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How does the COVID-19 pandemic affect franchises systems?

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. As the situation evolves, the day-to-day affairs of businesses are constantly changing. Responding to a pandemic poses a unique situation for franchise systems, which are comprised of many independent businesses operating under a common brand. In order to protect that brand, it is incumbent upon parties to the franchise relationship to take decisive action to address the current pandemic throughout the system.

At a minimum, franchisors likely need to consider a response to the COVID-19 pandemic at two levels: their head office operations and in their unit franchises. Franchisors that have other aspects to their operations – such as company-owned units or that act as manufacturers or suppliers – may have additional levels or concerns. In addition to following the policies or practices implemented by the franchisors, franchisees must also consider whether the minimums established by the franchisor are sufficient for their own business with regard to their local circumstances.

Some systems will also encounter additional issues, such as temporary closures (mandatory or voluntary), interim management situations, failure to meet sales quotas and supply chain problems. These sorts of issues are more difficult to plan for and address proactively. 

How should franchise systems respond?

For many systems, reviewing, updating and adopting applicable policies, and then ensuring those policies are followed, will address immediate risks and concerns. As more specific situations arise, parties will need to turn to the terms and conditions of their franchise agreement and related contracts to determine what rights and obligations apply.

Pandemic policies

If the system is lucky enough to have a pandemic policy in its policies, procedures or operating manuals, that policy should be reviewed and updated to meet the current recommendations of local and national health authorities. For the vast majority of systems that don’t have any such policy, now is the time to create one. A properly prepared pandemic policy could, with some modifications, apply to the different aspects of a franchise system, and could be used as a template for adoption by unit franchised businesses.

This is also an opportunity to review, and potentially update, other potentially relevant policies based on how they may apply how the system responds to the COVID-19 pandemic. Health and safety, food handling, public relations and social media are just a few examples of the types of policies that could have implications in the context of a pandemic. While system wide policies are driven by franchisors, franchisees have a role to ensure that their units are following the policies and by being aware of and following any applicable directives and recommendations from local authorities.

Contractual rights and obligations

Most franchise agreements will contain certain clauses that will apply to some of the situations that may arise in a pandemic situation. For example, the obligation to devote full time and attention to the operation of the franchised business likely address temporary management situations due to illness of the franchisee or designated operator. At a more general level, a “force majeur” or “uncontrollable circumstances” clause likely provides for reasonable accommodation for failure or delay in the performance of obligations that are not within the reasonable control of the party. 

Parties to the franchise relationship should review and refresh their memory of these provisions so that they are familiar with them as they come into play. As applicable circumstances do arise, parties should review the applicable provisions with appropriate professional advice to ensure that they understand and are able to meet their rights and obligations.

Does your system need a pandemic policy?

In collaboration with the larger business services department at Siskinds LLP, the Franchise Law Group has developed forms of pandemic policies for franchises systems. The Franchise Law Group is also ready and able to assist parties to the franchise relationship apply their respective rights and obligations to circumstances that arise as a result of the COVID-19 pandemic. For more information about having Siskinds assist your system develop and adopt a pandemic policy, or to consult with an experienced franchise lawyer about your rights and obligations under franchise agreements, please contact us today.

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