Chapter 23: Exclusive Distribution Agreement under German Law Chapter 24: Franchising Agreement under German Law 429 458 476 Part IX. Greece by Harry Stamelos & Athena Moraiti 493 Chapter 25: Commercial Agency Agreement under Greek Law Chapter 26: Exclusive Distribution Agreement under Greek Law Chapter 27: Franchising Agreement under Greek Law 493 509 527 xx Table of Contents Part X. Hungary by Orsolya Görgenyi & Miklós Boronkay 547 Chapter 28: Commercial Agency Agreement under Hungarian Law Chapter 29: Exclusive Distribution Themes under Hungarian Law Chapter 30: Franchising Agreement under Hungarian Law 547 577 611 Part XI. India by Manoj K. Chhabra & Shilpa N. Galpalli 649 Chapter 31: Commercial Agency Agreement under Indian Law Chapter 32: Exclusive Distribution Agreement under Indian Law Chapter 33: Franchising Agreement under Indian Law 649 661 668 Part XII. Ireland by Philip Nolan & Anne-Marie Jenkinson 675 Chapter 34: Commercial Agency Agreement under Irish Law Chapter 35: Exclusive Distribution Agreement under Irish Law Chapter 36: Franchising Agreement under Irish Law 675 694 712 Part XIII. Italy by Elena Marangoni 733 Chapter 37: Commercial Agency Agreement under Italian Law Chapter 38: Exclusive Distribution Agreement under Italian Law Chapter 39: Franchising Agreement under Italian Law 733 745 756 Part XIV. The Netherlands by Suzan Lap 773 Chapter 40: Commercial Agency Agreement under Dutch Law Chapter 41: Exclusive Distribution Agreement under Dutch Law Chapter 42: Franchising Agreements under Dutch Law 773 796 818 Part XV. Spain by Marita Dargallo Nieto 851 Chapter 43: Commercial Agency Agreement under Spanish Law Chapter 44: Exclusive Distribution Agreement under Spanish Law Chapter 45: Franchising Agreements under Spanish Law 851 872 897 xxi Table of Contents Part XVI. Switzerland by Jean-Louis Collart 927 Chapter 46: Commercial Agency Agreement under Swiss Law Chapter 47: Exclusive Distribution Agreement under Swiss Law Chapter 48: Franchising Agreements under Swiss Law 927 943 960 Part XVII. Turkey by Cemile Demir Gökyayla 977 Chapter 49: Commercial Agency Agreement under Turkish Law Chapter 50: Exclusive Distribution Agreement under Turkish Law Chapter 51: Franchising Agreements under Turkish Law xxii 977 999 1022 Part XIV The Netherlands Chapter 40: Commercial Agency Agreement under Dutch Law by Suzan Lap* I. Introduction 1. The general legal provision applicable to said contract Dutch law contains specific provisions on commercial agency agreements laid down in Articles 428 up to 445 of Book 7 of the Dutch Civil Code (Burgerlijk Wetboek, hereinafter ‘‘DCC’’). A number of these provisions are of a mandatory nature. Article 7:428 DCC sets out the following definition of an agency agreement: ‘‘a commercial agency contract is a contract whereby one party, the principal, instructs the other party, the commercial agent, and whereby the latter binds himself, for a fixed or unlimited term and for remuneration, to act as an intermediary in the conclusion of contracts, and, as the case may be, to enter into such contracts in the name and for the account of the principal, without being his servant.’’ * Attorney-at-law, Amsterdam Bar, Amsterdam. Cristelle Albaric & Marianne Dickstein, International Commercial Agency and Distribution Agreements: Case Law and Contract Clauses, pp. 773–849. # 2011 Kluwer Law International BV, The Netherlands. Suzan Lap If a contractual relationship meets the definitions set out in Article 7:428 DCC, the agency provisions apply. The nomination given to the agreement by the parties is irrelevant. The object of an agency agreement can either be services or products, both to be delivered by the principal to the customer sought by the agent. Explicitly excluded from being an agency agreement is the once-only brokerage (bemiddelingsovereenkomst) agreement. Prior to the implementation of these articles in Book 7, the provisions were inserted in The Dutch Commercial Code.1 The present regulations date back to November 1, 1989, when the law of June 1, 1977 was adapted in order to comply with the EC Directive Concerning Independent Commercial Agents of December 18, 1986 (PbEG 382/17, the ‘‘EC Directive’’). As from January 1, 1994, the aforementioned regulation applies to all agency agreements including those concluded prior to November 1, 1989. The agency agreement is to be considered a species of the contract of assignment (overeenkomst van opdracht). The provisions of Articles 7:400–7:427 DCC (general rules regarding assignment) are therefore also applicable to the extent that these regulations are not overruled by specific provisions on agency agreements. The same applies for the more general principles on agreements derived from Dutch civil law. To the extent that an agency agreement is covered by the Financial Supervision Act (e.g., insurance agreements) (Wet op het financieel toezicht), the provisions included in the Articles 7:428–7:445 DCC are not applicable. In the event the agent is a natural person and employs no more than two assistants and/or conducts a business on behalf of a maximum of two principals, certain provisions of Dutch labor law are applicable, more in particular the Extraordinary Labour Relations Decree (Buitengewoon Besluit Arbeidsverhoudingen). This means that in principle, the prior permission of the competent authority (Centrale Organisatie Werk en Inkomen) is required for the termination of this kind of agency agreement. A notice without such permission is void. Furthermore, the Minimum Wage and Minimum Holiday Allowance Act (Wet Minimumloon en Minimumvakantiebijslag) could under that circumstance be applicable. Moreover, under certain circumstances the relationship between the principal and the agent could be considered an employment relationship for tax purposes. In general an agent (as well as any other undertaking) who maintains a business organization in the Netherlands must register its business with the Trade Register held by the relevant local Chamber of Commerce and comply with the relevant tax regulations (i.e., VAT registration). There are no specific administrative formalities that need to be fulfilled by agents. There are no specific professional bodies with respect to agents. 1. Articles 74 up to 74s. 774 The Netherlands II. Purpose: Agent’s Status—Subagents 1. Purpose Under Dutch law the purpose of the agent’s activities is to act, during a (un)limited period of time, as an intermediary for the conclusion/brokerage of agreements concerning products or services. Pursuant to Article 7:428 sub 1 DCC, the principal is not obliged to grant the agent the right to conclude agreements on its behalf and in its name. However, if such is the case, the articles with respect to mandate2 (lastgeving) and with respect to procuration3 (volmacht) are also applicable to the agency agreement. Mandate concerns agreements of assignment pursuant whereto one party obliges oneself to undertake one or more legal acts for the account of the other party. Procuration applies if a party is represented by another party. 2. Independence Although the agent has to observe timely and reasonable instructions given by the principal, the agent is formally independent of the principal.4 Article 7:428 sub 1 DCC states that the agent, formally, isn’t a subordinate to the principal. However, as set out above, the agency agreement can, under certain circumstances, be considered to be an employment agreement. Contractual Clause: ‘‘The Principal grants to the Agent the right to negotiate the sale or the purchase of the contractual goods /services (the ‘‘Goods’’/ ‘‘Services’’) and to conclude such transactions on its behalf and in its name.’’ OR ‘‘The Agent has continuing authority to negotiate and to conclude the above mentioned transactions on behalf and in the name of the Principal without being the Principal’s subordinate.’’ 3. Subagents If the provisions concerning mandate and procuration apply to the agency agreement (i.e., the agent may conclude agreements on behalf of the principal), Article 7:404 in conjunction with Article 3:64 DCC provide for the conditions of appointing a subagent: the agent can appoint a subagent where it follows from 2. Articles 7:414–7:424 DCC. 3. Articles 3:60–6:79 DCC. 4. Article 7:402 DCC. 775 Suzan Lap the agreement that his task may be performed by other persons under his responsibility (and does not have to be performed by the agent himself). According to Article 6:76 DCC the agent is responsible for the activities of the subagent. Contractual Clause: ‘‘The Agent may appoint, for the purposes of marketing, distributing and selling the Goods/Services, a company, organization or person it deems fit as subagents, provided he informs the Principal at least [ ] month(s) before the appointment. The Agent shall be responsible for the activities of his sub-agents.’’ OR ‘‘The Agent must carry out his activity without recourse to sub-agents.’’ III. Rights and Obligations of the Agent 1. Typical rights and obligations of an agent In accordance with Dutch contract law an agreement is also subject to the principles of reasonableness and fairness (redelijkheid en billijkheid) and, therefore, the agent is obliged to act in good faith towards the principal, defined in a manner of reasonableness and fairness. Article 6:248 DCC provides that an agreement shall have the legal consequences agreed upon, as well as those consequences, subject to the nature of the agreement, which arise from statutory provisions, custom and the principles of reasonableness and fairness. Acting in contradiction to the said principles may result in a provision not being applicable. Moreover, the principles may impose additional obligations on the parties, not explicitly set out in their (written) agreement. Articles 7:401–7:403 DCC provide, in short, for the obligation of the agent (i) to look after the principal’s interests with due care; and (ii) to follow the principal’s reasonable instructions. Article 7:403 sub 1 DCC includes the duty of the agent to provide the principal with information concerning the progress of his activities and the completion of the assignment. Moreover, all contracts procured by him must be notified immediately. Parties are free to include any other kind of duty to be imposed upon the agent based on the general principle of freedom of contract, provided that such clauses are compatible with the aforementioned mandatory statutory provisions as well as principles of reasonableness and fairness. In this respect, it is advisable for the parties to describe the obligations of the agent in the agency agreement in as much detail as possible. 776 The Netherlands Contractual Clause: ‘‘In performing his activities the Agent must look after the Principal’s interests and act dutifully and in good faith; specifically, the agent must: (a) make proper efforts to negotiate and, where appropriate, conclude the transactions he is instructed to take care of by the Principal; (b) communicate to the Principal all the necessary information available to him as soon as possible; (c) comply with reasonable instructions given by the Principal.’’ 2. Specific rights and obligations a. Competition law Commercial agents have a special position under the competition rules. Provided that the agent does not bear financial or commercial risks in relation to its agency activities, restrictive agreements between the principal and the agent fall outside the scope of Article 101 Treaty on the functioning of the European Union (hereafter TFEU) and its Dutch equivalent, Article 6 of the Dutch Competition Act (Mededingingswet). A principal may therefore impose far going restrictions on its agents, such as absolute territorial restrictions and—unless such non-compete obligation on the agent will foreclose the market for competitors of the principal—long term non-compete obligations. If an agent does bear financial or commercial risks in relation to its agency activities, restrictions on the agent will have to be assessed under the competition rules. Bearing this in mind it is noted that both a del credere obligation and a clause on consignment stock could impose commercial risks on the agent. Such risks may have the result that restrictive agreements between the agent and the principal, that would normally fall outside the prohibition on restrictive agreements, may have to be assessed under Article 101 TFEU and Article 6 of the Dutch Competition Act. As a consequence an absolute territorial restriction in an agency agreement may be incompatible with the competition rules. Indeed absolute territorial restrictions on independent sales representatives are generally considered a ‘hardcore’ restriction of competition. Moreover, non-compete obligations on independent sales representatives are generally only exempted for a maximum period of five years and non-compete obligations that continue after termination of the contract are only allowed under strict conditions. b. Del credere clause According to Article 7:429 DCC a del credere clause (making the agent liable for the obligations of third parties resulting from the agreements concluded by the agent on behalf of the principle) has to be agreed upon between the parties in 777 Suzan Lap writing. This provision is of a mandatory nature. The agent’s liability under such clause may not exceed the agreed commission, unless the clause is i) concluded in respect of specific contracts or ii) only applies in relation to contracts concluded by the agent in the name of the principal. The liability is limited to the solvency of the third party (i.e., not the delivery of goods), unless the parties agree otherwise in writing. The court may mitigate the liability of the agent under a del credere clause to the amount of the commission, if it finds that the risk taken on by the agent is clearly disproportionate to the agreed commission. Contractual Clause: ‘‘The Agent shall verify the solvency of Clients as per orders he transmits to the Principal. He shall not transmit orders from Clients of which he knows or ought to know that they are in a critical financial situation, without informing the Principal of the said situation. He shall, furthermore, provide reasonable assistance to the Principal in the process of recovering debts due. The Parties hereby explicitly agree that the Agent [shall act/shall not act] as a del credere agent.’’ Dutch law does not contain any particular provisions concerning sales targets, nor does it contain provisions on the consignment of stock to the agent. If any stock is given in consignment to the agent, parties are free to determine the conditions of such consignment in the agreement. Moreover, they could apply the (regulatory) rules concerning depository (bewaarneming) of Article 7:600–7:608 DCC by analogy. The difference between depository and consignment is that, as an element of the definition of depository, goods that are given in depository are intended to be given back to the bailor. Therefore, parties may want to deviate from the regulatory rules concerning this aspect of the relationship and agree on specific conditions on return or transfer of the goods in their agreement. Contractual Clause: ‘‘The Principal shall provide the Agent with such quantities of the Goods as set forth in the Schedule attached as Annex . These stocks shall remain the ownership of the Principal who will, to the extent permitted by the law, bear all the risks of loss or damage of these stocks. These stocks shall be transported to the Agent’s storage facility located in [ ] at the Principal’s cost. The Agent shall be entitled to the remuneration for his consignment activity as set forth in [ ].’’ ‘‘[ month ] prior to the beginning of each calendar year, the Parties shall agree, in writing, on the sales targets (‘‘Sales Targets’’) for the forthcoming year. The annual Sales Targets shall be calculated based upon the then current sales price applied to the Clients. The Parties shall make their best efforts to reach the targets agreed upon, but the non-attainment shall not be considered as a breach of the contract by a party, unless that party is clearly at fault. The parties may agree, 778 The Netherlands in writing, on a Guaranteed Minimum Target as defined in Annex discuss in good faith the consequences of non-attainment.’’ IV. and agree to Rights and Obligations of the Principal In accordance with Dutch contract law any agreement is also subject to the principles of reasonableness and fairness (redelijkheid en billijkheid) and therefore a general obligation of the agent towards the principal exists to act in good faith, defined in a manner of reasonableness and fairness. The principal is obliged to do everything necessary to enable the agent to perform his duties. These obligations include the duty of the principal to provide the agent with (i) all necessary documentation concerning the goods and services to which the agency agreement applies and (ii) all necessary information for the performance of the agency agreement.5 Provisions that release the principal from these duties are void. Article 7:430 DCC contains a number of mandatory obligations for the principal. These include the obligation for the principal to inform the agent within a reasonable period of acceptance, refusal or non-execution of a commercial transaction. Pursuant to Article 7:430 sub 4 DCC such does not have to be in writing, but Parties may agree otherwise. Moreover, the article includes the obligation for the principal to notify the agent without delay (onverwijld) once the principal anticipates that the volume of commercial transactions will be significantly lower than the agent could generally have expected.6 We note that this provision is stricter than the relevant EC Directive provision since according to the latter notice has to be given within ‘a reasonable period’. In the event the principal does not comply with the aforementioned obligation and the extent to which the volume is decreased can be considered a termination of the relationship, the agent can claim damages from the principal on the basis of Articles 7:439 DCC (concerning the irregular termination (onregelmatige opzegging) of the agency agreement) and 7:441 DCC (which sets out rules for the calculation of the indemnification (omvang van de schadeplichtigheid) in the event of irregular termination). To the extent that the decrease of volume cannot be considered to constitute the termination of the agreement, Article 7:435 DCC contains provisions concerning entitlement to commission for the agent.7 Parties are free to include any other kind of duty to be imposed upon the principal based on the general principle of freedom of contract, provided that such clauses are compatible with the mandatory statutory provisions, as well as principles of reasonableness and fairness. In this respect, it is advisable that parties describe the obligations of the principal in the agency agreement in as much detail as possible. 5. Article 7:430 sub 2 DCC. 6. Article 7:430 sub 3 DCC. 7. Reference is made to theme 6 and 7. 779 Suzan Lap Contractual Clause: ‘‘In its relations with the Agent the Principal must act dutifully and in good faith.’’ ‘‘The Principal must, inform the Agent in writing, within [x days/weeks] after the receipt thereof, of his acceptance, refusal, and of any non-execution of a commercial transaction which the Agent has procured for the Principal.’’ ‘‘The Principal shall notify the Agent in writing without delay (onverwijld) once the Principal anticipates that the volume of commercial transactions will be significantly lower than the Agent could generally have expected.’’ V. Exclusivity and Undertaking Not to Compete 1. Exclusivity If the principal allocates a group of clients and/or a territory to the agent, the agent is deemed to have been granted an exclusive right in respect of such clients/ territory, unless the principal has explicitly (in writing) reserved the right to sell the contract products himself or through other agents, distributors or salesman. The agent is entitled to commission for any transaction concluded with its exclusive customers, even if he wasn’t involved in concluding the particular sales agreement. However, since Article 7:431 DCC is of a regulatory nature, parties are free to include alternative arrangements on the subject matter in the agency agreement. We note that an infringement of the principal of the exclusivity rights of the agent, to which the agent does not object, does not lead to the conclusion that there is no exclusivity or that the agent has processed his rights to exclusivity.8 The subdistrict court (kantonrechter) Maastricht ruled that in the situation of a non-exclusive agency agreement, the principal is allowed to directly approach potential clients.9 However, the principal is not allowed to approach clients on the basis of information provided to him by the agent. Contractual Clause: ‘‘The Principal shall refrain, during the life of this Agency Agreement, from concluding agency contracts covering the same subject-matter with third parties within the Territory. The Agent shall therefore enjoy exclusivity in the Territory for the Goods, Services and Clients.’’ ‘‘The Principal is not entitled to promote and sell the Goods/Services to Clients established within the Territory through his Internet website. In the event, the 8. Supreme Court, Jan. 15, 1971, NJ 1971, 144. 9. Subdistrict Court Maastricht, Jan. 29, 2003, NJ 2003, 253. 780 The Netherlands Principal is solicited by a Client geographically located within the Territory, the Principal shall systematically invite the Client to contact directly the Agent.’’ OR ‘‘The Principal is entitled to promote and sell the Goods/Services through his Internet website to Clients established within the Territory.’’ ‘‘The Agent shall be entitled to a commission in respect of the sales made by the Principal through Internet to Clients established within the Territory.’’ OR ‘‘The Agent shall not be entitled to a commission in respect of the sales made by the Principal through Internet to Clients established in the Territory.’’ 2. Undertaking not to compete Provided that the agent qualifies as a ‘genuine agent’ in respect of the competition rules,10 the freedom of contract allows the parties to agree upon an undertaking not to compete during the agency agreement, provided, however, that the non-compete obligation does not foreclose the market for competitors of the principal, since such foreclosure could be contrary to the competition rules. The possibility of agreeing upon an obligation not to compete after termination of the agency agreement is provided for in Article 7:443 DCC. Such post contractual non-compete obligation is only valid if agreed upon in writing and for a maximum period of two years. Furthermore, it has to concern (i) those goods and/ or services forming the subject of the agency agreement and (ii) the territory or group of clients for which the agent conducted his activities. The principal cannot invoke a non-competition clause in the specific circumstances as set out in Article 7:443 sub 3 DCC, that is: (a) the principal has terminated the agreement without the consent of the agent, without observing the legal or contractual term of notice and without an urgent reason, notified forthwith to the commercial agent; (b) the agent has terminated the agency agreement for an urgent reason, notified to the principal forthwith and for which the latter can be blamed; and (c) the agency agreement has been terminated by a judicial decision based on circumstances for which the principal can be blamed. Article 7:443 DCC contains mandatory rules of Dutch law. Please note that, in the event the agency agreement does not contain a non-competition clause, the fact that an agent would compete with his (former) principal can, under circumstances, qualify as a wrongful act (onrechtmatige daad). 10. Reference is made to theme 3. 