Did Corona also cause a crisis in contracts?

The coronavirus crisis: we can be brief about it; it was both a humanitarian and an economic disaster. In various industries, the demand for products and services decreased significantly. Uncertainty was prevalent. The "one-and-a-half-meter society" was temporarily embedded in our system. The hospitality and retail sectors suffered major losses, and sports and fitness centers remained closed for a long time. But fortunately (!) this misfortune did not apply to every sector. The supermarket sector, food delivery & take-away, and parcel delivery services in general achieved revenues that one would relish even during an economic boom.

However, these impactful times brought about significant changes. Consider alterations in business processes, revenue models, or other necessary investments. These are matters that influence the nature of collaboration in such a way that it is required to be documented in the contract. But can or should this be done just like that?

The practice

Koelewijn & Partners supports franchise organizations in every industry. Thus, we are in contact with companies that have experienced both the positive and negative effects of the coronavirus period.

An example:

A hospitality franchise formula operationalized its delivery process during the lockdown. Previously, the restaurant did not engage in home delivery. To stay ‘amongst customers’ and generate some income, they invested in transport vehicles, packaging materials, IT structures to handle orders and payments, and made adjustments to the menu. Delivery was previously done on a voluntary basis, but the franchisor wanted to integrate this into the concept and make it mandatory for all franchisees after the lockdown.

How to deal with this in the light of contractual obligations?

The Dutch Franchise Act and the contract

Since January 1, 2021, the Franchise Act has come into effect. This law stipulates that the franchisor must inform the franchisee in time about significant interim changes. These can be various changes. The franchisor may want to start a webshop, offer a different range of products, or, as in the example above, invest in delivery facilities. But they can also increase the fee or introduce other interim costs for the franchisee. For all these significant changes for the franchisee, the franchisor must request prior consent and provide the franchisee with all relevant information, unless it does not exceed the threshold value included in the contract. This information must be clear and understandable. A franchisee must be able to understand the information and it must include an explanation if necessary.

On time

But what does ‘on time’ mean in a crisis situation? It is conceivable that unusual circumstances have forced franchisors to make accelerated decisions. In the past, there might have been more meetings and consultations. Assume that this decisiveness is necessary to cope with unforeseen circumstances. And be glad with developments that respond to changing market conditions.

Threshold value and consent

This timeliness also applies if the franchisor implements a change that exceeds a pre-agreed threshold amount. A threshold amount means that the franchisor cannot unilaterally change the franchise formula if its impact exceeds a certain (financial) limit. Furthermore, the law stipulates that changes the franchisor wants to implement above the threshold value can only be implemented with the consent of the franchisee.

The franchisor can obtain this consent in two ways. If there are multiple franchisees within a formula, this can be done by a majority vote from the franchisees. The other option is that the franchisor arranges this individually with all franchisees affected by the changes. Therefore, it is essential to establish threshold values that are reasonable and workable for both franchisor and franchisees.

Read more on how we can help you get your franchise agreement up-to-date at: Franchise Act Update

Force majeure clauses

This pandemic has also taught us that the future is inherently unpredictable. Many of the measures taken and their impact on businesses could not have been foreseen before the coronavirus. The impact this has on businesses falls under force majeure. However, the text about this in the civil code is very limited. Just one article, as follows:

"A shortcoming cannot be attributed to the debtor if it is not due to his fault, nor accountable to him by law, legal act, or generally accepted principles."

Practice, however, has shown that this is often insufficient. Therefore, it might be wise to include a separate force majeure clause in the franchise contract. For example, stating that the relevant obligations are suspended during the force majeure and automatically resume thereafter. This avoids a legal gray area.

Communication is key!

Especially in times of crisis! We have received many stories and experiences from the franchise sector. Where intensive communication started from day one of the crisis, we saw that franchisor and franchisees benefited greatly from each other. And thereby came out stronger. Sharing best practices daily, personal videos from the franchisor, establishing a Corona task force committee, are just some examples of how people stood by each other. A cliché, but shared pain is half the pain. Even more challenging matters like legal changes and the proper documentation thereof do not necessarily have to lead to a contract crisis.

In conclusion

A question you should at least ask yourself as a franchisor; do the contracts drafted in other, possibly better times still suffice? Or are changes needed? If you, as a franchisor and franchisee, enter into an agreement at a certain time, you cannot know if those arrangements will still be relevant later on. This crisis teaches us, at least, that earlier agreements can drastically change due to the consequences of a pandemic.

More information?

Do you want more information or support in assessing your franchise agreement? Contact us via the form below!

Koelewijn en Partners helps franchise organizations achieve growth, in every development phase of the franchise organization. We advise you on how to tackle questions, or we can do it for you. Alone or with professional partners. Even if you are considering starting a franchise, we can support you.