Introduction
In long-term franchise relationships, termination is often governed by detailed contractual provisions. Dutch law, however, imposes important limitations on the exercise of contractual termination rights. This has again been confirmed by the Dutch Supreme Court in its judgment of 29 November 2024, which has continuing relevance, particularly for franchise agreements that have existed for many years.
Background of the dispute
A franchisor, Leen Bakker, entered into a franchise agreement with a franchisee in 1995. Under that agreement, the franchisee operated a home furnishings store using the Leen Bakker franchise formula. The franchise agreement included a termination clause providing for a notice period of 13 months and stipulating that termination by the franchisor was only permitted if continuation of the agreement could not reasonably be required.
In mid-2020, Leen Bakker announced that it would discontinue the franchise formula altogether. It subsequently terminated the franchise agreement with the franchisee for business-economic reasons, observing a notice period of three years, which was significantly longer than the contractual notice period.
In addition, Leen Bakker offered to take over the store, pay EUR 40,000 in goodwill compensation, acquire the inventory at book value and take over the trading stock at cost price and book value.
The franchisee challenged the termination, arguing that it was either without legal effect or that Leen Bakker was obliged to pay compensation for damages. The subdistrict court rejected the franchisee’s claims, but the Court of Appeal of ’s-Hertogenbosch overturned that judgment. While the Court of Appeal held that the termination itself was valid, it ruled that Leen Bakker was nevertheless obliged to compensate the franchisee.
Supreme Court judgment and legal framework
In its judgment of 29 November 2024, the Dutch Supreme Court clarified the legal framework applicable to the termination of continuing performance contracts (duurovereenkomsten), including franchise agreements.
The Supreme Court confirmed that a continuing performance contract that contains a contractual termination regime is, in principle, terminable in accordance with that regime. However, where the law and the contract leave room for it, the requirements of reasonableness and fairness under Article 6:248(1) of the Dutch Civil Code may impose additional requirements on the termination.
Those requirements may include:
- the existence of a sufficiently serious ground for termination;
- the observance of a notice period longer than the contractually agreed period;
- the obligation to accompany the termination with an offer to pay compensation or damages.
In addition, reliance on a contractual or statutory power to terminate may, under Article 6:248(2) of the Dutch Civil Code, be unacceptable according to standards of reasonableness and fairness in the specific circumstances of the case.
Compensation and validity of termination
The Supreme Court further clarified the relationship between compensation and the validity of termination.
As a general rule, if reasonableness and fairness require that termination be accompanied by compensation, the absence of an offer to pay compensation does not automatically render the termination invalid. However, the fact that no (adequate) compensation was offered may be relevant when determining the amount of damages owed.
In exceptional circumstances, the Supreme Court held, reasonableness and fairness may require that termination without a simultaneous offer of adequate compensation is unacceptable. In such cases, the termination itself may be invalid.
The Court also addressed the situation where a terminating party observes a notice period longer than the contractual period. Even then, an entitlement to compensation for damages may still exist. The extent to which the longer notice period mitigates or reduces the damages depends on the circumstances of the case, including the extent to which the franchisee was able to adapt its business operations in anticipation of termination.
Consequences
This judgment is particularly significant for franchise relationships, which are often long-standing and characterized by economic dependence, brand integration and substantial franchisee investments.
The judgment confirms that franchisors cannot assume that strict compliance with contractual termination provisions will, in itself, shield them from claims for compensation. Even where a franchisor has a legitimate business reason to terminate and observes a generous notice period, the specific circumstances of the relationship may still give rise to an obligation to compensate the franchisee.
The judgment also fits into a broader trend in Dutch law, in which courts closely scrutinise the exercise of contractual rights in long-term relationships against the backdrop of reasonableness and fairness. This trend is reinforced, though not replaced, by the Dutch Franchise Act, which has applied fully to existing franchise agreements since 1 January 2023.
Goodwill under the Dutch Franchise Act
The Supreme Court did not express an opinion in this judgment on the goodwill regime introduced by the Dutch Franchise Act as of 1 January 2021. That regime requires franchise agreements to address how goodwill attributable to the franchisee will be taken into account if the franchise location is continued after termination.
It is expected that the interaction between general contract law principles on termination and the statutory goodwill provisions of the Franchise Act will increasingly be addressed in damages proceedings following termination. The Leen Bakker dispute illustrates that even where a franchisor offers a goodwill payment, disagreement may still arise as to whether that payment is adequate in light of the overall circumstances.
Practical implications
For franchisors, the key lesson is that termination of a franchise agreement requires more than mechanical application of contractual clauses. A careful assessment is needed of:
- the seriousness of the grounds for termination;
- the length and adequacy of the notice period;
- the economic impact on the franchisee; and
- whether compensation is required to meet the standards of reasonableness and fairness.
For franchisees, the judgment confirms that even a formally valid termination may give rise to a claim for compensation, and in exceptional cases may even be invalid if carried out without adequate safeguards.
Conclusion
Dutch law continues to treat the termination of long-term franchise agreements as a matter requiring substantive fairness, not merely contractual compliance. The Supreme Court’s judgment of 29 November 2024 underscores that reasonableness and fairness remain a powerful corrective mechanism, particularly in franchise relationships marked by longevity, investment and dependency.
Article published by Leeway (The Netherlands)
