FRANCHISING | COVID-19 | CORONAVIRUS

Since early March 2020 when the World Health Organisation (WHO) declared the outbreak of COVID-19 a pandemic - the Federal, State and Territory Governments in Australia have implemented a range of mechanisms to try and minimise the spread of coronavirus.

This has led to widespread loss of employment, business closures or the winding back of business operations in Australia.

Franchisors and Franchisees are particularly exposed to risk, uncertainty and the practical difficulties of how to deal with the fallout from a legal, financial and business perspective. 

It is a dynamic environment at present with the respective governments announcing stimulus packages and other support measures to try and assist business owners. For some, these government backed packages and assistance may be enough to keep their business trading, but in other situations businesses will struggle to remain open and trade.

In a franchise network where there are not only contractual obligations as between the Franchisor and Franchisee, but other obligations to third parties, such as, landlords, suppliers and employees - this can be difficult to navigate.

It is important for Franchisors and Franchisees to understand their legal obligations and rights. The Franchise Agreement, other contractual documents, legislation, regulations, and common law will provide guidance on the contractual and other issues arising from business slowdown or business shutdown due to the coronavirus.

If you require assistance in relation to your legal rights and obligations arising from the impact of coronavirus, Greyson Legal are open and able to field your enquiry. 

Franchise Agreements

Franchise Agreements across different brands and industries will vary, so it is important to check those agreements to see what terms and conditions  are set out which might deal with the scenarios which arise due to the effect of Covid-19.

If the franchise system or your franchise business is affected by Covid-19 and you are unsure of your rights and obligations under a Franchise Agreement, we recommend you obtain professional legal advice from a franchise lawyer.

Force Majeure

Some Franchise Agreements may contain what are referred to as force majeure clause. Depending on the drafting of the clause, it may allow the parties to either:

  • pause their respective obligations under the contract; or

  • end the Franchise Agreement,

where a party is affected by an unavoidable or unforeseeable event.

Where such a clause is expressed in the Franchise Agreement, it would be a matter of reviewing the actual force majeure provision and seeking appropriate legal advice to see if the clause has effect in the current Covid-19 environment.

Generally, the courts interpret force majeure clauses very strictly - meaning that each element of the clause would need to be satisfied. Also, the onus of providing evidence to support a force majeure claim would be on the party seeking relief under that provision.

It is important not to rashly seek to avoid your obligations under a contract on the basis of a force majeure argument. This is because the other party may dispute your legal right to do so and the other party may also have the right to terminate the contract and seek damages for your refusal to perform your obligations.

Good Faith

The Franchising Code of Conduct ("Code") provides that each party to a Franchise Agreement must act towards another party with good faith in respect of any matter arising under the Code or Franchise Agreement. In determining whether a party has acted in good faith, a court may have regard to:

  • whether the party acted honestly and not arbitrarily; and

  • whether the party cooperated to achieve the purposes of the Franchise Agreement.

In the current circumstances arising from Covid-19, there is arguably an obligation on the parties to consider the good faith provision under the Code before taking a step which would adversely affect the other party. For example, it would be prudent to consider other reasonable alternatives before terminating a Franchise Agreement due to non performance of an obligation.

Even where a force majeure provision is not set out in the Franchise Agreement, it may still be important to consider the application of good faith and whether, in the circumstances surrounding Covid-19, there is a need to "pause" certain obligations under the Franchise Agreement, such as, marketing fund contributions, royalties, etc.  Any such "pause" should be reflected in writing and ideally some form of Deed of Variation entered into to formally amend the requisite obligation under the Franchise Agreement.

Contact Greyson Legal for assistance preparing a Deed of Variation or advice on amending the Franchise Agreement.

Doctrine of Frustration

In general, the common law doctrine of frustration can cause a contract to come an end where, through no fault of the parties, a post-contract event has either made contractual obligations impossible to perform or it fundamentally transforms an obligation into a radically different obligation.

Whereas a force majeure clause will only apply if it is expressly stated in a Franchise Agreement, the common law doctrine of frustration does not need to be expressly stated in a contract.

The test to determine if frustration applies typically involves as assessment as to whether:

  • the frustration event causes the contractual obligation owed by a party under the contract to become impossible or radically different from the obligation contemplated at the time that the parties entered into the contract;

  • the frustration event was not caused by either party; and

  • the contract (Franchise Agreement) does not otherwise deal with what will happen on the occurrence of the alleged frustration event (for example, there is no express force majeure clause).

Determining the extent to which the Covid-19 pandemic has impacted on a party's ability to perform their obligations under a Franchise Agreement will be assessed on a case by case basis, depending on the specific circumstances. 

The recent government restrictions/lock-downs which have effectively banned certain "non-essential" services (eg. cinemas, restaurants, fitness centres/gyms, etc) will have a greater impact on that business than in other industries. If the impact of these bans effectively makes it impossible for a party to honour their contractual obligations, it is more likely that party may be able to show that their contract has been frustrated.

Typically, where frustration can be shown, the Franchise Agreement is terminated at the time of the frustrating event, and all parties are ‘discharged’ from their future obligations under the contract.  

It is important to obtain legal advice before asserting any frustration argument in relation to contractual non-performance. 

Franchisor Support, Training and Advice

Many Franchise Agreements will include provisions which oblige franchisors to provide their franchisees with assistance, support, training and advice.

It will be important to check the Franchise Agreement to ascertain the exact terms and conditions.

The impact of Covid-19 will place an onus on franchisors to take on a more proactive role in supporting their franchisees during these unusual and difficult times.

Supply Chains

The Covid-19 pandemic is creating increased stress on the supply of goods and services. Depending on the franchise system and nature of products and services sold, some franchisors incorporate provisions within their Franchise Agreements to the effect their franchisees can only buy in product or services from "Approved Suppliers".

It is important to check the terms and conditions of the Franchise Agreement to ascertain the rights and obligations of each party around supply from  Approved Suppliers, and the circumstances that permit products or services to purchased from alternative suppliers.

Reporting

Many Franchise Agreements contain reporting obligations on franchisees. From a franchisor's perspective it is worth checking the terms and conditions under the Franchise Agreement and considering making requests of your franchisees to provide financial and other information. This will allow you to assess how your franchisees are performing and whether they need additional assistance due to the impact of Covid-19.

Leasing and Covid-19

If your franchise business operates from a fixed premises with a commercial lease, refer to our webpage for further comments about Covid-19 and leasing.  

For further information or assistance, contact Greyson Legal | Franchise lawyers.