Franchising specific look at COVID-19 and Force Majeure

In our efforts to keep as many businesses informed as possible during the ever-changing COVID-19 outbreak, we have updated our initial blog covering force majeure. In this revised version, we will explore  how the clause specifically applies to franchisors and Franchisees, and offer some guidance regarding potential courses of action.

It is likely that franchisors and franchisees are both concerned about their ongoing contractual obligations and the affect the pandemic is having on their franchise agreements.  Those with agreements that incorporate a force majeure may be considering triggering the clause given the current circumstances, which if successful; could lead to the termination of their franchise arrangement or, at least, a period of respite whilst the pandemic passes.

What is it?

Force majeure is a contractual clause that is invoked when an event outside the reasonable control of either party prevents the performance of contractual obligations. Sometimes referred to as ‘impossibility,’ the clause will be expressly listed in the contract and permits the termination or suspension of obligations that would otherwise constitute a breach.

It is important to take note of the exact rights granted in the force majeure. It may be that it is one sided, permitting only one of the parties to invoke it, or grants reciprocal use by either party. Some clauses may only permit immediate termination, while the provision of another may only permit a suspension of certain obligations. A well worded force majeure clause will include a mixture of both and allow a certain level of flexibility. By way of example, a force majeure clause may read similar to the example shown below:

‘This agreement shall be suspended for any period during which either party is prevented or hindered from complying with any obligations under this agreement by any cause beyond their reasonable control, including but not restricted to strikes, fuel shortages, war, civil disorder and natural disasters (“Force Majeure Events”).  If such period of suspension exceeds 180 days, then the agreement may be terminated and all money due to either party shall be paid immediately.’

How does it apply?

Force majeure has no set definition in common law, meaning that its application needs to be judged on a case-by-case basis. Broadly, the following considerations need to be met in order for a force majeure clause to be invoked:

1. An event has occurred
2. The event has prevented, impeded, or delayed performance
3. The non-performance was due to circumstances outside of the control of the parties

4. There were no reasonable steps that could have been taken to avoid or mitigate against the event.

While the COVID-19 pandemic is in its early stages, a force majeure clause is capable of encompassing such an event provided it has made the performance of obligations impossible and not just less convenient or more expensive.

What does this mean for franchisors?

Depending on the rights granted by the force majeure clause, it may be that it can only be exercised by the franchisor. If this is the case, the franchisor retains the sole discretion of invoking the clause and terminating or altering the franchise agreement between the parties. For franchisor’s that are thinking of doing so, the following considerations should first be explored:

• Are alternative options available? It is likely that franchisees are also concerned about the current outlook and may be open to discussing the adoption of temporary operational policies that benefit both parties.
• Does the force majeure allow suspension of obligations? If so, it may be worth considering whether termination is not required, and a suspension of obligations is sufficient to weather the current storm.
• Engage your legal representatives. Force majeure carries with it a level of uncertainty, and it is best to liaise with your legal representatives before taking any action especially as it is considered a last-resort approach.
• Focus on the long term. The outlook for all industries is currently unclear. It would be unfortunate to take a quick view that would have long-term implications for your franchise network and consumer confidence.

Goldstein Legal strongly suggest that franchisors seriously consider the implications of engaging force majeure and contact us for specialist legal advice on the details provided below.

What does this mean for franchisees?

If the clause has been drafted to allow either party to invoke force majeure, it may be that franchisees are considering doing so. As mentioned above, a decision to invoked force majeure can be final, and may lead to the complete termination of your franchise agreement.

Franchisees concerned about the performance of their obligations should take the following steps:

• Take stock. Consider your current resources and measure these alongside your commitments to determine if performance of your contractual obligations is achievable.
• Contact your franchisor. The longer-term impact of the pandemic is unknown, and it is likely your franchisor is equally concerned. It may be that an agreement can be reached between both parties that permits the temporary suspension of some obligations.
• Review the T&Cs of your other contracts. Determine if force majeure clauses have been included in other supply contracts you have entered into in relation to the business. If this is the case, we recommend speaking with your franchisor to determine an appropriate course of action.
• Review your existing insurance provisions to determine whether situations similar to the virus outbreak are included and explore any potential coverage this may offer.

Franchisees concerned about the effect of COVID-19 on their existing obligations should contact Goldstein Legal for expert advice on 01753 865 165.