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Come, let us reason together? New Dutch code raises thorny questions


Philip F. Zeidman

Illustration by Jonathan Hankin

Dateline: Amsterdam

When we examine the laws that will apply to the relationship between a franchisor and a franchisee in a cross-border context, we are accustomed to asking the usual questions: Will it be governed by the law of the franchisor’s home country? The franchisee’s? Or, in unusual circumstances, the law of a third country?

Is the legal system of the governing country civil law or common law? Is there an established body of judicial precedent? Is there franchise-specific legislation? These are all questions to ponder, as noted by my colleague and co-author of this article, Khaled Dadi.

In assembling this legal inventory, a distinctly lower order of significance is typically accorded to any “code of conduct” or similar set of principles. That’s the case for several reasons. By no means are these present in all countries, and where they do exist they may consist of bland pronouncements, offering little if any guidance to most factual circumstances. They do not have the force and effect of law.

Furthermore, where the source of the code is a franchise association in the franchisee’s country, its provisions may be binding only on a member company, typically located in that country, but that may be of little moment to an incoming franchisor who is not a member of the association.  

The code, too, may be accompanied by language to the effect that it reflects commonly accepted standards of franchisor–franchisee relationships, but there is no assurance that a court will in fact embrace that aspiration in which the code comes wrapped. Often, courts will stick to what they know best and apply general principles of contract law instead of more elusive “customs and practices” specific to a particular sector. 

Overhyped offenses?

There is a traditional pattern of events that usually leads up to the adoption of a code: incidents (sometimes overhyped) of abuses or excesses; mutterings by one or more legislators; a generally understood syllogism: “We are destined to be regulated. If we do not regulate ourselves, the government will do it for us. Therefore we will self-regulate.” And, sooner or later, some form of “code of conduct” or “statement of principles” emerges.

But a credible process assumes that this “self-regulatory” code in fact represents the views of those to be regulated by it; without that prerequisite, it becomes difficult to argue that the code truly rests upon “the consent of the governed.” That ought to be self-evident, but it appears to be where the new “Dutch Code of Ethics” may have gone off the rails.

Indeed, the accustomed scenario did play out in the Netherlands. In a country without legislation dealing specifically with franchising, general rules of contract law were deemed adequate, with the principles of freedom of contract paramount.  

Then, some lawsuits involving high-profile franchises caught the attention of the mainstream press.  Some members of the parliament were prompted to ask the minister of economic affairs to examine possible excesses in the franchise sector.  The minister concluded that there was in fact a need for self-regulation, and “encouraged” franchisors and franchisees to find common ground.

A drafting committee composed of two franchisors (one linked to the Netherlands Franchise Association) and two franchisees, “supported” by employees of the ministry, produced a draft. When confronted with the draft, many franchisors protested on the grounds of vagueness, inconsistency and one-sidedness.  

But the final version, presented earlier this year, was not significantly changed.  There are rumors that some large franchise companies essentially boycotted the process, and it seems clear that franchisors’ views are poorly reflected.

So what is the legal status of this code?  It was produced at the urging of a government official, but in a process that gave it no legal force. And those who drafted it cannot demonstrate that they were expressing the will of the franchise community, at least as far as franchisors are concerned.

Thus, any infirmities in the substance of the code may be less important than the legitimate questions that can be raised as to how it came into being. And surely there are infirmities, or at least grounds for puzzlement.  

One notable example is the position of the minister that alternative dispute resolution mechanisms should be established, because the traditional court structure is not suitable for franchisor–franchisee disputes, a position with which many would surely disagree.

A missed opportunity

It is clear that considerable work went into this code, and there are some salutary intentions behind it. In that sense, it may represent a missed opportunity. Perhaps the episode will serve as an instructive reminder that a form of “self-imposed” regulation that purports to well up from the desires of those to be regulated will be scrutinized to ascertain whether it in fact meets that standard.

Like so many other well-intentioned efforts, the code is being held out as an expression of the ancient call to consensus—in the words of Isaiah, “Come let us reason together.” But the biblical passage that follows immediately, while less familiar, is as significant: “But if you refuse and rebel, ye shall be devoured by the sword.”  

Whatever else can be said for the rather tortured path this code has followed, it can hardly be described as a model of self-regulation.

Philip Zeidman is a senior partner in the Washington, D.C., office of DLA Piper and an expert in international franchise law. Reach him at philip.zeidman@dlapiper.com. Khaled Dadi, who co-authored this article, is an attorney in DLA Piper’s Amsterdam office. Reach him at khaled.dadi@dlapiper.com.

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