Over the years, franchising has gained a, somewhat unfair, reputation for disputes and litigation between franchisors and franchisees.
The pandemic of Coronavirus is already having dramatic impact on our everyday lives but also on all businesses of all sizes.
The most obvious is the loss of business whilst everyone stays home, works from home or attempts to social distance from each other. Although business providing key services such as groceries and medicine will still be operating throughout, we are now starting to see the impact on the hospitality sector turning to takeaway options only or simply closing shop.
But what impact is it having on the franchise sector and in particular those being unable to fulfil their contractual obligations under franchise agreements?
Many franchise agreements may contain a “force majeure” clause which is intended to suspend the contractual obligations of parties in the event of an occurrence outside their control resulting in a party being unable to perform their end of the contract. It is usually up to the defaulting party to show that it has reasonably tried to or tried to mitigate the effect. For example, a children’s nursery being unable to remain open due to government-imposed closure of nurseries.
In more recent years, force majeure was considered in relation to the 2014 West African Ebola crisis. The multinational steel and mining company ArcelorMittal declared force majeure in relation to one of their Liberian mines when the government started moving people out of the country because of the outbreak.
Force majeure clauses in their standard form usually cover events such as fires, wars, weather, but can apply to government action. However, the precise wording of each clause must be considered carefully to assess its true scope and effect.
In our view, governmental measures, enforcing, for example, the closure of business would likely constitute a force majeure event, yet, government advisory measures may not. However, it is strongly advisable to take specialist advice on the provisions of your force majeure clause and whether coronavirus would be covered.
So what advice can we give to franchisors on how to cope with coronavirus?
A starting point is to consider how to approach the franchise network. Some franchisees may feel that in the light of the pandemic they are unable to continue trading and therefore be unable to pay franchise fees. Can they do this under their agreement or can you reach a compromise with them until the uncertainty lifts?
Franchisors should also consider limiting exposure under all agreements and reviewing all contracts particularly in the light of whether force majeure can be triggered. Food related franchise brands may consider invoking force majeure to cancel current orders or future orders.
Thirdly, customers are key to any brand. It is inevitable that demand will reduce. However, this may be a time to think “out of the box” and consider providing goods and services online? Some are already doing so, with some engagement. A key to the success of that will be broadband speed as we all live, work and play ‘virtually’ for a time.