Is a franchise agreement subject to the mandatory Belgian Distributions Act, with a strict and complex calculation of an (extensive) notice periods and additional indemnities?

Mandatory distribution rules applicable to franchise agreements?

Should the mandatory and stringent Belgian Distribution Act be applied to (distribution) franchise agreements. A recent decision of the Enterprise Court of Brussels provides further clarification.

In doctrine and case law, it has long been unclear whether the mandatory Belgian Distribution Act should to be applied to franchises where the franchisee sells certain products of the franchisor (a so called distribution franchise). 

Before embarking on the different positions under Belgian law, it is useful to ascertain the difference between the franchise agreement and the distribution agreement. One of the main differences between the two lies in the purpose or object of the agreement, i.e.: 

• in a (distribution) franchise agreement and for a recurring fee, the franchisor makes available a detailed commercial formula and assists the franchisee, which enables the franchisee to build a commercial activity in close concertation with the franchisor, e.g. the distribution of certain products; whereas
• in a distribution agreement, the principal grants the distributor the right to sell a certain product in a certain (quasi) exclusive territory or imposes significant obligations on the distributor. The distributor, however, principally remains responsible for the organization and infrastructure of the shop, even when the principal can provide certain (binding) guidelines.

The different positions under Belgian law on the application of the mandatory Belgian Distribution Act to (distribution) franchises can be summarized as following:

• the Distribution Act should be applied insofar as all the conditions thereof are fulfilled. Consequently, the Distribution Act should be applied to franchise agreements that also fulfill the legal conditions of a distribution agreement under the Distribution Act; or
• The Distribution Act should be applied to a franchise agreement, but only insofar as the franchise elements are ancillary to the actual distribution agreement; or
• In light of the different treatment under European competition law, a franchise agreement should be regarded as an autonomous agreement that cannot be subjected to the strict rules of the mandatory Distribution Act.

The relevance of the question lies in the fact that distribution agreements are strictly regulated under the mandatory Belgian Distribution Act – in particular the complex calculation of the (extensive) notice periods in case of unilateral termination and the additional indemnities – whereas franchise agreements are broadly unregulated and subject to common law principles.

In a decision of the French speaking Enterprise Court of Brussels of 22 May 2022, the court was confronted with the termination by the manufacturer of three agreements for the distribution of the chocolates in a shop operating under the brand of the manufacturer of the chocolates. Since the agreements were not explicitly qualified, the manufacturer stated that they should be qualified under the unregulated regime of a franchise agreement, where the distributor was of the opinion that the mandatory Distribution Act should be applied.

After a careful analysis of the agreements, the court found that the agreements presented all the characteristics of a distribution agreement and also several important characteristics of a franchise agreement, e.g. the use of the brand and signage, the transmission of know-how, etc. It furthermore decided that (i) a (distribution) franchise agreement is a distribution agreement with certain specific franchise features, so the mandatory Belgian Distribution Act should be applied insofar as the conditions of the Distribution Act are met; and (ii) the legislator deliberately adopted a broad definition of a distribution agreement so the Distribution Act could not easily be circumvented. 

In light of the positions mentioned above, this decision forms another compelling argument that the mandatory Distribution Act should be applied to the (distribution) franchise agreement.

Main takeaway of this decision is that both franchisors and franchisees better take into account the conditions and application of the mandatory Belgian Distribution Act, not only when deciding on unilaterally terminating the franchise agreement but also at contract formation.

Please do not hesitate to contact EY Law if you would have any questions regarding the qualification of a franchise/distribution agreement and how to take position in case of (unilateral) termination.