New Belgian Civil Code – Impact of this revolution in contract law on franchising agreements

This Book 5 of the new Belgian Civil Code will have an important impact on the negotiating, structuring and drafting of franchise agreements subject to Belgian law. There are a significant number of changes to Belgian contract law (e.g. knock-out rule in battle of forms, a fairness test for standard terms, a revised nullity regime, the partial contract termination, etc.), but the five most key changes specifically for franchise agreements are summarised below.

1. Pre-contractual liability

In addition to the specific liabilities resulting from precontractual disclosure requirements (under Book X, Section 2 of the Belgian Code on Economic Law), a new and more general regime of precontractual liability is introduced. Contrary to the precontractual disclosure requirements, this regime of precontractual liability does not only protect the franchisee but also the franchisor. The principle retains the parties’ freedom to negotiate, but the new Belgian Civil Code enshrines a duty to provide information during negotiations to the extent required by law, good faith or customs, hereby taking into account the respective quality of the parties, their reasonable expectations and the contract purpose. A leading franchisee may therefore also be legally required to provide certain information to the franchisor before entering into new franchise agreements.

Further, the sanctions applicable to wrongful termination of negotiations are also clarified in the new Belgian Civil Code. A party wrongfully aborting negotiations may be liable to indemnify all costs (including loss of profits etc.) incurred by the other party in the context of such negotiations. This is particularly relevant in light of the mandatory one-month cooling off period which needs to be respected after the submission of precontractual information to the franchisee. Extra caution is indeed needed when a party, having created the legitimate expectation that the franchise agreement will be signed, unilaterally decides to walk away during this cooling off period.

2. Abuse of circumstances

Following the case law of the Belgian Supreme Court, the legislator has adopted a general concept of abuse of circumstances. If there is a gross disparity between the reciprocally agreed obligations of the parties, which is caused by an abuse of circumstances linked to the weak position of the other party (which can result from either moral, physical or economic distress, ignorance/inexperience of one party or functional superiority of the other party), the obligations can be revised by court or the agreement can be declared null and void. This risk is particularly relevant for renowned franchisors executing franchise agreements with financially or commercially “weaker” franchisees. It confirms the added value of justifying and, more importantly, documenting the economic reasons for clauses which may at first sight appear imbalanced in the franchise agreement (e.g. certain exclusivity obligations, audit rights or step-in rights).

3. Exoneration clauses

The prohibition to rely on a contractual limitation of liability in case of wilful misconduct is extended to the wilful misconduct of subcontractors. This implies that, if a franchisee has contracted a sub-franchisee for (part of) the obligations under the franchising agreement, the franchisee cannot rely on the limitation of liability clauses towards the franchisor if such liability is caused by intentional acts of the sub-franchisee. This risk needs to appropriately addressed by e.g. including the necessary warranties in the sub-franchise agreement.

4. Anticipatory breach

The possibility of terminating a franchise agreement, even before –but anticipating– a breach of contract by the other party, is now enshrined in the Belgian Civil Code. An appeal to this principle of “anticipatory breach” is possible if, after giving prior notice, it is clear that the other party will not perform its obligations in due time and the consequences of the non-performance are sufficiently serious. Rather than having to go through (often lengthy) court proceedings, the creditor is now entitled to suspend its obligations or even terminate the franchise agreement on the grounds of anticipatory breach. This is especially useful, under a long term franchise agreement where the franchisee’s operations are performed unsatisfactorily, to prevent damages to the franchisor’s brand reputation by a franchisee. Similarly, a franchisee may benefit from this principle of anticipatory breach to be released from the franchise agreement if the franchisor e.g. continuously fails to supply essential products. However, the parties may freely deviate from this principle by tailoring or excluding the possibility of anticipatory breach, which may certainly be advisable in the more important franchise agreements.

5. Hardship

One of the most important innovations – especially considering the number of franchisees and franchisors currently affected by general pandemics, shortages of raw materials and increasing energy prices – may be the general recognition of a hardship theory in the new Belgian Civil Code. Many franchise agreements were impacted by delays in the supply chain and price increases which may not have been factored in the franchise fees. When, because of an unforeseen change of circumstances after the conclusion of the contract, performance becomes excessively onerous (but not necessarily impossible) and cannot therefore be reasonably required, the parties are obliged to renegotiate the contract terms. If these renegotiations fail, the court will be able to terminate the agreement or even to adjust the terms of the agreement.

This court appreciation is rather unique and may be hazardous in a franchising context of long term, because a party may be compelled to respect undesirable contract terms imposed by court. This should be carefully considered when drafting and negotiating a franchise agreement, because the optional nature of the hardship theory allows the parties to contractually modulate, restrict or exclude this principle of hardship. The parties to a franchise agreement may benefit, for example, from a mathematical threshold triggering the rights under hardship, from the involvement of a third-party mediator in the renegotiations and/or from an exclusion of court revision.

Conclusion - Be part of the revolution

If not explicitly opted out, franchise agreements governed by Belgian law will be subject to an entirely new set of rules as from 1 January 2023. This does not only apply to new franchise agreements, but also to franchise agreements renewed as from this date. However, considering the non-mandatory nature of many provisions of Book 5 of the new Belgian Civil Code, there are a number of best practices which will help the franchisor and/or franchisee to (at least partially) mitigate the potentially negative effects of this revised legislation. More than ever, the provisions of the franchise agreement need to be tailored to the specifics of each franchising relationship.