781 Suzan Lap Contractual Clause (depending on possible competition law issues): ‘‘Without the prior written consent of the Principal, the Agent shall refrain from, and shall ensure that entities it is controlling and which undertake competing businesses shall refrain from, distributing any Goods or Services (including production activities) which are in direct or indirect competition with the Goods or Services covered by the present Agreement for the entire term of this Agreement. The Agent may represent or distribute any Goods or Services which are (i) not competing with the Goods or Services covered by this Agreement, and (ii) not manufactured nor provided by a competitor under the condition the Agent informs the Principal in writing, in advance, of such activity. The Agent declares and the Principal accepts that the Agents represents and/or distributes, directly or indirectly the Goods or Services listed under Annex on the date on which this Agreement is executed.’’ The period after the Agreement is covered in the following provision: ‘‘The Agent shall refrain from representing or distributing Goods/Services which are (i) either in competition with the Goods or Services covered by the present Agreement, or (ii) not competing but provided or manufactured by a competitor within the Territory for a maximum period of 2 years to be calculated as of the date of termination of the Agreement.’’ An example of case law in respect of non-competition is the verdict of the President of the District Court of ’s-Hertogenbosch, in which the Court ruled that the agent was not bound by the post non-competition clause, because the principal made the termination of the agency agreement inevitable on the basis of facts and circumstances which where attributable to the principal.11 VI. Remuneration 1. Commission a. Right to commission during the contract termination Pursuant to Article 7:431 sub 1 DCC, the agent is entitled to commission on commercial transactions concluded during the period covered by the agency agreement in the event (i) the transaction has been concluded as a result of his action or (ii) has been concluded with a party the agent had previously concluded such 11. Pres. District Court ’s-Hertogenbosch, Jan. 25, 1996, KG 1996, 77. 782 The Netherlands transaction with. Finally, the agent shall be entitled to commission on iii) transactions concluded with a party belonging to the (implicitly or explicitly) clients or the territory exclusively allocated to the agent.12 Article 7:431 sub 1 DCC is of a regulatory nature and therefore parties are free to agree on any other kind of arrangement in this respect. The agent shall not be entitled to the commission referred to in Article 7:431 sub 1 DCC, if such commission is due to his predecessor, unless it follows from the circumstances that it is reasonable to share the commission between the agent and his predecessor.13 Contractual Clause: ‘‘The Agent shall be entitled to commission on commercial transactions concluded during the period covered by the Agency Agreement in the event: (i) the transaction has been concluded as a result of his action, or (ii) has been concluded with a party the Agent had previously concluded such transaction with, or (iii) the transaction is concluded with a party belonging to the Clients or the Territory assigned to the Agent, unless explicitly agreed between the Agent and the Principal the Agent has not been granted exclusivity in relation to such Clients or Territory. The Agent is not entitled to commission if, pursuant to article 9, it is due to his predecessor, unless it follows from the circumstances that it is reasonable to share the commission between the Agent and his predecessor.’’ b. Right to commission after the contact termination According to Article 7:431 sub 2 DCC (mandatory law), the agent shall be entitled to commission on commercial transactions prepared by the agent before the agency agreement has terminated, but concluded after the agency agreement has terminated: (a) if the transaction is mainly attributable to the agent’s efforts during the period covered by the agency agreement and if the transaction was entered into within a reasonable period after this agency agreement terminated; or (b) if, in accordance with the conditions mentioned in Article 7:431 sub 1 DCC (see above), the order of the third party reached the principal or the agent before the current agency agreement terminated. 12. Reference is made to theme 5. 13. Article 7:431 sub 2 DCC. 783 Suzan Lap Contractual Clause: ‘‘The Agent shall be entitled to commission on commercial transactions prepared by the Agent before the Agreement has terminated, but concluded within the Territory after the Agreement has terminated: (a) if the transaction is mainly attributable to the Agent’s efforts during the period covered by the Agreement and if the transaction was entered into within a reasonable period after this Agreement terminated; or (b) if, in accordance with the conditions applicable to entitlement to commission during the Agreement, the order of the third party reached the Principal or the Agent before the current Agreement terminated.’’ c. Payability of the commission In general, Article 7:405 DCC provides that compensation (loon) is owed by an assignor (i.e., the principal) in case an agreement of assignment is conducted in the exercise of the profession or business of the assignee (i.e., the agent). Sub 2 of this article provides that in the event the amount of compensation has not been set by the parties, an amount of compensation is due which has been calculated in a customary manner or, in absence thereof, a reasonable compensation. This provision is not of a mandatory nature and may be deviated from. More specifically, in respect of an agency agreement, the agent’s right to commission arises at the moment the contract with the third party has been concluded.14 In cases where the agent’s role is limited to intermediary services, the contract is deemed to have been concluded as soon as the client’s order has been passed on by the agent to the principal, unless the principal, within a reasonable period of time, notifies the agent of his refusal or conditional approval of such order. In case the parties did not agree on a reasonable period, this period shall be one month.15 Pursuant to Article 7:432 sub 2 DCC the provision that payment of commission is subject to performance under the contract must be explicitly agreed upon by the parties. This provision is of a mandatory nature. Even if payment of the commission has been made subject to performance of the contract, the agent shall be entitled to the commission when the third party has executed his part of the transaction or should have done so if the principal had executed his part of the transaction in a timely and correct manner.16 Parties may not derogate from this article to the detriment of the agent.17 14. 15. 16. 17. 784 Article Article Article Article 7:426 DCC. 7:432 sub 1 DCC. 7:432 sub 3 DCC. 7:445 sub 2 DCC. The Netherlands The principal must supply the agent with a monthly written statement regarding the commission.18 Parties may agree that such statement is only issued every two or three months. Article 7:434 DCC provides that the commission ultimately becomes due on the date on which the statement must be issued. Article 7:445 DCC stipulates that parties may not derogate from Article 7:434 DCC to the detriment of the agent. Please note that according to Article 7:435 DCC the agent may also be entitled to commission in case the principal did not use the services which the agent could have rendered or used the services to a lesser extent than the agent could reasonably have expected. Reference is made for example to the verdict of the District Court Amsterdam, in which the court ruled that the voluntary dissolution of the principal’s company is not a circumstance that should have an effect on the entitlement of the agent to commission due.19 Contractual Clause: ‘‘The commission shall become due as soon as and to the extent that one of the following circumstances occurs: (a) the Principal has executed the transaction; or (b) the Principal should, according to his agreement with the third party, have executed the transaction; or (c) the third party has executed the transaction. The commission shall become due at the latest when the third party has executed his part of the transaction or should have done so if the Principal had executed his part of the transaction in a timely and correct manner. The commission shall be paid not later than on the last day of the month following the month in which it became due.’’ d. Right to inspect the principal’s books Article 7:433 sub 2 DCC recognizes the right of an agent to inspect the principal’s books, but not the right to request for delivery of such books. For completeness sake we note that Article 7:433 sub 2 DCC does not recognize the right of the agent to request for an extract of the books. Rejection by the principal of inspection of books by the agent has led to two rulings of the Supreme Court.20 The first ruling confirmed that the principal in general is obliged to honor the right of the agent. The second ruling stated that the 18. Article 7:433 sub 1 DCC. 19. District Court Amsterdam, Feb. 6, 1980, NJ 1980, 459. 20. For example: Supreme Court Feb. 28, 1964, NJ 1964, 456 and Supreme Court Jan. 24, 1986, NJ 1987, 56. 785 Suzan Lap right of an agent to request for inspection is accessory (accessoir) to the entitlement to commission. Therefore the right of inspection is limited to inspection in order to verify the amount of the commission. It does not grant the agent the right for a general inspection of the books. The agent may invoke the assistance of a expert (accepted by the principal) in the inspection of the books or the parties may agree that a third party will perform the inspection. If the parties do not agree on the identity of such third party the agent may request the court to appoint one. The law provides for a general obligation of confidentially as regards the inspection of the books. Parties may however whish to make clear (additional) arrangements in this respect. Contractual Clause: ‘‘The Agent shall be entitled to demand that he be provided with all the information which is available to the Principal, and in particular may request to inspect the books of the Principal, and which he needs in order to check the amount of the commission due to him. The agent’s right to inspect the Principal’s books does not include the right to require delivery of the books or to take copies or extracts of the Principal’s books.’’ VII. Conclusion and Termination of the Agency Agreement 1. Validity Dutch law does not provide that an agency agreement has to be agreed upon in writing. Having said this, there are several reasons why a written agreement is advisable. First, Article 7:428 sub 3 DCC stipulates that each of the parties is obliged to provide the other party with a written statement, containing the current content of the agency agreement, upon request of that other party. Moreover, arrangements deviating from certain statutory (mandatory) provisions need to be ‘explicitly’ agreed upon, such as a del credere clause and a non-compete clause. Finally, from an evidential perspective, it is in the interest of both parties to agree upon the agency agreement in writing. 2. Duration: limited versus unlimited duration Parties to the agency agreement are fee to agree on a limited or unlimited duration of the agreement. Article 7:436 DCC provides that an agency agreement, which is continued by both parties after expiry of the initially agreed limited duration, binds the parties for an unlimited period upon the same conditions. 786 The Netherlands 3. Notice period Dutch legislation provides for a minimum mandatory notice period of one month during the first year of the agency agreement, two months during the second year of the agency agreement and three months in the following years. Parties may agree on a longer notice term, however, such a term may not be shorter for the principal than for the agent.21 In the event parties have not agreed upon a notice term, Article 7:437 DCC stipulates that a term of notice of four months applies, which period is to be extended by one month after the third anniversary of the agency agreement and to be extended by two months after the sixth anniversary of the agency agreement.22 Unless otherwise agreed by the parties, the end of the notice period must coincide with the end of a calendar month.23 Pursuant to Article 7:438 DCC, the agency agreement will terminate in case the agent passes away. Parties are free to include an arrangement in addition to this statutory provision. We note that sub 2 of Article 7:438 DCC provides that in the event the principal passes away the heirs of the principal as well as the agent are authorized to terminate the agency agreement, within nine months after the decease, with a notice period of four months. Contractual Clause: ‘‘This Agreement may only be amended by an instrument in writing signed by the Parties. This Agreement contains the whole Agreement between the Parties and replaces any other preceding agreement between the Parties on the subject. This Agreement is concluded for a period of years. In the event this Agreement is continued to be performed after that period has expired, it shall be deemed to be converted into an agency agreement for an indefinite period.’’ 4. Indemnities Articles 7:439–441 DCC contain mandatory provisions with respect to termination of the agency agreement by the agent or the principal without due observance of its term or the proper notice term. The agency agreement ends on the day of the irregular termination. However, the party that has terminated the agency agreement without taking into account the agreed or lawful notice term, is obliged to pay damages to the other party, unless that party terminated the agreement for a valid urgent reason (dringende reden). Article 7:439 DCC provides for the consequences of an irregular termination (onregelmatige opzegging) of an agency agreement. 21. Article 7:437 sub 2 DCC. 22. Article 7:437 sub 1 DCC. 23. Article 7:437 sub 3 DCC. 787 Suzan Lap According to Article 7:439 sub 2 DCC, an urgent reason exists in the event that circumstances have occurred that have resulted in a situation that it is not reasonable to expect the terminating party to continue the agreement, not even temporarily (examples are listed below under ‘case law’). Sub 4 of Article 7:439 DCC provides that any stipulation which entitles one of the parties to—independently— make the assessment whether an urgent reason exists for termination of the agency agreement is null and void. To avoid the risk that the urgent reason which the terminating party invokes, turns out not to be considered an urgent reason that justified the immediate termination; pursuant to Article 7:440 DCC, parties can request the subdistrict court (kantonrechter) to dissolve (ontbinden) the agency agreement in the event of (i) circumstances giving rise to an urgent reason within the meaning of Article 439 sub 2 DCC; or (ii) a change in circumstances of such a nature that fairness (billijkheid) requires that the contract be terminated immediately or after a short period. This dissolution by the court concerns the future relationship between the agent and the principal and therefore no obligation(s) to undo (ongedaanmakingsverbintenis) as set out in Article 6:271 DCC will arise. The court may rule that one of the parties is obliged to pay a compensation for damage to the other party. Pursuant to Article 7:441 DCC, the party who is entitled to compensation on the basis of Article(s) 7:439 and/or 7:440 DCC has two options. The first one is to demand a fixed indemnity, which amounts to the commission the agent would have earned if proper notice had been given. Secondly, there is an option to claim full compensation in which case the extent of the damage must be evidenced by the party requesting such full compensation. This full compensation covers the period up to the moment the agency agreement would have ended, should the proper term of notice been taking into account. Please note that the court may mitigate the amount of compensation. According to case law, the specific ruling of the court shall depend on the circumstances of the case and the interests of both parties. Contractual Clause in respect of irregular termination: ‘‘Without prejudice to its other rights hereunder or under applicable law, this Agreement may be terminated by a Party with immediate effect and without being liable for damages upon written notice to the other Party in case of a valid urgent reason (dringende reden), including but not limited to the following reasons: – the other Party has been granted a suspension of payments (surséance van betaling), makes a voluntary arrangement with all or a substantial part of its creditors, becomes subject to an administrative order to that effect or has been declared bankrupt (failliet); or – the other Party ceases to exist or is in the process of winding-up or liquidating its activities and/or assets or a resolution to that effect has been taken in relation to such party; or 788 The Netherlands – the other Party commits a material breach of any of the provisions of the Agency Agreement, and, in case of a breach capable of remedy, it fails to remedy the same within [30 days] of the receipt of a written notice by the other party, giving particulars of the breach and requiring it to be remedied.’’ The Dutch legislator has opted for a compensation of goodwill as provided for in Article 17 paragraph 2 of Directive 86/653. Dutch law provides for an arrangement concerning goodwill remuneration (klantenvergoeding) in Article 7:442 sub 1 and 2 DCC, which articles stipulate that the agent shall be entitled to a goodwill remuneration at the termination of the agency agreement if and to the extent that: – the agent has brought the principal new clients or has significantly increased the volume of business with existing clients, and the principal continues to derive substantial benefits from the business with such clients, and – the payment of this indemnity is equitable (see below under ‘case law’) having regard to all the circumstances and, in particular, the commission lost by the agent on the business transacted with such clients. Furthermore, it is included that the amount of a goodwill remuneration may not exceed a figure equivalent to an indemnity for one year calculated from the agent’s average annual remuneration over the preceding five years, and if the duration of the agreement was less than five years, the indemnity shall be calculated on the average for the period of its duration. Article 7:442 sub 3 DCC dictates that the agent shall lose his entitlement to a goodwill remuneration in the instances provided for in Article 7:442 sub 1 DCC, if within one year following termination of the agency agreement the agent has not notified the principal that he intends pursuing his entitlement to a goodwill remuneration. From the principal’s perspective it is often more advantageous not to include a clause on the goodwill compensation in the agreement or if a clause is included to keep it as simple as possible in order to avoid an extension of the rights of the agent. Although a contractual clause containing a calculation method for the goodwill compensation, that deviates from the statutory rule, will not be enforceable,24 the principal may attempt to limit the amount of goodwill compensation that may be due by negotiating a low commission level and a separate fee for ‘additional’ services, which do not constitute part of the agency activities, or, if such structure is not possible in view of the ‘pure’ agency character of the activities, the principal could include a clause in the considerations to the agreement (or in body of the agreement) that clarify/limit the agent’s contribution to the goodwill of the principal (e.g., because the principal has to perform a lot of activities itself to consolidate the order of the customer brought in by the agent or because the parties agree that the level of the commission already reflects a goodwill element). 24. District Court ’s-Hertogenbosch Apr. 23, 2009. 789 Suzan Lap Whether the principal can successfully invoke the limiting effect of such clauses will depend on the circumstances of the case. Contractual Clause: ‘‘The Agent shall be entitled to a goodwill remuneration (klantenvergoeding) in accordance with article 7:442 DCC.’’ Article 7:442 sub 4 (a)–(c) DCC dictate that a goodwill remuneration shall not be payable by the principal (a) where the principal has terminated the agency agreement because of default attributable to the agent which would justify, immediate termination of the agency agreement; (b) where the agent has terminated the agency agreement, unless such termination is justified by circumstances attributable to the principal or on grounds of age, infirmity or illness of the agent in consequence of which he cannot reasonably be required to continue his activities; (c) where, with the consent of the principal, the agent assigns his rights and duties under the agency agreement to another person. Finally, we note that pursuant to Article 7:445 DCC, parties may not derogate from Article 7:442 DCC to the detriment of the agent before an agency agreement expires. 5. Case law with regard to the payment of (goodwill) compensation upon termination a. General In general, if the agent can proof that it has contributed to increasing the sales volume of the principal (first criteria), Dutch courts tend to take the maximum compensation for goodwill (one year’s commission) as a starting point, after which this amount may be decreased if it deems such maximum compensation inequitable (second criteria). b. With regard to the notion of ‘equitable’ The Supreme Court stated that the justification of compensation must be found in the fact (which fact often arises as a result of agency agreements) that the agent in the event of continuation of the agency agreement could have profited of his earlier constructed group of clients, which opportunity disappears with the termination of the agency agreement.25 The Court in Zwolle-Lelystad ruled on July 4, 2006, that in the case at hand the circumstances to be taken into account to determine whether the amount of goodwill remuneration would be equitable, were: – the turnover realized by the agent on behalf of the Principal was slightly decreasing in the period before termination of the agency agreement, which 25. Supreme Court, Mar. 2, 1990, NJ 1991, 50. 790 The Netherlands would definitely had consequences for the amount of provision the agent would have been entitled to (in the event of continuing the agency agreement); and – the agent was not subject to a non-compete clause, resulting in the possibility for the agent to approach clients of the principal in relation to a competitive business. It would therefore be possible that the agent would have benefits from its clients, although the agency agreement was terminated. Please note that the notion of ‘equitable’ refers only to the amount of the indemnity the agent is entitled to and is not to the entitlement to compensation. The right to compensation can, however, be determined to zero. Furthermore, it is noted that the agent may only rely upon an equitable indemnity (Article 7:442 sub b DCC) if the conditions of Article 7:442 sub a DCC are met. Termination of the agency agreement solely does not justify an entitlement to maximum compensation. c. With regard to ‘equitable’ having regard to all the circumstances Payment of the goodwill remuneration needs to be equitable depending on the circumstances of the case. The circumstances that could be taken into account are, for example, lost provision from agreements with clients, the duration of the agency agreement, the amount of provision and whether the parties agreed that this already included a goodwill component, whether or not a non-compete clause has been agreed upon between the parties, the financial situation of the agent and the principal and the initial costs made by the agent. Some examples: – Goodwill calculation method provided for in agreement unenforceable. However, despite average annual commission of EUR 700,000, a goodwill compensation of EUR 200,000 was deemed equitable since (i) the turnover brought in by the agent was already decreasing in the period before the termination, therefore the expectation was that the level of commission would be lower if the agreement where to be continued; and (ii) the agent also received EUR 500,000 damages compensation on basis of urgent cause for termination;26,27 – A goodwill compensation to the level of 50% of the average annual commission was deemed equitable, because the principal had to perform a lot of activities to consolidate the orders of the customers;28 – Considering the long lifetime of the products new orders from existing customers were rare, however, such customers did require servicing of the products and the supply of spare parts, therefore in calculating the average commission, the commission paid in relation to new customers 26. Reference is made to s. VII 4 above. 