The blacklist of unlawful clauses in franchise agreements
The Royal Decree lists 4 types of clauses that are outright forbidden in order to protect franchisees or independent supermarket operators. These are:
- Clauses that intend to deny the franchisee or independent supermarket operator the possibility to seek compensation or to deny or inappropriately restrict their right to seek supplies from third parties if the franchisor fails to comply with the terms for the supply of goods and services or complies with them inadequately.
Charles Claeys: “The continuity of a grocery store’s business comes first. If supermarket chains cannot supply products (because of strikes or difficult price negotiations with producers), then, thanks to the Royal Decree, you the franchisee will be able to seek supplies elsewhere worry-free.”
- Clauses that intend to make the franchisee or independent operator bear more than half of the costs resulting from the materialization and execution of the promotional campaigns that are required by the franchisor.
Lisa Opdecam: “The financial risks for a franchisee are high. Its profitability gets squeezed because of the maximum sale prices imposed, the fixed range of goods that it must purchase from, and the obligation to give all sorts of promotional offers. To give independent supermarket operators better protection, Belgian lawmakers impose on the franchisor the obligation (among others) to bear half of the costs of the promotional campaigns that it requires the franchisee to organize.”
- Clauses that restrict the franchisee’s right during the termination notice period or non-compete period to start negotiations when the franchise partnership has come to an end.
Charles Claeys: “Everyone has the right to do business. A franchisee should not be prohibited from doing everything necessary at the end of the franchise partnership to prepare itself to work with a competing retail chain. The Royal Decree does not forbid non-compete clauses so far. But we should look out for this.”
- Clauses that give jurisdiction to only the courts of the place where the franchisor’s registered office is located to rule on a dispute.
Lisa Opdecam: “Just as what the law on leases stipulates concerning jurisdiction, the court that has jurisdiction is the one in the judicial district where the business is carried out. This is to enable the independent supermarket operator to go to the closest court to settle any dispute.”
The grey list of unlawful clauses in franchise agreements
Moreover, the Belgian legislature finds the following types of clauses unlawful and believes that they must consequently be considered null unless the franchisor can prove otherwise:
- Clauses that set a lump-sum value of the business if the franchisor wishes to acquire the franchisee, unless the value justifies what the franchisee would receive in normal circumstances.
Charles Claeys: “When concluding a franchise agreement, it is not illogical to set a fixed value on a business. An independent supermarket operator works hard, invests, and takes risks. These factors must be able to influence the valuation positively if the supermarket operator sells its business at the end of the career.”
- Clauses that compel the franchisee to run a business that is structurally loss-making for at least 12 months without granting the franchisee the right to terminate the agreement by giving notice of 4 months maximum and without the right to any additional compensation.
Lisa Opdecam: “No one should have to dig a financial hole deeper than necessary. If the independent supermarket operator is making a loss, it must have the possibility to put an end to it on a short term. If not, the costs would only continue to increase, and who would benefit from that?”
- Clauses that give the franchisor the right to terminate the commercial partnership by invoking an explicit dissolution clause.
Charles Claeys: “Contracts with supermarket chains often have clauses that provide for the possibility to terminate the partnership suddenly (for example, in the event of certain breaches of contract or certain situations that are detrimental to the retail chains). Such clauses can be useful, but from now on, supermarket chains will have to justify the termination of their partnership and must give independent operators a chance to remedy their breaches.”
Entry into force
The draft Royal Decree has been approved provisionally by the Council of Ministers. The Council of State must issue their opinion on it by 5 May 2024. The Royal Decree can be expected to enter into force in the second half of 2024.
Conclusion
This new piece of legislation tries to protect the freedom to do business from the independent supermarket operator’s perspective—and this during as well as after the termination of the franchise agreement—by limiting the financial risks they have to bear and by making it easier for them to find a way out.
If you’re a franchisor, you should be cautious every time you conclude a contract, given that an unlawful clause can lead to the nullity of the clause, and this comes with all the additional negative financial and practical consequences of it.
If you’re a franchisee, it’s important that you be aware of any unlawful clauses so that you don’t take on any unnecessary financial or practical risks when you’re running a supermarket. For these reasons, sector organizations advise franchisees to hold off on signing any franchise agreements until the new Royal Decree is in force.
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