Can my franchisees use ‘force majeure’ as a reason not to pay their MSF?April 2, 2020
The starting point, of course, is that it depends what your force majeure clause says. Note that your agreement may not specifically use the term ‘force majeure,’ but you almost certainly will have a clause somewhere which references issues ‘beyond the reasonable control’ of one or both of the parties. Please ask your lawyer if you are having trouble finding it.
Now let’s assume that your ‘force majeure’ clause says something typical about:
- neither party being liable for any failure to comply with the franchise agreement due to events beyond its reasonable control, and;
- that either party can terminate the agreement if the force majeure event continues for more than, say, 90 days.
Depending on your business and your sector, it may be quite obvious that in current circumstances your franchisee has a ‘force majeure’ reason preventing them from providing their services to customers. Particularly where there is no practical way that services can be provided on a virtual or online basis. But this does not mean that the franchisee has a ‘force majeure’ reason for not paying. Force majeure is supposed to apply where it is physically impossible for someone to comply with their agreement. Not where world events make it uneconomical for franchisees to pay. Note, though, that we are in uncharted waters. There are no legal precedents for the current situation. We do not yet know how courts would determine the issue.
But here is where the difference between theory and reality kicks in.
Even if you have legal grounds to hold your franchisees liable to pay their fees, your options are limited:
- You can sue for non-payment, but note that the courts may currently not be able to progress the claim, if they deem it to be non- urgent. And in any event the costs of suing may not be proportionate.
- You can terminate for breach. That means that when this epidemic is over, you will have lost franchisees.
- You can defer the time for paying fees for a few months, whilst reserving your position clearly in writing. (Get legal advice on how to do this.)
- As per the steps taken by an increasing number of franchisors, you can agree to waive the requirement to pay fees altogether for a set period of time. (Again, be careful how you communicate this and get legal advice.)
Be realistic, though, that none of the above options give you an easy route to getting fees from franchisees in the short term. Managing your internal cost base for the coming months, whether by furloughing employees, taking Government grants, getting interest free loans from your bank, and negotiating rent holidays with your landlord, are all of key importance whilst we ride out the storm.
From what I can currently see, the franchisors who are managing their franchisee relationships well at the moment are getting there by open and transparent communication. They are showing their franchisees that we are all in this together, with all parties taking a financial hit for the time being, whilst remaining poised to take advantage when the up-tick eventually comes.