27. District Court s’-Hertogenbosch, Apr. 23, 2009. 28. Supreme Court, Mar. 31, 2006. 791 Suzan Lap was taken into account for 100% and commission paid to the agent in respect of existing customers for 50%;29 – The fact that the agent did not perform to the best of its abilities and therefore the termination of the agency agreement is contributable to the agent does not take away from the agents entitlement to a (full) goodwill compensation, particularly if the principal did not complain about the level of performance during the course of the agreement.30 d. With regard to urgent reasons for termination According to Dutch case law urgent reasons for the agent can be, among other circumstances, the appointment of a second agent, while the first agent is exclusively authorized or the situation that a principal uses the services of the agent in a far less extent than the agent could expect. Urgent reasons for the principal could for example be adjudication of bankruptcy of the agent, fraud by the agent or breach of the non-compete obligation. VIII. Assignment Unless otherwise agreed in the agency agreement the parties to the agency agreement may assign its/their rights to a third party. Article 6:159 DCC provides for the requirements for an assignment of contract. Article 6:159 DCC stipulates that the cooperation of the counterparty of the assignor is required in the event of an assignment of contract. Furthermore, such assignment can only be effected by means of a deed between the assignor and assignee. The assignee (a third party) will be bound by the obligations set out in the agency agreement between the principal and the former agent. Please note that in the event of an assignment of the agent’s rights and obligations to a third party in accordance with arrangements made with the principal, no goodwill remuneration shall be owed by the principal to the (former) agent.31 Contractual Clause: ‘‘None of the Parties shall have the right to transfer its rights or obligations arising from the Agency Agreement to a third party without the prior written consent of the other party.’’ 29. Subdistrict Court Zwolle, Apr. 6, 2006. 30. Subdistrict Court Apeldoorn, Jan. 7, 1998. 31. Article 7:442 sub 4(c) DCC. 792 The Netherlands IX. Jurisdiction/Escalation Clause 1. Amicable settlement Amicable settlement is not subject to restrictions under Dutch law and Parties may always try to amicably settle any dispute. 2. Arbitration or litigation (ordinary courts) In accordance with Articles 1020 and 1074 of the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering—‘‘CCP’’) it is possible to include an option for Dutch or foreign arbitration in an agency agreement. The procedural rules are set in Article 1020 and further CCP. The Netherlands has signed and ratified the 1958 Convention of New York on the Recognition and Enforcement of Foreign Arbitral Awards. Besides these arbitration rules it is also possible to stipulate that any dispute will be settled pursuant to the Arbitration Rules of the Netherlands Arbitration Institute. The total number of arbitrators should be odd. Dutch courts will decline jurisdiction if a party invokes a valid arbitration clause before putting forward other defenses. In principle, an arbitrational clause does not preclude a party from petitioning a Dutch court to take conservatory measures or from instituting summary proceedings before a Dutch court, if the court would have jurisdiction otherwise.32 The remedy of arbitral appeal is only available, if parties by agreement have provided therefore. A party may seek recognition and enforcement of a foreign arbitral award on the basis of Article 1075 (in conjunction with an international treaty, such as the New York Convention) or 1076 CCP. Leave for enforcement is seldom denied. In international cases, a Dutch court will first of all investigate if EC Regulation 44/2001 is applicable, and if so, it will determine whether the requirements of Article 23 (choice of court) are met. In other international cases a Dutch court may deem a choice of court clause valid under Article 17 of the Treaty of Lugano of September 16, 1988, the revised Treaty of Lugano of October 30, 2007, or Article 8 CCP. There are restrictions to the choice of court in case the contract qualifies as an employment contract. Articles 93 (absolute competence—see our comments below), 99, 100 (both relative competence—see our comments below) and 108 CCP (freedom of choice of law) are relevant in national cases, and in international cases to determine internal jurisdiction. In principle jurisdiction shall be exclusive, unless the parties have agreed otherwise. Dutch law provides for a distinction between absolute and relative competence of the courts. Pursuant to Articles 99 and 100 CCP both the court of the place of business of the defendant as well as the place of business of the agent (if the principal is defendant) is relative competent. The choice of a relative competent court is allowed pursuant to Article 108 CCP. Article 93 CCP provides that the subdistrict court (kantonrechter) is exclusively the absolute, competent court in 32. Articles 1022 and 1074 CCP. 793 Suzan Lap the Netherlands with regard to agency agreements. An agency agreement derogating from this procedural rule is null and void. If you do not know the places of the subdistrict courts it is recommended to have a general choice of court clause. Contractual Clause: ‘‘The parties shall first attempt, without prejudice to the current article, to settle amicably any dispute arising out of or in connection with the current Agreement.’’ ‘‘Any dispute arising out of or in connection with this Agreement or any agreement resulting there from, which cannot be settled amicably, shall be settled pursuant to the [ ICC Arbitration Rules/Arbitration Rules of the Netherlands Arbitration Institute]. The arbitration shall be conducted by a panel of [3] arbitrators, one of whom shall be nominated by each Party, with the appointed by . The location of the arbitration shall be (in The Netherlands), and the language of the arbitration shall be .’’ OR ‘‘Any dispute arising out of or in connection with this Agreement or any agreement resulting there from, which cannot be settled amicably, shall be submitted to the competent court of The Netherlands.’’ In respect to the clause concerning arbitration we note that it would be an option to also include reference to the relocation of costs. X. Applicable Law Pursuant to Article 1054 CCP Dutch arbitrators should observe a choice of law. A Dutch Court will apply Dutch International Private Law to determine whether a choice of law is valid. An agency agreement falls under the scope of the Hague Convention of March 14, 1978 on the Law Applicable to Agency (‘‘Hague Agency Convention’’), which entered into force on May 1, 1992. The new European Regulation 593/2008 (‘‘Regulation Rome I’’) determines the law applicable to contracts concluded after December 17, 2009. This Regulation is the successor of the 1980 Rome Convention on the law applicable to Contractual Obligations. In case the litigious subject matter is covered by both the Regulation Rome I as the Hague Agency Convention, the convention prevails (Article 25 Regulation Rome I ). In arbitrational procedures a choice of law is not restricted to national laws, and can include for instance international trade usages (‘‘lex mercatoria’’) and the UNIDROIT Principles. In any case the arbitrators should consider the relevant trade usages.33 It is not certain whether a Dutch court will allow a choice for nonnational law. In other words, the court should use these rules and principles as 33. Article 1054 CCP. 794 The Netherlands supplementary to the agency agreement, but it is not certain whether these rules and principles can derogate from mandatory provisions of national law which are applicable to the case. Pursuant to Article 5 Hague Agency Convention, the internal law chosen by the principal and the agent shall govern the agency agreement (if based on procuration) between them. Also the Regulation Rome I honors a choice of law clause.34 Please note that a choice of law clause in an agency agreement is not automatically applicable to any further (sales) agreements following from the agency agreements, that is procured by the agent. A choice of law cannot preclude the applicability of certain public policy provisions or of mandatory provisions of a state with which the situation has a certain close connection. Following the Ingmar Eaton decision, in which the European Court of Justice35 decided that Articles 17 and 18 of the EC Directive (concerning the (goodwill)compensation upon termination of the agency agreement) are of a public nature and therefore precede despite the choice of law of the parties. Dutch courts tend to follow this rule,36 unless the parties to the agreement have opted for the laws of another EU country.37 Contractual Clause: ‘‘This contract [as well as any (sales) contract concluded on the basis this contract] [is/are] governed by the laws of (name of the country the law of which is to apply).’’ 34. 35. 36. 37. Article 3 Regulation Rome I. ECoJ Nov. 9, 2000, NJ 2005, 332. Arnhem District Court, Jan. 28, 2005, NIPR 2005, nr 146. Zwolle District Court, Nov. 7, 2001, NIPR, nr 120. 795 Suzan Lap Chapter 41: Exclusive Distribution Agreement under Dutch Law by Suzan Lap* General Preliminary Note In anticipation of the detailed explanation below, the following general principles should be considered when drafting a distribution agreement: – Distribution agreements are not specifically addressed under Dutch legislation. As a consequence, the general law of contract and the provisions relating to contracts of sale have to be taken into account when drafting a distribution agreement; – Case law on distribution (agreements) is highly casuistic; – A company in the Netherlands must register its business with the Trade Register held by the relevant local Chamber of Commerce and comply with the relevant tax regulations; – The principles of reasonableness and fairness (redelijkheid en billijkheid) are the guiding force behind Dutch contract law, so a distribution agreement must be construed and performed in accordance with such principles; – The principles of reasonableness and fairness may not only impose additional obligations, it may also have a limiting effect. A clearly stipulated contractual provision may be set aside if the provision concerned is unacceptable under said principles; – A distribution agreement does not need to be in a written form; – Dutch law does not provide for specific provisions in respect of indemnities in case of termination of a distribution agreement. The rules are set by case law provided by the relevant courts. Distribution agreements are not specifically addressed in Dutch law. They are governed by the general rules of contract law. Books 3, 6, 7 of the Dutch Civil Code (‘‘DCC’’) contain the major part of the Dutch statutory provisions on contract law. Most of the provisions are of a regulatory nature and the parties to an agreement are—to a large extent—free to determine the conditions of their relationship. In view hereof—and taken into account the generality of each theme—the comments to each of the chapters below should neither be considered comprehensive nor complete. The aim is to provide the reader with some insight on Dutch (case) law for each theme. Moreover, the draft clauses provided herein, should be considered as suggestions for possible solutions to deal with a certain theme. The provisions relating to Dutch competition law are applicable to distribution agreements that have an effect in the Netherlands. The Dutch Competition Act * Attorney-at-law, Amsterdam Bar, Amsterdam. 796 The Netherlands (Mededingingswet) is mainly based on the EC competition rules. Pursuant to Article 12 of the Dutch Competition Law, the European block exemptions are directly applicable under Dutch national competition law. In this respect reference is made to the EC regulation on the block exemption in relation to vertical restraints (EC Regulation 2790/1999) (‘‘BEVR’’).1 We note however that, contrary to the EU de minimis exemption, the statutory Dutch de minimis exemption also exempts hardcore restrictions that meet the thresholds set out in Article 7 of the Dutch Competition Act. Moreover, the 1960 Vienna Convention on Sale of Goods (the ‘‘Vienna Convention’’) may apply to the international sales of goods agreements resulting from distribution agreements. The Vienna Convention only applies to contracts resulting from a distribution agreement, not to the distribution agreement itself. Due to the lack of distributorship-specific legislation, there is no statutory definition of a distribution agreement. However, in both Dutch case law and general practice a distribution agreement is usually referred to as: an agreement whereby one party (the distributor) purchases the goods contracted for from the manufacturer or another distributor (the supplier) under a purchase agreement and agrees to distribute and resell these goods to third parties in his own name and for his own account. The supplier enters into a sales agreement with the distributor and they agree on the (wholesale) prices and other conditions of sale. The supplier delivers the products to the distributor who pays the invoice. The distributor subsequently resells the products under his own name and for his own account to customers, establishing his own prices. Exclusive distributorship is a form of distributorship whereby the supplier undertakes to supply the products contracted for in the contractual territory or on behalf of a specific client group only to the distributor. The supplier agrees to refrain from appointing other distributors or agents in the contractual territory/ clientele and from direct sales in the territory/to the allocated clientele. In return for such territorial exclusivity and protection, the distributor generally agrees to concentrate its activities solely on the resale of the products contracted for and/or not to represent competing products. Exclusivity must be agreed upon and can be related to specific contractual products and/or a specific territory and/or a specific clientele. In general, a distributor (as well as any other entrepreneur) who maintains a business organization in the Netherlands must register his business with the Trade Register held by the relevant local Chamber of Commerce and comply with the relevant tax regulations (i.e., VAT registration). There are no specific professional bodies for distributors. 1. Please note that the current BEVR expires in May 2010. 797 Suzan Lap I. Precontractual Information Disclosure 1. Main legal characteristics Dutch law does not contain regulations with respect to precontractual information disclosure. Primarily, the principles of reasonableness and fairness (redelijkheid en billijkheid) apply to such obligation, as well as the provision concerning error (dwaling).2 The principles of reasonableness and fairness are the guiding principles of Dutch contract law, that is contracts must be entered into, construed and performed in accordance with reasonableness and fairness. These principles may imply that both parties to the distribution agreement have to provide the other party with relevant information. Moreover, parties are obliged to take reasonable action to prevent that the other party agrees upon an agreement under the influence of incorrect understandings (i.e., error). Reference is made in this respect to, for example, the decision of the Supreme Court in the case Baris/Riezenkamp (NJ 1958, 67). In this case, the court ruled that, a party considering entering into an agreement has the obligation, within reasonable boundaries, to prevent that the other party enters into such agreement under the influence of incorrect understandings. Dutch case law provides in the following consideration concerning precontractual disclosure of information and examination: ‘‘the extent to which the seller needs to disclose information to the purchaser, also depends on what the seller may expect from the examination effort of the purchaser.’’3 Contractual Clause:4 ‘‘The Supplier is obliged to provide the Distributor with all reasonable information with respect to its business operations, allowing the Distributor to make an informed decision prior to signing this Agreement.’’ II. Contract Formation 1. Forms For an agreement (i.e., the Distribution Agreement) to be valid, the following requirements must be met: (i) there must be an offer and an acceptance of that offer;5 an agreement is reached by the acceptance of the offer;6 2. 3. 4. 5. 6. Article 6:228 DCC. For example Supreme Court, Dec. 22, 1995, NJ 1996, 300 with regard to a due diligence. Note of contributor: the contractual clauses included in this chapter are only suggestions. Article 6:217 DCC. Article 3:37 DCC. 798 The Netherlands (ii) any legal act requires the intention of a party regarding the legal consequences revealed by a statement to that effect;7 (iii) each of the parties must be competent (e.g., a minor or a person under legal restraint is not competent) to enter into an agreement, otherwise the contract is voidable.8 In this respect it is also relevant that a legal entity is represented by a natural person authorized to do so; (iv) the rights and obligations under the agreement should be identifiable or at least the criteria of establishing these rights should be set forth;9 (v) the agreement may not contravene public order, mandatory law and good morals (goede zeden) otherwise it is null and void by operation of law;10 (vi) the limits imposed by the principles of reasonableness and fairness should be taken into account. See the General Preliminary Note. Pursuant to Dutch law no registration or particular form is required for a distribution agreement to be valid. However, for evidentiary purposes an agreement in writing is preferable. Parties are free to stipulate in their negotiations (which arrangement could be laid down in a letter of intent) that a written form of agreement is required in order for the envisaged distribution agreement to come into effect. Such condition might be helpful in the event that the negotiations are broken off one-sidedly (see below). In any event, according to Article 23 of EC Regulation 44/2001 of the Brussels Convention, respectively Article 2 of the New York Convention, clauses with respect to jurisdiction and arbitrage must be agreed upon in writing. There is no obligation under Dutch law that a written (distribution) agreement needs to have been drafted in the Dutch language. It should be noted that under Dutch law, breaking off negotiations at an advanced stage of the negotiation may result in liability for compensation (or even an obligation to continue the negotiations), even if a distribution agreement does not exist yet. Such liability will arise if the counterparty has a legitimate expectation (gerechtvaardigd vertrouwen) that a (distribution) agreement will be concluded. 2. Formalities No formalities, for example registration, are required under Dutch law. 3. Admitted means of proof The admitted means of proof for a (distribution) agreement are determined in Articles 149 et seq. of the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering—‘‘CCP’’). Article 150 CCP outlines the basic rule that the party will be required to offer evidence of facts that he has asserted. Having said this, 7. 8. 9. 10. Article Article Article Article 3:33 DCC. 3:32 DCC. 6:227 DCC. 3:40 DCC. 799 Suzan Lap statutory rules or (a court may rule that) the principles of reasonableness and fairness may require that the burden of proof be borne by another party. In the Netherlands the ‘‘freedom-of-evidence’’ rule applies; evidence may be supplied in any appropriate form except where the law provides otherwise. For example, a written agreement; deeds and judgments; inspection of accounts, records and documents; witness testimony; formal or oral reports by experts; or inspections of and visits to premises. It is long standing case law that agreements are interpreted in accordance with the intentions of the parties.11 In view hereof, it is advisable to hold on to minutes, draft versions of an agreement and notes of the negotiations in order to prove the intentions of the parties, if needed. Having said this, the textual meaning of words, as read in the context of the entire agreement, is becoming more important. In a recent case concerning the interpretation of a complex and detailed commercial contract (share purchase agreement) which had been negotiated with expert legal assistance/between expert parties, the Supreme Court ruled that at the most obvious textual meaning of words was the decisive starting point, but that both parties could put forward evidence of their intentions to the contrary.12 Although there is no (statuary) obligation to this extent, parties could consider to include a clause stipulating that the distribution agreement should be interpreted solely on the textual meaning of the words or a clause concerning the forms of proof which are admitted. III. Purpose 1. Products and territory To stimulate the distributor to make investments on behalf of the marketing of the products, the supplier may be willing to grant exclusivity to the distributor with respect to a certain territory (or customer group), that is the supplier will not appoint any other distributor in that specific territory (or with respect to that specific customer group). Such restriction is generally exempted from the prohibition on restrictive agreements set out in Article 6 of the Dutch Competition Act and Article 101 TFEU by the BEVR (see General Preliminary Note). 2. Subdistributors a. Appointment of subdistributors There are no specific rules in Dutch law that deal with the matter of appointing subdistributors. However, in view of the object of the Distribution Agreement, the supplier will not have to allow the distributor to appoint sub-distributors. 11. Supreme Court, Mar. 13, 1981, NJ 1981, 635. 12. Supreme Court, Jan. 19, 2007, NJ 2007,575 and Supreme Court, Jun. 29, 2007, NJ 2007, 536. 800 The Netherlands b. Prohibition regarding the appointment of subdistributors The distributor acts as an independent party, who sells the specific distribution products for his own account and at his own risk as indicated above. The distributor is therefore—within certain boundaries—free to organize its business and to use among others sub-distributors in order to fulfill his obligations under the distribution agreement. However, pursuant to the principles of reasonableness and fairness the distributor has to act as a prudent businessman and must therefore also look after the supplier’s interests. The supplier is the owner of the distribution products and the intellectual property rights and may not be confronted with subdistributors appointed by the distributor against its will. It is quite common, in view of the principle behind a distribution agreement and the required control of the supplier in connection thereto to restrict the possibilities for a distributor to appoint sub-distributors and/or third parties to perform any obligations under the distribution agreement. Having said this, the prohibition to appoint sub-distributors should not be confused with a prohibition to sell the products to (professional) customers who may resell these products. Such prohibition is generally incompatible with the competition rules of set out in Article 6 of the Dutch Competition Act and Article 101 TFEU (see General Preliminary Note). Contractual Clause: ‘‘Without the prior written approval of the Supplier, the Distributor is not allowed to appoint any sub-distributor.’’ If the supplier is willing to allow the distributor to appoint sub-distributors, the supplier may set selection criteria that have to be met by such sub-distributors in order to be appointed. Moreover, in this respect it is suggested to include specific clauses in the distribution agreement between the supplier and the distributor that the distributor will impose the same rights and obligations on a sub-distributor as are set forth in the main distribution agreement between the supplier and the main distributor. In addition the main distribution agreement should include a liability clause/guarantee stating that the distributor is liable for/guarantees that the sub-distributor, appointed by the distributor, will act in accordance with all applicable rules and obligations. If a distributor appoints a sub-distributor, on the basis of Article 6:76 DCC, the distributor is responsible for the activities of the sub-distributor. This responsibility can, however, be excluded in the distribution agreement. IV. Rights and Obligations of the Exclusive Distributor 1. Sales organization Freedom of contract allows the parties to agree upon the sales organization. 801 Suzan Lap 2. Sales’ target As a result of the freedom of contract the parties may include sales targets in the distribution agreement. The sanctions that apply if the distributor fails to meet the purchase or sales targets are governed by the principles of reasonableness and fairness. A minimum purchase obligation may qualify as a non-compete obligation under the Dutch and European competition rules. 3. Guaranteed minimum target There is no specific Dutch legislation with respect to guaranteed minimum targets; Parties are free to agree upon guaranteed minimum targets. In a recent case of the Alkmaar District Court (Rechtbank),13 the court ruled that it was not unreasonable that the supplier requested minimum sales target in consideration of exclusivity. Parties entered into a settlement agreement to settle their dispute concerning the termination of their distribution agreement. The settlement agreement included the obligation on the parties to negotiate on a (new) exclusive distribution agreement. Complainant stated that defendant contravened the settlement agreement by not negotiating in good faith. The court ruled, however, that it was not unreasonable that the supplier requested minimum sales target in consideration of exclusivity. It is not automatically in breach of good faith, if, in light of negotiations on a continuing performance contract and on the basis of exclusivity, the supplier requires high targets. It would however be contrary to good faith, if the targets required by the supplier would be that unrealistic that it could not be desired from the distributor to negotiate on such targets. 4. Minimum stock The distributor may be obliged to maintain a minimum stock of the products. Purpose of such stock may be to provide for a continuation of the business and selling activities of the distributor. The principles of reasonableness and fairness may require that the distributor must be given the opportunity to sell the stock maintained in the event of termination of the distribution agreement. Reference is made to a ruling of the Supreme Court, in which the Supreme Court stated that during the termination period parties must, to the extent reasonably possible, perform the agreement that will be terminated.14 As a consequence, new orders can be submitted and must be met, as long as the orders are in accordance with what is normal in their trading relationship. 13. District Court Alkmaar, Apr. 16, 2008, LJN: BD 1686. 14. Supreme Court, May 29, 1998, NJ 1998/641. 802 The Netherlands Contractual Clause: ‘‘The Distributor undertakes to maintain, at his own risk and expense, for the entire duration of the Distribution Agreement, a minimum stock of Products as set out in Annex [] to the Distribution Agreement. Such minimum stock should be sufficient to provide for the regular demand in the Territory for the Products.’’ 5. After sales service a. Solely regarding Products As to after sales warranty, Dutch legislation concerning consumer purchase (consumentenkoop) may be relevant, as well as legislation concerning product liability (productaansprakelijkheid). These articles are included in section 3 book 7 DCC respectively Articles 6:185–193 DCC. The extent to which the distributor is obliged to undertake after sales service depends on the products sold under the distribution agreement. It is permitted under Dutch and European competition law to agree upon detailed provisions concerning customer service in the distribution agreement. If the distributor does not duly undertake its service obligations, this could be a ground for the supplier to terminate the distribution agreement.15 The customer is entitled to expect that the Products are in compliance with the express stipulations in the contract and the customer’s reasonable expectations. Furthermore, the products should have the characteristics which are necessary for the normal use of such products.16 What ‘‘reasonably’’ can be expected, depends on the circumstances, such as the nature of the products, the nature of the shop which sells the products, the price of the products, or other information provided by the distributor.17 Please note that the manufacturer’s product liability, cannot be excluded if the purchaser is a consumer. The rules on product liability are based on the European Directives and are implemented by means of the Articles 6:185–193 DCC. If the purchaser is not a consumer, the Articles 6:185–193 DCC are permissive law (see section V(4)(a) below). 6. Resale prices a. The exclusive distributor is free to fix the resale prices Imposing fixed and minimum resale prices on independent distributors is generally considered to constitute hardcore restrictions of competition, and therefore, an 15. Reference is made to Ch. 9 regarding termination. 16. Article 7:17 sub 2 DCC. 17. Court of Appeal Den Haag, Jan. 12, 1972, NJ 1972, 221. 803 Suzan Lap infringement of the European and Dutch competition rules. The distributor has to be free to fix the resale price. Only maximum and recommended resale prices are exempted. Having said that, if an agreement can benefit from the de minimis exemption set out in Article 7 of the Dutch Competition act, even hardcore restrictions such as price fixing are exempted from the prohibition (see General Preliminary Note). V. Rights and Obligations of the Supplier 1. Undertaking to supply the exclusive distributor As the distribution agreement concerns the sale of products from the supplier to the distributor, the legal provisions on the sale of goods are applicable. Under the distribution agreement, each time the distributor places an order and the supplier accepts such order, a specific sales agreement for those products is concluded. Under Dutch law the sales agreement may take any form and does not have to be in writing. There is no document required that confirms the consensus reached between the distributor and the supplier. Article 6:27 and Article 6:28 DCC distinguish between the sale of a fungible item (soortzaak) and a non-fungible item (specieszaak). In the sale of a fungible item, the supplier must deliver any products of the type or nature agreed upon. The quality of the products delivered may not be less than the average quality of such fungible items. In the sale of a non-fungible item, the supplier is obliged to ensure that the specifically identified Products are delivered. According to Article 7:17 DCC the Supplier must deliver products which conform to what is stipulated in the sales agreement. The goods must have the characteristics which the distributor could expect them to have. Unless otherwise agreed upon, a distribution agreement or applicable general conditions of sale do not generally oblige the supplier to honor all orders the distributor may place. The supplier will often have an obligation to fulfill orders only in part, in proportion to the amount of Products available to the supplier. However, the principles of reasonableness and fairness may limit the Supplier’s freedom not to accept the orders of the distributor. For example, to refuse an order there must be business-related reasons. This especially applies where the distribution agreement imposes a minimum purchase obligation and/or an exclusive purchase obligation upon the distributor. Please note, that the sanctions which apply to the unreasonable or unfair refusal of the supplier are also governed by the principles of reasonableness and fairness. Dutch law does not provide for an obligation of the distributor to notify the supplier within a reasonable period once he anticipates that the transaction volume will be significantly lower than the estimation that the distributor communicated to the supplier before. Pursuant to Article 6:2 DCC the parties have, however, to act in accordance with the requirements of reasonableness and fairness. 804 The Netherlands 2. Pricing policy of the supplier Dutch law does not provide for specific relevant legislation or case law in this respect. To the extent that the supplier holds a dominant market position, its pricing policy may constitute abuse of such position. This would be contrary to the prohibition on abuse of dominance set out in Article 102 TFEU and its Dutch equivalent Article 24 Dutch Competition Act. 3. Retention of title Article 3:92 DCC provides for the possibility to agree upon a retention of title clause. By retention of title, ownership is not transferred until the purchase price is paid. Please note that, according to Dutch law, a property right exists only if the object is sufficiently specified. If similar objects are delivered to the distributor under different distribution agreements, it may be impossible to specify the objects which are delivered under that very contract. Consequently, the retention of title clause shall be ineffective. 4. Construction defects warranty a. Warranty and remedies to end user (clients) The supplier may not deliver products, other than those which the parties agreed upon. In the event the supplier gives a warranty with regard to such products, the distributor may rely upon such warranty. As set out under chapter IV point E, if the purchaser is not a consumer, the provisions in this respect are permissive law. Therefore, the supplier’s liability may be restricted or modified in the distribution agreement. In general, the distribution agreement itself does not generate any third party rights. In principle default involves only the parties to the distribution agreement. The extent of the supplier’s contractual liability toward the end user may be determined by adding such wording to the supplier’s warranty clause in the distribution agreement. In the absence of a contractual liability, the product liability may also be a liability in tort. If a third party suffers damage because of defective products, the third party has a direct course of action based on the common tort rules as set forth in the Articles 6:162 et seq. DCC. Product liability cases are based on two conditions: (i) the product is defective; and (ii) the producer is found to be negligent in putting the product into circulation. The Articles 6:185–193 DCC create a strict liability on the part of the producer for damage caused by a defective product. The term producer (in this distribution agreement also the supplier) has an extensive meaning and includes the manufacturer of a finished product, of any raw material and of a component part. Also the importer of products within the EU as well as any person (e.g., the Distributor) who, by putting his name, trademark, or other distinguishing feature on a product, presents itself as its producer and is considered to be a producer. Where a producer of the product cannot be identified, 805 Suzan Lap each supplier of the product shall be treated as its producer unless he reveals the identity of the actual producer. The injured person has to prove the defect, the damage and the causal link between the damage and the defect. A product is defective if it does not provide the safety that a consumer is entitled to expect, taking into account all circumstances. Negligence of the supplier does not have to be proven by the consumer. As said, the supplier may not restrict or exclude his liability towards consumers. Moreover, the EU Directive on certain aspects of the sale of consumer goods and associated guarantees (Directive 99/44) has been implemented under Dutch law. Contractual Clause: ‘‘The Products are warranted to be free of defects under normal use for a period of months from the date of acknowledgment of receipt of the Products by the Exclusive Distributor (hereinafter the Warranty Period). Exceptions The Products warranty does not apply in the event of: (i) misuse, neglect, or abuse; or if, (ii) the Products are repaired or altered by anyone other than the Supplier without the Supplier’s written approval, or if, (iii) the Products are not used in accordance with the maintenance and operating instructions, manuals or technical advisories of the Supplier. General In the event a defect is discovered during the Warranty Period, the Exclusive Distributor shall send the Supplier prompt written notice describing the Product(s) alleged to be defective, including the date and place of original purchase and delivery, and the problem. For the Product warranty to apply, the written notice has to be received by the Supplier before the end of the Warranty period. If, after inspection, the Supplier determines that a defect exists, the Supplier shall replace the defective Product free of charge. The Distributor shall retain any Product alleged to be defective for days after notice for the Supplier’s inspection or, at the Supplier’s request, will forward the part to the Supplier at the risk and expense of the Supplier. Limitation of warranty and remedies The warranties set forth herein are in lieu of all other warranties, express or implied, which are hereby disclaimed and excluded by the Supplier, including without limitation, any warranty of merchantability or fitness for particular purpose or use and all obligations or liabilities on the part of the Supplier for 806 The Netherlands damages arising out of or in connection with the use, repair, or performance of the equipment. The Supplier shall not be liable for any loss or damage caused by delay in delivering the Product(s) or any other performance as per this Agreement. The sole and exclusive remedies for breach of any and all warranties and the sole remedies for the Supplier’s liability of any kind (including liability for tort) with respect to the Product(s) shall be limited to repair or replacement of the defective Product(s). In the event the Supplier fails to replace or repair as aforesaid, the Supplier’s entire liability shall not exceed the entire amount paid to the Supplier by the Distributor as per this Agreement. Indemnification of liability The Distributor shall indemnify and hold the Supplier harmless from any claims from a Client—End User. The Supplier shall not be liable for any loss or damage caused by delay in delivering the Product(s) or any other performance as per this agreement, except in the event of fraud or gross negligence of the Supplier or the Supplier’s personnel.’’ VI. Exclusivity and Undertaking Not to Compete 1. Exclusivity The DCC does not provide for specific obligatory provisions concerning distribution agreements. As to the exclusivity, Dutch Competition law is relevant, which reflects European law. The Rotterdam District Court decided that, when assessing agreements that possibly restrict competition, the economic context of the competition agreements should be taken into account as well as the objectives of the agreements.18 Contractual Clause: ‘‘The Supplier undertakes, during the term of the Distribution Agreement, not to grant any other (natural or legal) person within the Territory the right to represent or market the Products. Save as otherwise stated hereinafter, the Supplier shall furthermore refrain from selling to clients in the Territory.’’ or: ‘‘The Supplier is entitled to sell the Products to clients which are located outside the Territory, even in the event such clients intend to resell the Products into the 18. District Court Rotterdam, Feb. 28, 2006. 807 Suzan Lap Territory. In any case the Supplier shall not actively solicit or otherwise provoke such sales to third parties with the purpose of circumventing the exclusivity granted as per this article.’’ or: ‘‘The Supplier shall not sell the Products to clients which are located outside the Territory, when the Supplier knows, or ought to know, that such clients intend to resell the Products within the Territory. Moreover, the Supplier shall also impose the same obligation on its other exclusive distributors.’’ VII. Delivery 1. INCOTERMS The Dutch legislation recognizes the ICC International Commercial Terms 2000 (‘‘INCOTERMS’’). It is recommended to include a reference to the applicability of the INCOTERMS in the distribution agreement, since the INCOTERMS are not customary in the Netherlands. The INCOTERMS used by the parties are dependent on the means of transport. Research indicates that the FOB (Free On Board) and the CIF (Cost, Insurance and Freight) clauses are frequently used in the Netherlands. The FOB- and the CIF-clauses are also best known and most traditional trade terms. The purpose of the FOB-clause is that the seller delivers the products at the moment the products pass the ship’s rail at the named port of shipment. As of that moment, possible loss or damage to the products are at the buyer’s risk and expense. A CIF-clause means that the seller has to deliver the products at the moment the Products passes the ship’s rail in the port of shipment. The seller has to pay the costs and freight of delivering the Products to the named port of destination. However, the risk of loss or damage to the Products, as well as any additional costs due to events occurring after the moment of delivery, shall be borne by the buyer. The FOB- and the CIF-clauses may only be used for sea and inland waterway transport. 2. Other rules Additionally, the Books 3, 5, 6 and 7 section 1 of the DCC are relevant. These books contain general provisions of Dutch contract law, which are applicable if (i) (the general terms and conditions of) the Distribution Agreement do not provide for regulations as to the delivery of products and/or (ii) no commercial usage could be determined between the parties. With respect to international purchase, the Vienna Convention applies. If parties wish to exclude the applicability of this Convention to their sales agreements deriving from the Distribution Agreement, they must explicitly state this. Pursuant to Article 6 of the Vienna Convention, 808 The Netherlands parties may derogate from these provisions. Parties may—amongst others— declare the INCOTERMS applicable to the Distribution Agreement. VIII. Duration 1. Limited or unlimited duration Pursuant to Dutch legislation and the freedom of contract, parties can in principle agree upon a limited or an unlimited term of the distribution agreement. The desire to impose a non-compete obligation and/or exclusive purchasing obligations on the other party may influence the term, since such non-compete obligation and/or exclusive purchasing obligations are only automatically block exempted by the BEVR to a maximum duration of five years (unless the distributor is acting from premises rented from the supplier). It is important in this regard that an agreement that shall be tacitly renewed is considered to be an agreement for an unlimited term from a competition law perspective. Moreover, distribution agreements with a fixed term agree, that are continued, without the parties agreeing on a new (fixed) term, are generally considered to have been continued for an unlimited term. Contractual Clause: ‘‘This Distribution Agreement shall be effective as of the date hereof for a limited period of [five] years, unless terminated by either Party in accordance with this Distribution Agreement. This Distribution Agreement shall tacitly be extended with successive periods of [five] years upon expiration of a preceding term, unless terminated by written notice by either the Distributor or the Supplier taking into account a notice period of [six] months.’’ or ‘‘This Distribution Agreement shall be effective as of the date hereof and shall expire upon the [fifth] anniversary of such date, unless terminated during this term by either Party in accordance with this Distribution agreement. Parties undertake to discuss and negotiate an extension of the Distribution Agreement ultimately [six] months prior to the expiration of the term.’’ or ‘‘This Agreement shall be effective as of the date hereof and is agreed upon for an unlimited period of time.’’ 809 Suzan Lap IX. Termination of the Exclusive Distribution Agreement 1. Termination grounds Termination can have the legal form of annulment (ontbinding) or termination (opzegging). There is a general provision under Dutch law that an agreement can be annulled in the event of default. This rule is laid down in Article 6:265 DCC. These rules are of a regulatory nature and the parties may agree differently in the distribution agreement. Article 6:265 states that any default by the other party, gives the right to (partially) annul the agreement, unless the default does not justify the annulment. It is up to the party in default to state and provide evidence that the (partial) annulment is not justified. In the event that the correct fulfillment of the agreement is not (temporarily or permanently) impossible, the defaulting party must be given a chance to remedy the default before the agreement can be annulled. Freedom of contract allows the parties to agree upon the grounds for termination of their cooperation (even if there is no default). This freedom is however limited by the principles of reasonableness and fairness, which may have an important complementary effect on the ability to terminate the distribution agreement. In exercising their rights under the distribution agreement the parties should always take into consideration the interests of the other party, including the right of termination. The length of the notice period must be reasonable taking into account all specific circumstances. In Dutch distribution agreements termination rights without a notice period are usually based on a failure to cure a substantial breach of the distribution agreement by the other party, as well as on bankruptcy, liquidation and force majeure. Reference is made to Supreme Court April 21, 1995, NJ 1995, 437 (Kakkenberg) in which the Supreme Court ruled that the mutual interests of the parties should be weighed, and that the reasons for termination are important. If the parties have not provided for rules on termination, an agreement for a fixed term cannot be terminated except in the event of unforeseen circumstances. If the agreement is concluded for an indefinite term, it generally can be terminated, provided that account is taken of a reasonable notice period. Although the reason for termination may play a role in determining whether a notice period is reasonable, the termination will generally have the desired effect, irrespective of the reason for termination. Having said this, the Supreme Court ruled that, with respect to a distribution agreement regarding the import of wines that had been in place for over 100 years, the principle of reasonableness prevented termination of the contract because there was no compelling reason for such termination.19 19. Supreme Court, Dec. 3, 1999, NJ 2000, 120. 