Buying a franchise in Belgium: review penalties and damages clauses

A missed report, a shop display that falls short of brand standards or a delayed opening: a franchise agreement may attach financial consequences to any of these breaches. A franchise network needs rules to protect its business format. But penalties should not create financial risks that are impossible to assess. Before buying a franchise, check not only what you are required to do, but also what a mistake could cost you under the contract.

1. Bring all penalties together in one overview

Damages clauses will not necessarily appear under a heading labelled ‘penalties’. Look for fixed compensation payments, late-payment interest, administrative charges, deductions and charges for non-compliance. Check the draft agreement, its appendices and any documents it refers to.

A damages clause sets out in advance the compensation payable for a particular breach. This can reduce disputes over the amount of loss. It deserves particular attention if it applies automatically, accrues daily or is payable on top of other claims.

For each clause, draw up an overview covering five questions:

• Trigger: what specific action or omission triggers the penalty?
• Calculation: is it a fixed sum, a percentage or a daily amount?
• Procedure: will you receive a written warning first?
• Remedy: can you put the breach right within a reasonable period?
• Overlap: can the same event trigger several payments?

Where wording is vague, such as ‘any breach of the franchise concept’, ask exactly which situations it covers. A penalty for a minor administrative error needs to be assessed differently from one for serious misuse of the franchise system.

2. Understand the Belgian legal framework

Belgium has no single, comprehensive franchise law setting out all contractual rights and obligations. Franchise agreements are governed, among other things, by general contract law and the Belgian Code of Economic Law, known by its Dutch abbreviation WER.

Book VI of the Code contains rules on unfair terms in business-to-business contracts. The general test considers whether there is a manifest imbalance between the parties’ rights and obligations. There are also black and grey lists: some terms are always prohibited, while others are presumed unfair unless proven otherwise.

Of particular relevance to damages clauses, the grey list includes terms setting compensation that is manifestly disproportionate to the loss the business could suffer. This does not mean that every large compensation payment is automatically invalid. The precise wording, the agreement and the circumstances all matter. An unfair term is void; the agreement can remain in force if it can continue without that term.

The Belgian Civil Code’s rules on damages clauses may also be relevant. Ask a Belgian legal adviser to assess which rules apply to your contract. Do not assume that a court will correct an onerous clause later: litigation takes time and money.

The pre-contractual disclosure rules in Book X of the Code of Economic Law, Articles X.26 to X.33, also apply. In principle, you must receive the draft agreement and the pre-contractual disclosure document at least one month before entering into the agreement. Use that period to have the penalties thoroughly reviewed as well.

3. Calculate the consequences of a single mistake

Do not read damages clauses in isolation. Under different provisions of the agreement, a single event could simultaneously trigger a daily charge, additional inspection costs and a claim for further damages.

Take a mandatory report submitted late because of a technical fault. Check when any penalty starts, when it stops and who decides that the breach has been remedied. Also check whether the agreement distinguishes between a mistake on your part and a problem with software the franchisor requires you to use.

Work through at least three scenarios: a one-off minor error, a repeated failure to comply and a serious breach. For each, note the maximum amounts claimable under the contract and any additional costs. If you cannot establish that maximum, make it a point for negotiation.

Also ask whether a fixed compensation payment covers the loss in full or whether further damages may be claimed. Have the agreement explicitly clarify how double compensation for the same loss will be prevented.

4. Negotiate a workable procedure for putting things right

A balanced agreement protects the franchise system while giving the franchisee clarity. For breaches that can be remedied, ask for written notice describing what went wrong, what needs to be done and the deadline for doing it.

Also discuss a distinction between minor and serious breaches, a cap on accruing charges and clear provisions on force majeure. Not every breach can wait to be addressed, but that does not justify an automatic, substantial penalty for every mistake.

Have verbal assurances such as ‘we never enforce that penalty’ written into the contract. Also ask your legal adviser whether the contractual remedies are sufficiently balanced when it is the franchisor that fails to meet its obligations.

Practical takeaway: sign only once you understand what triggers each penalty, how you can put matters right and what the financial consequences could be. Uncertainty over penalties is not a minor detail: it is a risk to discuss before joining the franchise network.