810 The Netherlands Contractual Clause: Substantial Breach: ‘‘Any violation of obligations under this Distribution Agreement may be considered a Substantial Breach in the event that such violation remains uncured for [ ] days to be computed as of the written notice of the breach given by the terminating Party. The Parties hereby agree that a violation of the obligations under article [ ] of this Distribution Agreement shall in any event be considered as a Substantial Breach of the Distribution Agreement.’’ Exceptional circumstances: ‘‘The Parties hereby agree that the following situations shall be considered as Exceptional Circumstances justifying termination by the other Party: (i) (ii) (iii) (iv) (v) 2. bankruptcy of the Supplier or the Distributor; receivership of the Supplier or the Distributor; liquidation of the Supplier or the Distributor force majeure; [other].’’ Notice period The obligation of the parties regarding the notice period is governed by the principles of reasonableness and fairness, set out in the Articles 6:248 DCC. What should be considered a reasonable notice period, depends on the circumstances of the case and requires an assessment of the mutual interests of parties. Case law is highly casuistic on this point and mainly from the lower courts. The following circumstances are—inter alia—taken into account by the courts:20 (a) (b) (c) (d) (e) The duration of the relationship; The nature and importance of the reasons for termination; Whether the termination is due to (reasons caused by) the other party; Whether the interests of the counterparty have been considered; Whether the agreement included the possibility of termination and that the distributor, therefore, had to take into account the possibility of termination; (f) Whether the distributor was aware of the intention of the supplier to terminate the agreement; (g) The degree of dependence of the counterparty; 20. District Court Utrecht, Jan. 11, 2000, KG 2000/70; District Court Zwolle, Oct. 19, 2000, KG 2001/38; Court of Appeals Amsterdam, Dec. 19, 1985, KG 1989/121; District Court ’s Hertogenbosch, Dec. 30, 1994, NJkort 1995/11; District Court of Arnhem, Jan. 7, 2004, LJN: AO2180; District Court ’s-Hertogenbosch, Jan. 31, 2007, LJN: AZ7537. 811 Suzan Lap (h) Whether the distributor is able to recoup its investments, made in relation to the agreement; (i) Expectations created, that is explicit or implicit statements as to the duration of the relationship; (j) The time required by the terminated party to adjust to the new situation (i.e., find new suppliers); (k) The timing of the termination (e.g., before or after a trade fair); and (l) The customs in the branch. Considering the casuistic nature of the matter, it is hard to give a rule on what period is reasonable. Nevertheless, in literature as a rule of thumb often a notice period is advocated of 1.2 month per year that the distribution has been in place. Contractual Clause: ‘‘In the absence of a Substantial Breach or Exceptional Circumstances this Distribution Agreement may only be terminated by taking into account a notice period of [ weeks/months] In the event of non compliance with such notice period, the terminating Party shall be liable for the payment of a compensation corresponding as determined in article [?]).’’ or ‘‘In the event of a Substantial Breach or Exceptional Circumstances, each Party may terminate this Distribution Agreement, with immediate effect, by means of a written notice providing evidence and date of receipt (e.g. registered mail with return receipt, special courier).’’ 3. Indemnity a. Notice period compensation indemnity Dutch law does not provide for specific provisions in respect of indemnities. The rules are set by case law provided by the relevant courts. If no reasonable period is taken into account, conversion of the notice period may be in place or a financial compensation in lieu of the reasonable notice period. In the latter event such compensation is generally calculated on the basis of the profit (before taxes) that would have been realized by the distribution, if there had been awarded a reasonable notice period. b. Goodwill indemnity The distributor has—in general—no legal right to compensation for goodwill. Indeed, a compensation for goodwill in the event of distribution agreements by analogy to the agency rules is not common under Dutch law. This was recently 812 The Netherlands confirmed once again, in case law. In a recent case, the District Court of ’s-Hertogenbosch21 considered that no compensation for client or goodwill was due, since the distributor was not obliged to forward the (contact) details of its customers, that is the customers remained customers of the distributor upon termination of the agreement. The circumstance that customers turn directly to the supplier to buy the products of that specific trademark and that the supplier consequently ‘‘gets’’ a sales channel, does not imply that the supplier has been unjustified enriched. Moreover, it is logical that the distributor could build such sales channel by means of the (popular) trademark of supplier. Because the distribution agreement is governed by the principles of reasonableness and fairness, it is possible that, although the agreement was lawfully terminated, damages may still be due since such damages should not be considered to be part of the business risk of the distributor and in determining the reasonable notice period account is taken of the interests of both the distributor and the supplier. Damages that may have to be compensated are investments (made at the incentive of the supplier) that cannot be earned back as a result of the termination and costs for personnel that have become redundant. 22 Contractual Clause: Notice period compensation indemnity: ‘‘In case the notice period is not complied with, the Supplier shall pay to the Exclusive Distributor compensation in lieu of the notice period, amounting to [ : e.g. the average monthly purchases’ amount over the last 12 months]. In case of non-performance under the notice period of Clause [], the terminating Party shall be liable to pay a compensation amounting to [ ].’’ option 1: non lump damages ‘‘In the event a Party terminates this Distribution Agreement invoking this Article, while its reasons for termination do not justify the termination, the termination shall be effective as of the date agreed upon. The applicable court shall state whether the termination is justified or not. In the event Parties did not agree upon an effective date, the court shall determine such date. The non-terminating Party shall be entitled to damages for the unjustified termination. Such damages shall be determined based on the following calculation method [ ], (the ‘Termination Penalty’), unless the damaged Party proves that the actual damage is higher (or, respectively, the Party having terminated the Agreement proves that the actual damage is lower).’’ 21. District Court ’s-Hertogenbosch, Jan. 31, 2007, LJN: AZ7537. 22. Supreme Court, Jun. 21, 1991, RvdW 1991, 169 (Mattel v. Borka). 813 Suzan Lap option 2: lump damages (penalty clause) ‘‘The terminating Party, in the event of an unjustified termination, shall be liable to pay, to the other party, by way of lump and undiminishable penalty, and without this impeding the allocation of damages for any higher proven loss suffered by the other party, a sum equal to [ ] (the ‘Lump Termination Penalty’). In the event of termination of the Distribution Agreement, the Distributor shall not be entitled to an indemnity for goodwill or similar compensation. In the event of termination of the Distribution Agreement, without compliance with the notice period as set forth under article [], the non terminating party shall be entitled to an indemnity for sudden termination as determined under Annex [ ]. In the event of termination of the Distribution Agreement by the Supplier for reasons other than a substantial breach by the Distributor, the latter shall be entitled to an investment indemnity as determined under Annex [ ].’’ X. Post-termination Effects 1. Post-termination undertaking not to compete In accordance with Article 5 b) BEVR a post contractual non-compete obligation imposed on the distributor is block exempted for a maximum period of one year after termination of the distribution agreement in the event that such restriction is limited to (i) products/services that compete with the goods/services; and (ii) the sale of goods or the provisions of services from the location from where the distributor exploited the products during the term of the distributor agreement and; (iii) such restriction is required in order to protect the know how provided by the distributor to the supplier. Besides these competition rules, Dutch law does not contain any provisions concerning this subject. 2. Fate of remaining stocks If no retention of title clause is included in the distribution agreement, the remaining stock will in principle be the property of the distributor. The principles of reasonableness and fairness may require that the supplier has to acquire the remaining stock. Parties are free to agree upon a provision regarding the fate of the remaining stocks. 3. Deposited equipment Dutch law does not contain specific provisions concerning this subject. Please note, that in the event the distributor has purchased the equipment or has made 814 The Netherlands an investment in that respect, there is no basis for recovery of the equipment by the Supplier. We recommend consenting to the return of the equipment insofar as the termination is agreed upon or justified. If there is any dispute between the Parties concerning the termination or expiration, it is recommended to await the outcome of such dispute. XI. Jurisdiction/Escalation Clause 1. Amicable settlement Amicable settlement is not subject to restrictions under Dutch law and Parties may always try to amicably settle any dispute. Contractual Clause: ‘‘The parties shall first attempt, without prejudice to the current article, to settle amicably any dispute arising out of or in connection with the current Agreement.’’ 2. Arbitration or litigation (ordinary court) In accordance with Articles 1020 and 1074 CCP it is possible to include an option for Dutch or foreign arbitration in the distribution agreement. The procedural rules are set in Articles 1020 et seq. CCP. The Netherlands have signed and ratified the 1958 Convention of New York on the Recognition and Enforcement of Foreign Arbitral Awards. In international cases, a Dutch court will first of all investigate if the Council Regulation (EC) No. 44/2001 of December 22, 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (‘‘EC Regulation 44/2001’’) is applicable to questions on jurisdiction. Article 23 EC Regulation 44/2001 is applicable if the parties, one or more of whom is domiciled in a Member State of the EU, have agreed that a court or the courts of a Member State are to have jurisdiction. In other international cases a Dutch court may deem a choice of court clause valid under Article 17 of the Treaty of Lugano of September 16, 1988, the revised Treaty of Lugano of October 30, 2007, or Article 8 CCP. Article 42 Judiciary Organization Act (Wet op de rechterlijke organisatie) and Article 93 CCP (absolute competence—see our comments below), Articles 99 CCP (relative competence—see our comments below) and 108 CCP (freedom of choice of court) are relevant in national cases, and in international cases to determine internal jurisdiction. a. Arbitration Dutch law does not prohibit an arbitration settlement. Next to the already mentioned arbitration rules, it is also possible to stipulate that any dispute will be settled 815 Suzan Lap pursuant to the Arbitration Rules of the Netherlands Arbitration Institute. The total number of arbitrators should be odd. Dutch courts will decline jurisdiction if a party invokes a valid arbitration clause before putting forward other defenses. In principle, an arbitrational clause does not preclude a party from petitioning a Dutch court to take conservatory measures or from instituting summary proceedings before a Dutch court, if the court would have jurisdiction otherwise (Articles 1022 and 1074 CCP). The remedy of arbitral appeal is only available, if parties have agreed thereto. A party may seek recognition and enforcement of a foreign arbitral award on the basis of Article 1075 (in conjunction with an international treaty, such as the New York Convention) or 1076 CCP. Leave for enforcement is seldom denied. b. Litigation (ordinary court) In principle jurisdiction shall be exclusive, unless the parties have agreed otherwise. Dutch law provides for a distinction between absolute and relative competence of the courts. Pursuant to Article 99 CCP the court of the place of business of the defendant is relative competent. Article 93 CCP provides that the subdistrict court (kantonrechter) has exclusive jurisdiction amongst others with regard to claims less than EUR 5,000 (this may be changed) and claims regarding employment agreements, tenancy agreements or agency agreements. Cases beyond the competence of the subdistrict court fall within the competence of a ‘‘regular’’ court.23 XII. Applicable Law 1. Application of standard international rules (UNIDROIT, etc.) Pursuant to Article 1054 CCP Dutch arbitrators should observe a choice of law. A Dutch Court will apply Dutch International Private Law to determine whether a choice of law is valid. Distribution agreements concluded after December 17, 2009 fall under the scope of the Regulation (EC) No. 593/2008 of June 17, 2008 on the law applicable to contractual obligations (‘‘Regulation Rome I’’). The Hague Convention of March 14, 1978 on the Law Applicable to Agency (‘‘Hague Agency Convention’’), which entered into force on May 1, 1992 may also apply, if there is an agency relationship created by the Distribution Agreement. Please note that the April 11, 1980 Vienna Sales Convention (CISG) is not applicable to the distribution agreement itself, but may be applicable to sales agreements following from the distribution relationship. 23. Article 42 Judiciary Organization Act. 816 The Netherlands Pursuant to Article 3 Regulation Rome I the internal law chosen by the Principal and the distributor shall govern the distribution agreement. The Hague Agency Convention also honors a choice of law clause.24 In arbitration procedures a choice of law is not restricted to national laws and can include for instance international trade usages (‘‘lex mercatoria’’) and the UNIDROIT Principles. In any case the relevant trade usages are considered.25 It is not certain whether a Dutch Court will allow that these rules and principles derogate from mandatory provisions of national law which are applicable to the case. In the absence of a choice of law, a distribution contract shall be governed by the law of the country where the distributor has his habitual residence.26 A contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence. Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with another country, the law of that other country shall apply. If, at the time of the choice of law, all of the other elements relevant to the situation (the distribution relationship) are connected with one country only, a Dutch court has to give effect to the rules of this country, which cannot be derogated from by contract. If, at the time of the choice of law, all other relevant elements are located in one or more EU Member States, Community law also has to be applied, which cannot be derogated from by agreement.27 A Dutch court may always—regardless of a choice of law—give effect to the overriding mandatory provisions of Dutch law and/or the law of the country where the obligations arising out of the contract have been performed.28 Please note that the term ‘‘overriding mandatory rules’’ refers only to provisions the respect for which is regarded as crucial by a country for safeguarding its public interests. According to the Supreme Court29 a distinction should be made between the distribution agreement and any further sales agreements between parties following from the distribution relationship. A choice of law clause in a sales agreement is not valid for disputes arising out of the distribution agreement. Contractual Clause: ‘‘This Distribution Agreement [as well as any (sales) contract concluded on the basis of this Distribution Agreement] [is/are] governed by the laws of (name of the country the law of which is to apply).’’ 24. 25. 26. 27. 28. 29. Article 5 Hague Agency Convention. Article 1054 CCP. Article 4 sub 1(f). Article 3 sub 3 and 4 Regulation Rome I. Article 9 sub 2 and 3 Regulation Rome I. Supreme Court May 24, 1991, NJ 1991, 676 (Häcker). 817 Suzan Lap Chapter 42: Franchising Agreements under Dutch Law by Suzan Lap* General Preliminary Note In anticipation of the detailed explanation and answers to the questionnaire below, the following general principles should be considered when drafting a franchise agreement: – franchise agreements are not specifically addressed in Dutch law, the general rules of contract law apply; – the principles of reasonableness and fairness are the guiding principles behind Dutch contract law, so a franchise agreement must be construed and performed in accordance with such principles; – the principles of reasonableness and fairness may lead to the setting aside of a clearly stipulated contractual provision if the provision concerned is unacceptable under said principles. Moreover, the principles may impose additional rights and obligations on the parties to an agreement; – there is no legal requirement for a franchise agreement to be agreed upon in writing, however, considering the complexity of a franchise agreement, a franchise agreement will generally be in writing; – a company in the Netherlands must register its business with the Trade Register held by the relevant local Chamber of Commerce and comply with the relevant tax regulations. A definition for franchise that is frequently used in the Netherlands is: Franchise is a form of cooperation between legal and economic independent and autonomous undertakings, the franchisor and its individual franchisees, regarding the sale of goods and/or services making use of a common name and a common image. This definition is ‘nonlegal’. Franchise agreements are not specifically addressed in Dutch law. They are governed by the general rules of contract law. Books 3, 6, 7 of the Dutch Civil Code (‘‘DCC’’) contain the major part of the Dutch statutory provisions on contract law. Most of the provisions are of a regulatory nature and the parties to an agreement are—to a large extent—free to determine the conditions of their relationship. In view hereof—and taken into account the generality of each theme—the comments to each of the chapters below should neither be considered comprehensive nor complete. The aim is to provide the reader with some insight on Dutch (case) law for each theme. Moreover, the draft clauses provided herein should be considered suggestions for possible solutions to deal with a certain theme. * Attorney-at-law, Amsterdam Bar, Amsterdam. 818 The Netherlands The provisions relating to Dutch competition law are applicable to franchise agreements that have an effect in the Netherlands. The Dutch Competition Law (Mededingingswet) is mainly based on the EC competition rules. Pursuant to Article 12 of the Dutch Competition Law, the European block exemptions are directly applicable under Dutch competition law. In this respect reference is made to the EC regulation on the block exemption in relation to vertical restraints (EC Regulation 2790/1999) (‘‘BEVR’’).1 On the basis of the guidelines accompanying this BEVR, franchise agreements generally qualify as selective distribution complemented by additional provisions regarding use of know-how and/or intellectual property rights by the franchisee and possible services rendered by the franchisor to the franchisee. We note that, contrary to the EU de minimis exemption, the statutory Dutch de minimis exemption also exempts hardcore restrictions that meet the thresholds set out in Article 7 of the Dutch Competition Act. In general, a franchisor and a franchisee (as well as any other entrepreneur) who maintains a business organization in the Netherlands must register its business with the Trade Register held by the relevant local Chamber of Commerce and comply with the relevant tax regulations (i.e., VAT registration). The Netherlands Franchise Society (Nederlandse Franchise Vereniging—the ‘‘NFV’’) is an association representing the interests of franchisors in the Netherlands. Franchisors who are a member of the NFV are obliged to accept and comply with the European Code of Ethics for Franchising. I. Precontractual Information Disclosure 1. Main legal characteristics Dutch law does not contain regulations with respect to precontractual information disclosure. Primarily, the principles of reasonableness and fairness (redelijkheid en billijkheid)2 apply to such obligation, as well as the provision concerning error (dwaling).3 The principles of reasonableness and fairness are the guiding principles of Dutch contract law, that is, contracts must be entered into, construed and performed in accordance with reasonableness and fairness. These principles may imply that both parties to the franchise agreement have to provide the other party with relevant information. Moreover, parties are obliged to take reasonable action to prevent that the other party agrees upon an agreement under the influence of incorrect understandings (i.e., error). Reference is made in this respect to, for example, the decision of the Supreme Court in the case Baris/Riezenkamp (NJ 1958, 67). In this case, the court ruled that, a party considering entering into an agreement has the obligation, 1. Please note that the current BEVR expires in May 2010. 2. Article 6:248 DCC. 3. Article 6:228 DCC. 819 Suzan Lap within reasonable boundaries, to prevent that the other party enters into such agreement under the influence of incorrect understandings. Dutch case law provides in the following consideration concerning precontractual disclosure of information and examination: ‘‘the extent to which the seller needs to disclose information to the purchaser, also depends on what the seller may expect from the examination effort of the purchaser.’’4 The Supreme Court ruled in its judgment of January 25, 2002 (LJN: AD7329, C00/118HR (Paalman/Lampenier)) that the principles of reasonableness and fairness, in relation to the nature of the franchise agreement, do not imply in general that the franchisor is obliged to provide the franchisee with the expected turnover or forecasts. The special circumstances of a case may, however, give rise to such obligation. To the extent that information is provided, the parties may rely that the information which has been provided by the other party is correct. Providing the franchisee with too optimistic forecasts may therefore lead to liability of the franchisor. Following Dutch case law, any forecasts provided to the franchisee by the franchisor should be based on a thorough market and location research, carried out with due care.5 Failure to do so may lead to liability for the franchisor. Contractual Clause: ‘‘The Franchisor has provided the Franchisee with all information with respect to the envisaged business operation which the Franchisor should reasonably know to be of relevance for the Franchisee to make an informed decision with respect to entering into the Franchise Agreement.’’ It should be noted that the consideration outlined above, is rather one-sided, that is in favor of the franchisee. An alternative clause could be: ‘‘Each of the Parties has provided the other Party with all information, including information concerning the envisaged business operation, of which the providing Party should reasonably know it to be of relevance for the other Party to make an informed decision with respect to entering into the Franchise Agreement. Moreover, each of the Parties has performed the necessary investigations to acquire all relevant information it needs to take an informed decision with respect to entering into the Franchise Agreement.’’ 4. For example Supreme Court, Dec. 22, 1995, NJ 1996, 300 with regard to a due diligence. 5. For example: District Court Arnhem, Jun. 18, 1999, Prg 1999, 5211 and District Court Breda, Apr. 14, 1998, Prg 1998/4976 (Aviti/Kinderparadijs). 820 The Netherlands II. Contract Formation 1. Forms (written versus oral) For an agreement—and thus a franchise agreement—to be valid, the following basic requirements must be met: (i) there must be an offer and an acceptance of that offer;6 an agreement is reached by the acceptance of the offer;7 (ii) any legal act requires the intention of a party regarding the legal consequences revealed by a statement to that effect;8 (iii) each of the parties must be competent (e.g., minors or persons under legal restraint are not competent) to enter into an agreement otherwise the contract is voidable.9 In this respect it is also relevant that a legal entity is represented by a natural person authorized to do so; (iv) the rights and obligations under the agreement should be identifiable or at least the criteria of establishing these rights should be set forth;10 (v) the agreement may not contravene public, mandatory law and good morals (goede zeden) otherwise it is null and void by operation of law;11 (vi) the limits imposed by the principle of reasonableness and fairness should be taken into account. See the General Preliminary Note above. Pursuant to Dutch law no registration or particular form is required for a franchise agreement to be valid. In view of the purpose and complexity of a franchise agreement it seems highly unlikely that a franchise agreement is entered into orally. Also for evidentiary purposes an agreement in writing is preferable. Parties are free to stipulate in their negotiations (which arrangement could be laid down in a letter of intent) that a written form of agreement is required in order for the envisaged franchise agreement to come into effect. Such condition might be helpful in the event that the negotiations are broken off one-sidedly (see below). In any event, according to Article 17 of the Brussels Convention, respectively Article 2 of the New York Convention, clauses with respect to jurisdiction and arbitrage must be agreed upon in writing. There is no obligation under Dutch law that a written (franchise) agreement needs to have been drafted in the Dutch language. It should be noted that under Dutch law, breaking off negotiations at an advanced stage may result in liability for compensation (or even an obligation to continue the negotiations), even if a franchise agreement does not yet exist. 6. 7. 8. 9. 10. 11. Article Article Article Article Article Article 6:217 DCC. 3:37 DCC. 3:33 DCC. 3:32 DCC. 6:227 DCC. 3:40 DCC. 821 Suzan Lap Such liability will arise if the counterparty has a legitimate expectation (gerechtvaardigd vertrouwen) that a (franchise) agreement will be concluded. In a recent case, a franchisor that broke off negotiations was ordered to compensate the lost revenue that the franchisee would have been able to make if the franchise agreement would have been concluded.12 The court considered—among others—that the franchisee had invested time and money in the selection procedure, the franchisor’s selection commission had given a positive advice and had already sent the franchisee a congratulation letter regarding the intended partnership. The franchisor’s defense that unforeseen circumstances justified the termination (i.e., the pressure of shareholders to reduce costs) failed. Indeed, the court ruled that such argument expressed that the decision to terminate the negotiations was an internal, strategic choice, which is at the risk and expense of the franchisor. With respect to the calculation of the compensation the court awarded damages based on the yearly revenues (in this case the expected revenues were included in the franchise agreement and calculated on the basis of the gross wage, operating profits and increase of goodwill) for the duration of the agreement. 2. Formalities In respect of the formalities on registration, reference is made to the comments included in the introduction section. 3. Admitted means of proof The admitted means of proof for a (franchise) agreement are determined in Articles 149 et seq. of the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering—‘‘CCP’’). Article 150 CCP outlines the basic rule that the party will be required to offer evidence of facts that he has asserted. Having said this, statutory rules or the principles of reasonableness and fairness may require that the burden of proof be borne by another party. In the Netherlands the ‘‘freedom-of-evidence’’ rule applies; evidence may be supplied in any appropriate form except where the law provides otherwise. For example, a written agreement; deeds and judgments; inspection of accounts, records and documents; witness testimony; formal or oral reports by experts; or inspections of and visits to premises. It is long standing case law that agreements are interpreted in accordance with the intentions of the parties.13 In view hereof it is advisable to hold on to minutes, draft versions of an agreement and notes of the negotiations, in order to prove the intentions of the parties, if needed. Having said this, the textual meaning of words, as read in the context of the entire agreement, is becoming more important. In a recent case concerning the interpretation of a complex and detailed commercial contract (share purchase agreement) which had been negotiated with expert legal 12. Amsterdam District Court, Jun. 4, 2008, LJN: BE9628. 13. Supreme Court, Mar. 13, 1981, NJ 1981, 635. 822 The Netherlands assistance/between expert parties, the Supreme Court ruled that at the most obvious textual meaning of words was the decisive starting point, but that both parties could put forward evidence of their intentions to the contrary.14 Although there is no (statuary) obligation to this effect, parties could consider including a clause stipulating that the franchise agreement should be interpreted solely on the textual meaning of the words or a clause concerning the forms of proof which are admitted. III. Purpose 1. Products and territory The essential aspect of franchise is that the franchisor provides the franchisee with a business concept (‘‘Franchise Formula’’) (often against a financial remuneration). The Franchise Formula can be limited to know-how and/or intellectual property rights regarding a production process. However, it often also relates to the presentation of a product/service in the market, that is the Franchise Formula aims to provide for a concept of efficient distribution by uniform businesses, by means of which is intends to build a strong brand. A Franchise Formula can relate to any product or service, however, most commonly they relate to consumer goods. A clause relating to the product description as subject of a franchise agreement depends on the intentions of the parties and the specific product or service involved. To stimulate the franchisee to make investments with the object to successfully exploit the Franchise Formula, the franchisor may be willing to grant exclusivity to the franchisee with respect to a certain territory (or customer group), that is the franchisor will not appoint any other franchisee in that specific territory (or with respect to that specific customer group). Such restriction is generally exempted from the prohibition on restrictive agreements set out in Article 6 of the Dutch Competition Act and Article 101 TFEU by the BEVR (see General Preliminary Note above). Having said this, franchise systems are often set up as selective distribution systems. Members of a selective distribution system can generally be prevented from selling the relevant products to unauthorized resellers. However, they must be free to sell to any other member of the system, as well as any end-user irrespective of their location. A territorial restriction as to where the franchisee can sell the products cannot be upheld and qualifies as a hardcore restriction.15 The (only) territorial restriction allowed for under the BEVR is a provision prohibiting the franchisee to sell from a location which is not authorized by the franchisor. 14. Supreme Court, Jan. 19, 2007, NJ 2007, 575 and Supreme Court, Jun. 29, 2007, NJ 2007, 536. 15. Article 4 sub C BEVR. 823 Suzan Lap Contractual Clause: ‘‘Subject to the terms and conditions of this Franchise Agreement, the Franchisor hereby grants to the Franchisee and the Franchisee hereby accepts, an [exclusive] license in the Territory: – to exploit the Franchise Formula in accordance with the instructions and guidelines set forth in the Formula Description; and – to use the Intellectual Property Rights for the sole purpose of exploiting the Franchise Formula [(from authorized locations)] in accordance with the instructions and guidelines set forth in the Formula Description.’’ 2. Subfranchisees There are no specific rules in Dutch law that deal with the matter of appointing subfranchisees. However, in view of the object of the franchise agreement, there is no obligation on the franchisor to allow the franchisee to appoint Subfranchisees. a. Appointment of Subfranchisee If the franchisor allows the franchisee to appoint Subfranchisee, the franchisor may set selection criteria that have to be met by such Subfranchisees, in order to be appointed. Moreover, in this respect it is suggested to include specific clauses in the franchise agreement between the franchisor and the main franchisee that the franchisee will impose the same rights and obligations on a Subfranchisee as are set for in the main franchise agreement between the franchisor and the main franchisee. In addition, attention should be paid that the main franchise agreement includes a liability clause/guarantee stating that the franchisee is liable for/guarantees that Subfranchisees, appointed by the franchisee, will act in accordance with all applicable rules and obligations. b. Prohibition regarding the appointment of subfranchisees The franchisee acts as an independent party, who sells the specific franchise products for its own account and at its own risk. The franchisee is therefore—within certain boundaries—free to organize its business and to use among others subfranchisees in order to fulfill his obligations under the franchise agreement. However, pursuant to the principle of reasonableness and fairness, the franchisee has to act as a prudent businessman and must therefore also look after the interests of the franchisor. The franchisor is the owner of the Franchise Formula and the intellectual property rights and may not be confronted with Subfranchisees appointed by the franchisee against its will. It is quite common, in view of (i) the principle behind a franchise agreement; (ii) the required control of the franchisor in connection thereto; and (iii) the ownership of the Franchise Formula by the franchisor, to 824 The Netherlands restrict the possibilities for a franchisee to appoint Subfranchisees and/or third parties to perform any obligations under a franchise agreement. In this respect please find below a suggestion for drafting such clause: Contractual Clause: ‘‘Without the prior written approval of the Franchisor, the Franchisee is not allowed to appoint any Subfranchisee.’’ IV. Rights and Obligations of the Franchisee 1. Prior to operating the business: securing the site (acquisition or lease of the site by the franchisee) Under Dutch law, no specific regulation exists in this respect. It is up to the parties whether the franchisee shall acquire or lease the business location from the franchisor or a third party and/or whether or not any other premises from which the franchised business will be undertaken by the franchisee should be approved by the franchisor. In the circumstances that the franchisee and the franchisor entered into a commercial lease agreement for the premises, Dutch law provides for restrictions in relation to the termination of such lease agreements. Commercial lease agreements can only be terminated by the landlord for specific grounds.16 These rules are of a mandatory nature. In principle, Dutch law prescribes a minimum commercial lease period of five years. This may give rise to difficulties if the franchise agreement will be terminated, for any reason whatsoever, before the end of the lease. If parties wish to include clauses in the franchise Agreement concerning the lease term and to deviate from mandatory Dutch law on lease, it is recommended to file a request for approval of the deviating clauses with the district court prior to concluding the relevant agreement(s). If the district court approves the deviating clauses, these clauses will apply between the parties. Whether a court is likely to grant the approval depends—inter alia—on the formulation of the clauses and the motivation of the request for approval. Following Article 7:291 subparagraph 1 DCC, the district court has to consider whether the deviating letting clauses do not materially infringe the lessee’s rights or whether the lessee’s (i.e., franchisee’s) social standing in relation to the franchisor is as such that the franchisee does not need the protection of Dutch commercial lease provisions. These standards are not usual under Dutch law (they are introduced in August 2003) and, therefore, Dutch courts still have to give substance to such standards in more detail. In a case of November 15, 2005, the court stated that a good business relation between the franchisor and franchisee 16. Article 7:293 DCC. 825 Suzan Lap (alone) is not decisive in relation to the franchisee’s social standing and therefore refused to approve the deviating clause.17 As an alternative solution, instead of filing a request of approval with the court, the parties may agree in the lease that the use of the leased object is restricted to exploitation of the franchised business. Such clauses are generally enforceable and may lead to the same effect: the leased object can no longer be used after termination of the franchise agreement, which is likely to trigger the lessee to terminate the lease agreement. A combination of both options (restricting the object of the lease and filing a request of approval with the court) has been successful in a recent case.18 The court determined that the deviating letting clauses did not materially infringe the lessee’s rights, since there were restricted possibilities for use (as a result of a provision in the lease agreement) and the franchise agreement included sufficient protection of the franchisee’s investments. Contractual Clause: ‘‘The Franchisee may only exploit the Franchise Formula from a location which is approved in advance by the Franchisor in writing. The approval of the Franchisor will not be unreasonable withheld. To obtain approval, the Franchisee must provide the Franchisor with written information concerning the proposed location, including [address, financials, photographs (inside and outside), geographic information, etc.]. In the event that the Franchisor has not informed the Franchisee within [one] month after receipt of the written notice of the proposed location, with its approval or disapproval, the proposed location will be deemed to be approved by the Franchisor.’’ and optional in addition hereto: ‘‘The Franchisee specifically acknowledges that site approval by the Franchisor is not to be interpreted as a guarantee of success or profitability of the franchised business which is to be operated at the location.’’ 2. Operation of the business a. Initial franchise fee and royalties Dutch law does not provide for specific regulations as regards initial franchise fees and/or royalties. It is up to the parties to determine these fees (provided that the fees are reasonable and fair). 17. Court of Appeal ’s-Hertogenbosch, LJN: AV5179. 18. Court of Appeal ’s-Gravenhage, Aug. 25, 2006, WR 2007/10. 826 The Netherlands The initial franchise fee may depend amongst others on the costs relating to the research and development of the Franchise Formula, the franchisor’s assistance to the franchisee and the use of the brand of the franchisor. Since it may not be easy for the franchisor to increase such franchise fees after it was agreed to with the franchisee, the fees should be carefully considered. Reference is made to section IV(2), point d. Contractual Clause: ‘‘In consideration for the rights granted to the Franchisee pursuant to this Franchise Agreement, Franchisee shall pay to the Franchisor a contracting fee in the amount of EUR []. In addition to this contracting fee, Franchisee shall pay to the Franchisor royalties in the amount of [EUR [] per month/[]% of the net turnover ([excluding/ including] VAT) of the franchised business of Franchisee per [month/quarter of a year].’’ [Naturally such arrangement will need to be complemented with arrangements concerning (late) payment, interest, calculations, objections to calculations, right of Franchisor to review Franchisees administration, etc.] b. Advertising and marketing Since there is no specific regulation under Dutch law regarding ‘‘advertising and marketing’’ obligations on a franchisor or franchisee, the principle of freedom of contract applies. In protection of the Franchise Formula a franchisor is likely to want to retain control over advertising and marketing. The Franchise Description may therefore include specific details concerning advertising and marketing. Moreover, it is not uncommon that the franchisor performs all or part of the marketing activities on behalf of the entire network and, in relation thereto obliges the franchisee to contribute to the franchisor’s budget for marketing activities. Contractual Clause: ‘‘On behalf of the Franchisee, the Franchisor shall perform the following activities: —coordinate sales promotion, public relations and advertisement; —( . . . ).’’ or ‘‘Promotional Activities (A) The Franchisee shall use its best efforts to promote the sale of the Products in the Territory. 827 Suzan Lap (B) The Franchisee will only use promotional materials, such as catalogues, furnished by the Franchisor in respect of the Products [and in conformity with the instructions contained in the Franchise Description]. (C) In deliberation with the Franchisor, but at its own account, the Franchisee will attend relevant fairs and exhibitions or perform other specific promotional activities, such as the development of an internet website. (D) Notwithstanding sub B, the Franchisee is entitled, but at its own account, to use other promotional materials, than the materials provided by the Franchisor, subject to the prior written approval of the Franchisor [and in any event solely in conformity with the instructions contained in the Franchise Description].’’ c. Compliance with the franchisor’s standards It goes without saying that the franchisor’s standards are only useful when the franchisee complies with such standards. The franchisor should include in the franchise agreement specific provisions regarding the supervision of the franchisee to ensure that he complies with the franchisor’s standards, for example a provision which allows regular inspection of the site by the franchisor. Moreover, the franchise agreement may include sanctions on infringements of the standards (e.g., fines or even termination of the agreement). There are no specific limits on supervision of franchisees by the franchisor under Dutch law. If, however, the franchisee is a natural person and the franchisor supervises the franchisee too closely, this could involve the risk that the franchisee shall be considered as an employee under the employment rules, as well as tax legislation. Pursuant to Article 7:610 DCC, there is an employment contract under civil law (i.e., granting employee protection rights, such as protection against unwilling dismissal, minimum wages and minimum holidays), if the following conditions are fulfilled: (i) the employee has to perform the work personally,19 (ii) the employer is obliged to pay the employee and (iii) there is an authority relationship between the employer and employee.20 Following a judgment of July 16, 2008, all facts and circumstances should be assessed together to determine whether an agreement is an franchise agreement or an employment contract.21 The tax authorities apply similar criteria. Although there is a chance that a franchise agreement meets these criteria, such cases are highly exceptional. For the sake of completeness, it should be noted that, since the 19. Central Appeals Tribunal for the public service and for social security matters (‘‘CRvB’’), Dec. 12, 1997, RSV 1998/121. 20. CRvB, Feb. 26, 1998, RSV 1998/122. 21. District Court, Groningen LJN: BD7453. 828 The Netherlands tax authorities are even more inclined to assess a case on the factual circumstances than the civil law judges, the chance that a franchise agreement qualifies as an employment agreement from a tax perspective is more likely than from an employment law perspective. The tax authorities put particular emphasis on the franchisee’s ability to have the work performed by someone else. In order to get confirmation that the agreement does not qualify as an employment relationship from a tax law perspective, the franchisee can file an application for a Declaration of Income Tax Status (Verklaring Arbeidsrelatie (‘‘VAR’’)) with the Dutch tax authorities. A VAR will safeguard the franchisor of payment of employee insurance contributions and wage tax contributions. Contractual Clause: ‘‘The Franchisee shall exploit the Franchise Formula on his own behalf and risk. Nothing in this Franchise Agreement shall be construed to constitute the Franchisee as a partner, employee or agent of the Franchisor. The Franchisee shall express his capacity as an independent entrepreneur towards third parties, yet observing the identity of the Franchise Formula. Unless expressly authorized in writing, the Franchisee shall have no authority whatsoever to accept, assume or create any obligation of any kind in the name of or on behalf of the Franchisor, or to execute, perform in the name of the Franchisor, any contract, commercial paper or other instrument of any kind. The Franchisee undertakes to comply with any [written] instructions of the Franchisor in relation to the exploitation of the franchised business in conformity with the Franchise Formula, [unless such instructions cannot be complied with without creating an unreasonable burden on the Franchisee].’’ d. Fate concerning improvements and modifications of standards and specifications of the franchisor’s concept In general, it should be noted that only to the extent that a proposed amendment to the franchise agreement (including a proposal to amend the Franchise Formula) is accepted by the other party to the franchise agreement it will come into effect. Since the franchisor (and the franchisee) is (are) likely to improve and amend the Franchise Formula/Franchise Description in the course of exploiting it, the franchise agreement should include an arrangement concerning amendments to the Franchise Formula/Franchise Description. In any event it is useful that the definition of Franchise Formula/Franchise Description includes the reference ‘‘as amended from time to time.’’ We note, however, that in case the substance of the franchise agreement is amended, the franchisor generally needs the franchisee’s explicit approval, irrespective of the fact that such arrangement is included in the franchise agreement. Reference is made to the judgment of the Court of Appeals Arnhem of 829 Suzan Lap March 30, 1999.22 In this case, the amendments by the franchisor, that is amending the Franchise Formula, without the franchisee’s explicit approval and a realistic possibility for the franchisor to continue the former Franchise Formula, led to unacceptable unilateral conduct of the franchisor, which justified an outof-court termination by the franchisee. The franchise agreement even included the possibility for the franchisor to amend the franchise agreement, but, since no in-depth investigation was possible given the nature of the interlocutory proceeding, it could not automatically be assumed that the intention of parties also pertained to provide for the possibility of unilateral amendments in the franchise agreement of such substantial nature as in the current case. In a more recent case of November 23, 2007 the franchisor continued under a new name and provided for the possibility for franchisees who did not agree to fulfill the former franchise agreement.23 This unilateral policy change was considered a breach of contract by the franchisor. The Court stated that franchisee’s fear that the franchisor would hardly invest to maintain the (former) franchise formula like before was justified and performance of the franchise agreement could not be required from the franchisee. The breach of contract justified the termination of the franchise agreement by the franchisee. Furthermore, if the franchise agreement provides for a procedure in case of substantial amendments and the franchisor does not follow such procedure, the franchisee is correct in taking the position that the former franchise agreement is still in force.24 Contractual Clause: ‘‘The Franchisor is entitled to amend, to improve or to edit the Franchise Formula and/or Franchise Description from time to time. The Franchisor shall inform the Franchisee of such changes by written notice ultimately [two] months prior to the day the amendments will have effect. In the event that the changes create an unreasonable burden on the Franchisee, it shall notify the Franchisor, within [one] month upon receipt, of the aforementioned written notice, in which event Parties shall undertake to find a reasonable solution.’’ Compliance with the amendments in the Franchise Formula may lead to the need to increase the franchise fee. In this respect, the franchisor should take into account that franchise fees can only be amended (under certain circumstances) if the franchise agreement provides for the possibility thereto or if rules of reasonableness, fairness or good faith justify such amendments. In both situations, if disputed by the franchisee, it is up to the franchisor to demonstrate the need of the increase of the franchise fee. 22. 98/265 KG. 23. District Court Utrecht, Nov. 23, 2007, LJN: BB9205, KG. 24. District Court Utrecht, Dec. 7, 1999, nr: 106630/KG 99—1076/BL (Steyn/Vobis Microcomputer). 830 The Netherlands e. Compliance with the franchisor’s IP rights There are no specific regulations as to the compliance with the franchisor’s intellectual property rights. The intellectual property rights provisions should, however, not have the same object or effect as any of the restrictions which are not exempted under the BEVR (as mentioned in Articles 4 and 5 of the BEVR). In this respect reference is made to our comments included in section V(1)(b). f. Reporting obligations All sorts of reporting obligations may be relevant, necessary or desired in a franchise-relationship. For example, in the event the franchisee is obliged to pay a (monthly) fee related to the monthly net turnover of the franchisee’s business, it may be relevant to include the right of inspection of the franchisor of the books and records of the franchisee. Contractual Clause: ‘‘The Franchisee hereby acknowledges that the Franchisor is entitled to [regularly] check if the Franchisee undertakes the franchised business in accordance with the terms and conditions of this Franchise Agreement and/or the Franchise Formula and/or the Franchise. In connection herewith, the Franchisee grants Franchisor access to its administration and other relevant documentation and information and Franchisee agrees to provide such information to the Franchisor as may [reasonable] requested for by the Franchisor.’’ V. Rights and Obligations of the Franchisor 1. Communication of know-how a. Initial know-how We recommend precisely indicating the franchisor’s know-how in the franchise agreement. A complete and precise description of the know-how will strengthen the position of the franchisor in a possible dispute with the franchisee regarding this subject. b. Evolution In the event a franchisee improves or modifies the Franchise Formula or the relevant goods/services, the franchisee will become the owner of such modified or improved concept or goods/services under Dutch law. 831 Suzan Lap The guidelines accompanying the BEVR indicate that, in light of the protection of the franchisor’s intellectual property rights, it is generally exempted to include in the franchise agreement the franchisee’s obligation to inform the franchisor about the acquired experience with the Franchise Formula and to grant the franchisor and all other franchisees a non-exclusive license of the know-how resulting from this experience. If the franchisor wishes to prevent that the franchisee becomes the owner of the improvements of the Franchise Formula, the franchisor can include a provision in the franchise agreement which prohibits the franchisee from modifying or improving the Franchise Formula or the Franchise goods/services and/or a provision that provides that, to the extent new intellectual property rights arise, such intellectual property rights will automatically pass to the franchisor and, to the extent such intellectual property rights cannot automatically pass to the franchisor, the franchisee undertakes to cooperate with the assignment of the intellectual property rights to the franchisor. In connection herewith the following clause can be included in the franchise agreement. Contractual Clause: ‘‘[The Franchisee is not entitled to modify or improve the Franchise Formula/ Franchise Description, [without the prior written approval of the franchisor].] Any new intellectual property rights originating from the Franchise Formula and/ or the exploitation of such Franchise Formula by the Franchisee vest in the franchisor and insofar as they vest in the Franchisee are hereby transferred to the franchisor (now for then) by the Franchisee, which transfer is hereby accepted by the franchisor by the signing of the Franchise Agreement. Insofar as the transfer of such rights requires an additional deed, the Franchisee hereby irrevocably authorizes Franchisor to draw up and sign such deed on the Franchisee’s behalf.’’ On the other hand it is also possible that the Franchisor might benefit from any improvements or modifications of the Franchise Formula made by the Franchisee and that it is in the interest of the Franchisor to stimulate the Franchisee to improve and modify. If such is the case, it could be considered to include the following clause: ‘‘The Franchisee undertakes to inform the Franchisor about the acquired experience in connection with the Franchise Formula and to grant the Franchisor and all other franchisees of this Franchise Formula a non-exclusive license to use the know-how resulting from this experience. The non-exclusive license to use the know-how is hereby granted to the Franchisor and the other franchisees of the Franchise Formula by the Franchisee and insofar as such granting of a non-exclusive license requires an additional deed, the Franchisee hereby irrevocably authorizes the Franchisor to draw up and sign such deed on the Franchisee’s behalf.’’ 832 The Netherlands 2. Assistance to the benefit of the franchisee a. Initial assistance As regards the franchisor’s obligation to provide the franchisee with assistance, we note that, according to Dutch case law, a franchise agreement involves a special duty of due care of the franchisor. Such special duty of due care brings along an obligation for the franchisor to provide the franchisee with continuing advice and assistance if the franchisee does not reach the forecasts. Not fulfilling such obligation may lead to liability of the franchisor for compensation.25 Contractual Clause: ‘‘The Franchisor undertakes to supply the franchisee with commercial and/or technical support and to a regular transfer of know-how, by means of [arranging for sales meetings and product workshops and sales workshops]. On behalf of the Franchisee, the Franchisor shall perform the following activities: – consulting regarding exploitation of the undertaking of the Franchisee, in particular concerning its product assortment, pricing, staffing policy and work force, management and administration; – coordinate sales promotion, public relations and advertisement; – workshops and (re)training of the Franchisee and its staff; – other services as expressed in the Franchise Description. Together: the ‘Services’. In consideration for the Services the Franchisee shall pay the Franchisor a [monthly fee in the amount of EUR []/a fee equal to []% of the net turnover ([excluding/ including] VAT) of the franchised business of the Franchisee]. In the event the Franchisee uses other services of the Franchisor, as the Services, the Franchisor shall determine a reimbursement for these additional services.’’ VI. Term and Renewal 1. Limited term a. Initial term Pursuant to Dutch law and the freedom of contract, parties can in principle agree upon a limited or an unlimited term of the franchise agreement. Elements that may 25. For example: District Court Arnhem, Jun. 18, 1999, Prg 1999, 5211 Court of Appeal ’s-Hertogenbosch Nov. 26, 1996, Prg 1997/4675, Court of Appeal Arnhem, Aug. 31, 1999, NJ 2000/708 and District Court Zwolle, Dec. 21, 2005, LJN: AV4181 (in the last mentioned case, the franchisor had fulfilled its duty of due care against the franchisee). 833 Suzan Lap play a role in determining the term of the franchise agreement are—inter alia—the term needed by the franchisee to amortize the investments made in respect of the exploitation of the Franchise Formula and the desire of the franchisor to retain control over the complexity and uncertainty of exploitation of the Franchise Formula through the possible renegotiations after x years. In a ‘‘normal’’ distribution relationship, the desire to impose a non-compete obligation on the other party may also influence the term since such non-compete obligations and/or exclusive purchasing obligations are only automatically block exempted by the BEVR for a maximum duration of five years. Having said this, in the event of a franchise agreement, a non-compete obligation is often needed to protect the common identity and reputation of the franchise network. If this is the case, such non-compete obligation does not qualify as an restrictive agreement. Therefore, a non-compete obligation for the duration of the franchise agreement will not be problematic from a competition law perspective, irrespective of the term of the franchise agreement.26 Contractual Clause: ‘‘This Franchise Agreement shall be effective as of the date hereof for a limited period of [five] years, unless terminated by either Party in accordance with this Franchise Agreement.’’ or ‘‘This Franchise Agreement shall be effective as of the date hereof and shall expire upon the [fifth] anniversary of such date, unless terminated during this term by either Party in accordance with this Franchise Agreement. Parties undertake to discuss and negotiate an extension of the Franchise Agreement ultimately [six] months prior to the expiration of the term.’’ or ‘‘A Extension of the term Subject to section B hereafter, the Franchisee may renew its right to operate as a franchisee of the Franchisor for successive [five] year terms, on the same terms and conditions on which the Franchisor is then customarily granting new franchises; or, if the Franchisor is not then granting any new franchises, then on the same terms and conditions on which the Franchisor is customarily granting renewal franchises by executing the then current form of such agreement. The Franchisee will not be required to pay a renewal fee upon exercise of such right. The Franchisee must give the Franchisor written notice of intent to renew such right not more than [six] months prior to the expiration of the preceding term. 26. European Court of Justice, Jan. 28, 1986, Case 161/84 (Pronuptia). 834 The Netherlands B Refusal to extension Notwithstanding the foregoing provision, the Franchisor will not be obliged to renew the Franchisee’s rights to operate as a franchisee of the Franchisor if the Franchisee has failed to fully perform his duties, obligations and covenants during the preceding term or is then in default of any provision of this Franchise Agreement.’’ and ‘‘This Agreement shall be effective as of the date hereof and is agreed upon for an unlimited period of time.’’ VII. Exclusivity 1. Territory and internet In accordance with the BEVR, the franchisor may grant an exclusive territory to the franchisee, to the extent that the market share of the franchisor does not exceed 30%. If the franchisor’s market share exceeds 30%, such agreements require an individual justification (the franchisor’s costs to enter into the market (sunk costs) may for example be such justification). Having said this, we note that it is prohibited to restrict the territory in which the franchisee can sell the products which are the object of the franchise agreement. Reference is made to section III(1). As to (the exclusivity of) the internet, we note that following the BEVR the franchisor cannot prohibit the franchisee from selling via the internet. However, the franchisor may set quality criteria as regards sales on the internet/a website. 2. Trademark Reference is made to section III(1). 3. Supplies As regards the franchisor’s obligation to exclusively supply to the franchisee, reference is made to section VII(1). As regards the franchisee’s obligation to exclusively purchase the products of the franchisor, reference is made to our comments relating to a non-compete stipulation (section VI(1)). Having said this, we note that in addition to sourcing from the franchisor or a source appointed by the franchisor, a franchisee should always be allowed to purchase from other members of the franchise network as well. Restrictions of sales between members of a selective distribution network constitute a hardcore restriction of competition law. 835 Suzan Lap It should be noted that if a clause is in contravention of competition law, the Court of Appeal of Leeuwarden recently determined that such void clause may not be converted into a less far-reaching (acceptable) clause.27 Contractual Clause: ‘‘Without prejudice to Franchisor’s right to sell and purchase Products from other authorized franchisees, the Franchisee shall be obliged to purchase from the Franchisor [or a supplier appointed be the Franchisor] the products as listed in Schedule x.’’ VIII. Assignment of the Agreement 1. Acceptance clause Article 6:159 DCC provides for the requirements for the assignment of a contract. The assignment of a contract requires the cooperation of the counterparty of the assignor and can only be effected by means of a deed between the assignor and assignee. The third party will be bound by the obligations set out in the franchise agreement between the franchisor and the franchisee. Freedom of contract allows the parties to the franchise agreement to agree on any additional conditions with respect to the assignment of the franchise agreement by the franchisee or the franchisor for that matter or exclude the right to such assignment in full. Below we have included optional clauses which also provide for a right of first refusal of the franchisor. In order to prevent being confronted with new contract partners, parties may also want to include a change of control clause in the franchise agreement, granting the right to terminate the franchise agreement in the event of a change of control in the other party. Furthermore, the franchise agreement may provide for conditions which will—at least—need to be met in order for the franchisor to grant its consent for the assignment, for example: – the proposed franchisee or its principals must meet the franchisor’s reasonable requirements for experience, net worth and character, as applied by the franchisor; – the proposed franchisee or its principals must attend and satisfactorily complete the franchisor’s initial training; – conditions concerning repair and maintenance of the business premises; – the franchisee must execute a general release of any and all claims against the franchisor (and its affiliates); – a transfer fee must be paid—in this respect an exception could be made for an assignment of the franchise agreement by a franchisee if the envisaged 27. Court of Appeal Leeuwarden, Nov. 7, 2007, LJN: BB8288 (Prisma) and the Court of Appeal Leeuwarden, Jan. 30, 2008, LJN: BC 3424 (Mitra). 836 The Netherlands transferee is the spouse or an adult child of a franchisee or in any way related to the franchisee. Contractual Clause: ‘‘In the event the Franchisee intends to sell and transfer its business and thus intends to assign its rights and obligations pursuant to the Franchise Agreement, he shall inform the Franchisor of such intend by written notice. The Franchisor shall have a right of first refusal concerning the envisaged sale and transfer of the business.’’ NB. If so desired this arrangement could be complemented with provisions concerning the logistics of this mechanism, that is what information should be included in the notice, does any term to give such notice apply, within what time frame should the Franchisor react, what happens in the event the Franchisor does not react at all. ‘‘In the event the Franchisor informs the Franchisee in writing that he will not invoke his right of first refusal, the Franchisee is entitled to sell and transfer its business and thus assign the Franchise Agreement to a third party upon prior written consent of the Franchisor. Such consent shall not be unreasonably withheld.’’ IX. Liability 1. Liability of the franchisee towards: a. The franchisor In principle, agreements only have internal effect between the parties to the agreement. Pursuant to Article 6:74 sub 1 DCC, a failure in the performance under the (franchise) agreement requires the non-performing party to repair the damage that the other party suffers therefrom, unless such failure is not attributable to the nonperforming party. However, the specific nature of franchising generates the effect that a defaulting franchisee under a franchise agreement could be considered to effect the whole group of franchisees and the franchisor, which may result in an unlawful act (onrechtmatige daad) of the defaulting franchisee towards the other franchisees.28 As is set out in our comments under section I, the parties may, in principle, rely on the information which has been provided by the other party. Providing the other party with incorrect information may therefore lead to liability. In the event the Franchise Formula has the object to sell goods to customers, a customer may expect the franchise products to comply with the express stipulations 28. Supreme Court, Oct. 12, 1979, NJ 1980, 117. 837 Suzan Lap in the contract as well as its reasonable expectations. The customer may expect the franchise products to have the characteristics which are necessary for the normal use of the products concerned.29 What might reasonably have been expected is determined by weighing all circumstances of the case, such as the nature of the products, the nature of the shop in which the products are sold, the price of the products, other circumstances of the sale and advertising or other information provided by the franchisee. In the event the franchisee gives a warranty with regard to the franchise products, the customer may rely upon such warranty. Under Dutch law, the franchisee may exclude or limit its liability towards customers only to a certain extent, and even such exclusion or limitation of liability could be contrary to the principles of reasonableness and fairness. However, if the customer is a consumer, these rules are mandatory and cannot be set aside.30 In this respect the franchise agreement (or documentation ancillary thereto) should include provisions concerning the division of liability for the products if purchased by the franchisee from the franchisor. While foremost the aforementioned principle applies, under certain circumstances the franchisor can also be liable in respect of customers, for example as a result of the major influence of the franchisor on the products, the nature of the shop in which the products are sold, the price of the products and other circumstances of the sale and advertising or other information provided by the franchisee. In short, the more the franchisor has created a presumption to the customer of one concern and of dependency of the franchisee, the sooner the franchisor shall be held liable to the customer. In addition to and in the absence of a contractual liability, the liability for products, either or not based on tort (onrechtmatige daad), may be relevant too. If a third party suffers damage because of defective products, such third party has a direct course of action based on the common tort rules as set forth in the Articles 6:162 et seq. DCC. Please note that the product liability of the franchisor may also arise under the Articles 6:185–193 DCC, which articles implement the EU product liability rules, which create a strict liability on the part of the producer for damage caused by an unsafe product. Contractual Clause: ‘‘The Franchisee shall indemnify and hold harmless the Franchisor against any and all claims of third parties to the extent that such claim is caused by an act or omission of the Franchisee. The obligation to indemnify the Franchisor does not apply in the event the act or omission of the Franchisee is the consequence of overdue or inappropriate performance of similar obligations by the Franchisor. The Franchisor shall indemnify and hold harmless the Franchisee against any and all claims of third parties to the extent such claims are the consequence of 29. Article 7:17 sub 2 DCC. 30. Article 7:6 DCC. 838 The Netherlands overdue or inappropriate performance of its obligations by the Franchisor to the Franchisee.’’ X. Unilateral Termination 1. Termination grounds Termination can have the legal form of annulment (ontbinding) or termination (opzegging). There is a general provision under Dutch law that an agreement can be annulled in the event of default. This rule is laid down in Article 6:265 DCC. These rules are of a regulatory nature and the parties may agree differently in the franchise agreement. Article 6:265 states that any default by the other party, gives the right to (partially) annul the agreement, unless the default does not justify the annulment. It is up to the party in default to state and provide evidence that the (partial) annulment is not justified. In the event that the correct fulfillment of the agreement is not (temporarily or permanently) impossible, the defaulting party must be given a chance to remedy the default before the agreement can be annulled. Freedom of contract allows the parties to agree upon the grounds for termination of their cooperation (even if there is no default). This freedom is however limited by the principles of reasonableness and fairness, which may have an important complementary effect on the ability to terminate the franchise agreement. In exercising their rights under the franchise agreement the parties should always take into consideration the interests of the other party, including the right of termination. The length of the notice period must be reasonable taking into account all specific circumstances. In Dutch franchise agreements termination rights without a notice period are usually based on a failure to cure a substantial breach of the franchise agreement by the other party, as well as on bankruptcy, liquidation and force majeure. Reference is made to Supreme Court April 21, 1995, NJ 1995, 437 (Kakkenberg) in which the Supreme Court ruled that the mutual interests of the parties should be weighed, and that the reasons for termination are important. If the parties have not provided for rules on termination, an agreement for a fixed term cannot be terminated unless in the event of unforeseen circumstances. If the agreement is concluded for an indefinite term, it generally can be terminated, provided that account is taken of a reasonable notice period. Although the reason for termination may play a role in determining whether a notice period is reasonable, the termination will generally have the desired effect, irrespective of the reason for termination. Having said this, the Supreme Court, ruled in respect of a distribution agreement regarding the import of wines, that had been in place for over 100 years, that the principle of reasonableness prevented termination because there was no compelling reason for such termination.31 31. Supreme Court, Dec. 3, 1999, NJ 2000/120. 839 Suzan Lap Contractual Clause: ‘‘Substantial Breach: Any violation of obligations under this Franchise Agreement may be considered a Substantial Breach in the event that such violation remains uncured for [ ] days to be computed as of the written notice of the breach given by the terminating Party. The Parties hereby agree that a violation of the obligations under article [ ] of this Franchise Agreement shall in any event be considered as a Substantial Breach of the Franchise Agreement Exceptional circumstances: The Parties hereby agree that the following situations shall be considered as Exceptional Circumstances justifying termination by the other Party: (i) (ii) (iii) (iv) (v) 2. bankruptcy of the Franchisor or the Franchisee; receivership of the Franchisor or the Franchisee; liquidation of the Franchisor or the Franchisee force majeure; [other]’’ Notice period The obligation of the Parties regarding the notice period is governed by the principles of reasonableness and fairness, set out in the Articles 6:248 DCC. What should be considered a reasonable notice period, depends on the circumstances of the case and requires an assessment of the mutual interests of parties. Case law is highly casuistic on this point and mainly from the lower courts. The following circumstances are—inter alia—taken into account by the courts:32 (a) (b) (c) (d) (e) the duration of the relationship; the nature and importance of the reasons for termination; whether the termination is due to (reasons caused by) the other party; whether the interests of the counterparty have been considered; whether the agreement included the possibility of termination and that the franchisee, therefore, had to take into account the possibility of termination; (f) whether the franchisee was aware of the intention of the franchise to terminate the agreement; (g) the degree of dependence of the counterparty; (h) whether the franchisee is able to recoup its investments, made in relation to the agreement; 32. District Court Utrecht, Jan. 11, 2000, KG 2000/70; District Court Zwolle, Oct. 19, 2000, KG 2001/38; Court of Appeals Amsterdam, Dec. 19, 1985, KG 1989/121; District Court ’s Hertogenbosch, Dec. 30, 1994, NJkort 1995/11; District Court Arnhem, Jan. 7, 2004, LJN: AO2180; District Court ’s-Hertogenbosch, Jan. 31, 2007, LJN: AZ7537. 840 The Netherlands (i) expectations created, that is explicit or implicit statements as to the duration of the relationship; (j) the time required by the terminated party to adjust to the new situation (i.e., find new suppliers); (k) The timing of the termination (e.g., before or after a trade fair); and (l) The customs in the branch. Considering the casuistic nature of the matter, it is hard to give a rule on what period is reasonable. Nevertheless, in literature as a rule of thumb often a notice period of about 1.2 months per year that the agreement has been in place. Contractual Clause: ‘‘Notice period: In the absence of a Substantial Breach or Exceptional Circumstances this Franchise Agreement may only be terminated by taking into account a notice period of [ weeks/months] In the event of non-compliance with such notice period, the terminating Party shall be liable for the payment of a compensation corresponding as determined in article []).’’ or ‘‘Notice period: In the event of a Substantial Breach or Exceptional Circumstances, each Party may terminate this Franchise Agreement, with immediate effect, by means of a written notice providing evidence and date of receipt (e.g. registered mail with return receipt, special courier).’’ 3. Indemnities a. Notice period compensation indemnity Dutch law does not provide for specific provisions in respect of indemnities. The rules are set by case law provided by the relevant courts. If no reasonable period is taken into account, conversion of the notice period may be in place or a financial compensation in lieu of the reasonable notice period. In the latter event such compensation is generally calculated on the basis of the profit (before taxes) that would have been realized by the franchisee, if there had been awarded a reasonable notice period. b. Goodwill indemnity The franchisee has—in general—no legal right to compensation for goodwill. Indeed, a compensation for goodwill in the event of franchise agreements by analogy to the agency rules, is not common under Dutch law. In a 2005 case,33 33. District Court Arnhem, Jun. 29, 2005, LJN: AU1698. 841 Suzan Lap Court of Arnhem considered that if the franchisee wanted a compensation for goodwill it should have negotiated such compensation in the franchise agreement. In a recent (distribution)case, the District Court of ’s-Hertogenbosch34 considered that no compensation for client or goodwill was due, since the distributor was not obliged to forward the (contact)details of its customers, that is the customers remained customers of the distributor upon termination of the agreement. The circumstance that customers turn directly to the supplier to buy the products of that specific trademark and that the supplier consequently ‘‘gets’’ a sales channel, does not imply that the supplier has been unjustified enriched. Moreover, it is logical that the distributor could build such sales channel by means of the (popular) trademark of the supplier. Because the franchise agreement is governed by the principles of reasonableness and fairness, it is possible that, although the agreement was lawfully terminated, damages may still be due since such damages should not be considered to be part of the business risk of the franchisee and in determining the reasonable notice period account is taken of the interests of both the franchisee and the franchisor. Damages that may have to be compensated are investments (made at the incentive of the Supplier) that cannot be earned back as a result of the termination and costs for personnel that have become redundant. 35 Contractual Clause: Notice period compensation indemnity In case the notice period is not complied with, the Franchisor shall pay to the Franchisee compensation in lieu of the notice period, amounting to [ ]: for example the average monthly purchases’ amount over the last 12 months]. In case of non-performance under the notice period of Clause [], the terminating Party shall be liable to pay a compensation amounting to [ ]. option 1: non lump damages In the event a Party terminates this Franchise Agreement invoking this article, while its reasons for termination do not justify the termination, the termination shall be effective as of the date agreed upon. The applicable court shall state whether the termination is justified or not. In the event Parties did not agree upon an effective date, the court shall determine such date. The non-terminating Party shall be entitled to damages for the unjustified termination. Such damages shall be determined based on the following calculation method [ ], (the ‘‘Termination Penalty’’), unless the damaged Party proves that the actual damage is higher (or, respectively, the Party having terminated the Agreement proves that the actual damage is lower). 34. District Court ’s-Hertogenbosch, Jan. 31, 2007, LJN: AZ7537. 35. Supreme Court, RvdW 1991, 169. 842 The Netherlands option 2: lump damages (penalty clause) The terminating Party, in the event of an unjustified termination, shall be liable to pay, to the other party, by way of lump and undiminishable penalty, and without this impeding the allocation of damages for any higher proven loss suffered by the other party, a sum equal to [ ] (the ‘‘Lump Termination Penalty’’). In the event of termination of the Franchise Agreement, the Franchisee shall not be entitled to an indemnity for goodwill or similar compensation. In the event of termination of the Franchise Agreement, without compliance with the notice period as set forth under article [], the non-terminating party shall be entitled to an indemnity for sudden termination as determined under Annex [ ]. In the event of termination of the Franchise Agreement by the Franchisor for reasons other than a substantial breach by the Franchisee, the latter shall be entitled to an investment indemnity as determined under Annex [ ] XI. Termination 1. Undertaking not to compete a. Franchisee’s undertaking In respect of a non-compete obligation to be imposed on the franchisee, reference is made to our comments included in section VI. Additionally, in accordance with Article 5 b) BEVR, a post contractual non-compete obligation imposed on the franchisee is block exempted for a maximum period of one year after termination of the franchise agreement in the event that such restriction is limited to (i) products/services that compete with the franchise goods/services and (ii) the sale of goods or the provisions of services from the location from where the franchisee exploited the Franchise Formula during the term of the franchise agreement and such restriction and iii) is required in order to protect the know-how provided by the franchisor to the franchisee. Depending on the situation at hand as outlined in section VI and above, the content of the clauses to be included in the franchise agreement concerning a noncompete obligation may differ. b. Franchisor’s undertaking As to the franchisor’s undertaking, we refer to section VII(1). 2. Undertaking not to reaffiliate to a competing franchise Reference is made to section (1)(a), above. 843 Suzan Lap 3. Proprietary right over the clientele As to the intellectual property rights over the clientele, we note that, according to Dutch database law, intellectual property rights of a database belong to the person who constituted such database. In light of this, the intellectual property rights over the clientele will belong to the franchisee. This is, however, regulatory law and can be excluded or deviated from in the franchise agreement by the parties. 4. Fate of customers’ lists created during the franchise agreement (ownership?) and data protection We refer to point C above, following Dutch database law the intellectual property rights over customers’ lists created during the term of the franchise agreement and/ or other data will belong to the franchisee, if constituted by the franchisee. XII. Bankruptcy 1. Liability of the franchisee With a view to the specific qualities of a franchisee, it is common practice to include a provision in the franchise agreement, that the franchisor is entitled to terminate the franchise agreement with immediate effect, in the event of bankruptcy of the franchisee. However, in view of the continuity of the franchisee and the investments made by the franchisee, in the event of bankruptcy of the franchisor, the trustee in bankruptcy of the franchisor may want to try to continue with the business of the franchisor. Unless otherwise provided in the agreement, if the trustee decides to continue the business, the franchisee is not accommodated with an option to terminate the franchise agreement. However, if the trustee in bankruptcy is not able to comply with the obligations of the franchisor under the franchise agreement, the franchisee should be entitled to terminate the franchise agreement. In the event the franchisor as well as in the event the franchisee is declared bankrupt, the question of who was responsible for the bankruptcy should be answered. The responsibility towards the other party for the bankruptcy of the other party may create a liability towards the other party. Contractual Clause: ‘‘The Parties hereby agree that the following situations shall be considered as exceptional circumstances justifying termination by the other Party: (i) bankruptcy of the Franchisee or the Franchisor; (ii) ( . . . ). 844 The Netherlands In the event of exceptional circumstances, each Party may terminate this Franchise Agreement, with immediate effect, by means of a written notice providing evidence and date of receipt (e.g. registered mail with return receipt, special courier).’’ XIII. Jurisdiction/Escalation Clause 1. Amicable settlement Amicable settlement is not subject to restrictions under Dutch law and parties may always try to amicably settle any dispute. 2. Arbitration or litigation In accordance with Articles 1020 and 1074 CCP it is possible to include an option for Dutch or foreign arbitration in the franchise agreement. The procedural rules are set in Articles 1020 et seq. CCP. The Netherlands has signed and ratified the 1958 Convention of New York on the Recognition and Enforcement of Foreign Arbitral Awards. In international cases, a Dutch court will first of all investigate if the Council Regulation (EC) No. 44/2001 of December 22, 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (‘‘EC Regulation 44/2001’’) is applicable to questions on jurisdiction. Article 23 EC Regulation 44/ 2001 is applicable if the parties, one or more of whom is domiciled in a Member State of the EU, have agreed that a court or the courts of a Member State are to have jurisdiction. In other international cases a Dutch court may deem a choice of court clause valid under Article 17 of the Treaty of Lugano of September 16, 1988, the revised Treaty Lugano of October 30, 2007, or Article 8 CCP. Article 42 Dutch Judiciary Organization Act (Wet op de rechterlijke organisatie) and Article 93 CCP (absolute competence—see our comments below), Articles 99 CCP (relative competence—see our comments below) and 108 CCP (freedom of choice of court) are relevant in national cases, and in international cases to determine internal jurisdiction. a. Arbitration Dutch law does not prohibit an arbitration settlement. Next to the already mentioned arbitration rules, it is also possible to stipulate that any dispute will be settled pursuant to the Arbitration Rules of the Netherlands Arbitration Institute. The total number of arbitrators should be odd. Dutch courts will decline jurisdiction if a party invokes a valid arbitration clause before putting forward other defenses. In principle, an arbitrational clause does not preclude a party from petitioning a Dutch court to take conservatory measures or from instituting summary proceedings before a Dutch court, if the court would have jurisdiction otherwise (Articles 1022 845 Suzan Lap and 1074 CCP). The remedy of arbitral appeal is only available, if parties have agreed thereto. A party may seek recognition and enforcement of a foreign arbitral award on the basis of Article 1075 (in conjunction with an international treaty, such as the New York Convention) or 1076 CCP. Leave for enforcement is seldom denied. b. Litigation (ordinary court) In principle jurisdiction shall be exclusive, unless the parties have agreed otherwise. Dutch law provides for a distinction between absolute and relative competence of the courts. Pursuant to Article 99 CCP the court of the place of business of the defendant is relative competent. Article 93 CCP provides that the subdistrict court (kantonrechter) has exclusive jurisdiction amongst others with regard to claims less than EUR 5,000 (this may be changed) and claims regarding employment agreements, tenancy agreements or agency agreements. Cases beyond the competence of the subdistrict court fall within the competence of a ‘‘regular’’ court.36 XIV. Applicable Law 1. Application of standard international rules (UNIDROIT, etc.) Pursuant to Article 1054 CCP Dutch arbitrators should observe a choice of law. A Dutch Court will apply Dutch International Private Law to determine whether a choice of law is valid. Franchise agreements concluded after December 17, 2009 fall under the scope of the Regulation (EC) No. 593/2008 of June 17, 2008 on the law applicable to contractual obligations (‘‘Regulation Rome I’’). The Hague Convention of March 14, 1978 on the Law Applicable to Agency (‘‘Hague Agency Convention’’), which entered into force on May 1, 1992, may also apply, if there is an agency relationship created by the franchise agreement. Please note that the April 11, 1980 Vienna Sales Convention (CISG) is not applicable on the franchise agreement itself, but may be applicable on sales agreements following from the franchise relationship. Pursuant to Article 3 Regulation Rome I the internal law chosen by the franchisor and the franchisee shall govern the franchise agreement. The Hague Agency Convention also honors a choice of law clause.37 In arbitration procedures a choice of law is not restricted to national laws and can include, for instance, international trade usages (lex mercatoria) and the UNIDROIT Principles. In any case the relevant trade usages are considered.38 It is not 36. Article 42 Judiciary Organization Act. 37. Article 5 Hague Agency Convention. 38. Article 1054 CCP. 846 The Netherlands certain whether a Dutch court will allow that these rules and principles derogate from mandatory provisions of national law which are applicable to the case. In the absence of a choice of law, a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence.39 A contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence. Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with another country, the law of that other country shall apply. If, at the time of the choice of law, all of the other elements relevant to the situation (the franchise-relationship) are connected with one country only, a Dutch court has to give effect to the rules of this country, which cannot be derogated from by contract. If, at the time of the choice of law, all other relevant elements are located in one or more EU Member States, also Community law has to be applied, which cannot be derogated from by agreement.40 A Dutch court may always—regardless of a choice of law—give effect to the overriding mandatory provisions of Dutch law and/or the law of the country where the obligations arising out of the contract have been performed.41 Please note that the term ‘‘overriding mandatory rules’’ refers only to provisions, the respect of which is regarded as crucial to a country for safeguarding its public interests. According to the Supreme Court42 a distinction should be made between a distribution agreement and any further sales agreements between parties following from the distribution relationship. A choice of law clause in a sales agreement is not valid for disputes arising out of the distribution agreement. This same rule may apply in the case of franchise agreements and the sales agreements resulting thereof. Contractual Clause: ‘‘This Franchise Agreement [as well as any (sales) contract concluded on the basis of this Franchise Agreement] [is/are] governed by the laws of (name of the country the law of which is to apply).’’ Bibliography Legal Reviews Contracteren Data Juridica Nederlands Juristenblad Praktijkgids 39. 40. 41. 42. Article 4 sub 1(e). Article 3 sub 3 and 4 Regulation Rome I. Article 9 sub 2 and 3 Regulation Rome I. Supreme Court May 24, 1991, NJ 1991, 676 (Häcker). 847 Suzan Lap Rechtspraak contractenrecht Rechtspraal ondernemingsrecht Vennootschap & Onderneming Law Books / Contributions Asser C., bewerkt door A.S. Hartkamp, Asser’s handleiding tot de beoefening van het Nederlands burgerlijk recht, Verbintenissenrecht II, Algemene leer der overeenkomsten, Zwolle, W.E.J. Tjeenk Willik, 1993 Asser C., bewerkt door A.S. Hartkamp, Asser’s handleiding tot de beoefening van het Nederlands burgerlijk recht, Verbintenissenrecht I, De verbintenis in het algemeen, Zwolle, W.E.J. Tjeenk Willik, 1996 Asser C., bewerkt door A.S. Hartkamp, Asser’s handleiding tot de beoefening van het Nederlands burgerlijk recht, Bijzondere overeenkomsten I (koop en ruil), Zwolle, W.E.J. Tjeenk Willik, 1994 Barendracht J.M., Peursem G.R.B. van, Serie recht en praktijk, Distributieovereenkomsten, Deventer, Kluwer, 1997 Bezemer J.C., Burgers J.A.I.M., Praktijkgids franchising, Hilversum, Nederlandse Franchisevereniging, 2008 Paverd, C.A.M. van de, De opzegging van distributieovereenkomsten, Amsterdam, Kluwer Rechtswetenschappelijke Publicaties, 1999 Smit F.M., Serie Praktijkhandelingen, De Agentuurovereenkomst tussen handelsagent en principaal, Zwolle, W.E.J. Tjeenk Willink, 1996 Urlus H.E., Serie recht en praktijk, De Agentuurovereenkomst, Deventer, Kluwer, 1990 Court Decisions Supreme Court, November 15, 1957, NJ 1958, 67 Supreme Court, February 28, 1964, NJ 1964, 456 Supreme Court, January 15, 1971, NJ 1971, 144 Court of Appeal Den Haag, January 12, 1972, NJ 1972, 221 District Court Amsterdam, February 6, 1980, NJ 1980, 459 Supreme Court October 12, 1979, NJ 1980, 117 Supreme Court, March 13, 1981, NJ 1981,635 Court of Appeal Amsterdam, December 19, 1985, KG 1989, 121 (KG) Supreme Court, January 24, 1986, NJ 1987, 56 European Court of Justice, January 28, 1986, Case 161/84 Supreme Court, March 2, 1990, NJ 1991, 5 Supreme Court, June 21, 1991, RvdW 1991, 169 Supreme Court, May 24, 1991, NJ 1991, 676 District Court ’s-Hertogenbosch, December 30, 1994, NJkort 1995, 11 Supreme Court, April 21, 1995, NJ 1995, 437 Supreme Court, December 22, 1995, NJ 1996, 300 District Court ’s-Hertogenbosch, January 25, 1996, KG 1996, 77 (KG) 848 The Netherlands Court of Appeal ’s Hertogenbosch, November 26, 1996, Prg 1997, 4675 Central Appeals Tribunal for the public service and for social security matters, December 12, 1997, RSV 1998, 121 District Court Apeldoorn, January 7, 1998, Prg 1998, 4945 (KG) Central Appeals Tribunal for the public service and for social security matters, February 26, 1998, RSV 1998, 122 District Court Breda, April 14, 1998, Prg 1998, 4967 District Court Arnhem, June 18, 1999, Prg 1999, 5211 Court of Appeal Arnhem, March 30, 1999, 98/265 KG (KG) Court of Appeal Arnhem, August 31, 1999, NJ 2000, 708 Supreme Court, December 3, 1999, NJ 2000, 120 District Court Utrecht, December 7, 1999, 106630/KG 99 - 1076/BL (KG) District Court Utrecht, January 11, 2000, KG 2000, 70 (KG) District Court Zwolle, October 19, 2000, KG 2001, 38 (KG) European Court of Justice, November 9, 2000, NJ 2005, 332 District Court Zwolle, November 7, 2001, NIPR 2002, 120 Supreme Court, January 25, 2002, LJN AD7329 District Court Maastricht, January 29, 2003, NJ 2003, 253 (KG) District Court Arnhem, January 7, 2004, LJN AO2180 District Court Arnhem, January 28, 2005, NIPR 2005, 146 (KG) District Court Arnhem, June 29, 2005, LJN AU1698 Court of Appeal’s-Hertogenbosch, November 15, 2005, LJN AV5179 District Court Zwolle, December 21, 2005, LJN AV4181 Supreme Court, March 31, 2006, LJN AU7933 District Court Rotterdam, February 28, 2006, LJN AX1341 District Court Zwolle, April 6, 2006, LJN AV8717 (KG) District Court Zwolle-Lelystad, July 4, 2006, LJN AY7844 (KG) Court of Appeal ’s-Gravenhage, August 25, 2006, WR 2007, 10 Supreme Court, January 19, 2007, NJ 2007, 575 District Court ’s-Hertogenbosch, January 31, 2007, LJN AZ7537 Supreme Court, June 29, 2007, NJ 2007, 536 Court of Appeal Leeuwarden, November 7, 2007, LJN BB8288 District Court Utrecht, November 23, 2007, LJN BB9205 (KG) Court of Appeal Leeuwarden, January 30, 2008, LJN BC3424 District Court Alkmaar, April 16, 2008, LJN BD1686 District Court Amsterdam, June 4, 2008, LJN BE9628 District Court Groningen, July 16, 2008, LJN BD7453 District Court’s-Hertogenbosch, April 23, 2009, LJN BI6162 (KG) Electronic Database <www.overheid.nl> <www.rechtspraak.nl> <www.legalintelligence.com> 849