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. Demand for products and services dropped significantly across various sectors. Uncertainty reigned supreme. The "one-and-a-half-meter society" was temporarily embedded in our system. The hospitality and retail sectors suffered significant losses, and gyms and fitness centers remained closed for extended periods. But fortunately (!), this misery didn't apply to every sector. The supermarket sector, food delivery & takeaway, and parcel delivery services in general achieved revenues that are still appreciated even during an economic boom.

Yet, these impactful times have led to drastic changes. Think of different business processes, revenue models, or other necessary investments. These matters have such an impact on the content of the partnership that they must be formally stipulated in the contract. But is that even possible?

In practice

Koelewijn & Partners supports franchise organizations in every sector. We are in contact with companies that have experienced both the positive and negative consequences of the coronavirus pandemic.

An example:

A hospitality franchise launched its delivery process during the lockdown. Previously, the restaurant didn't offer home delivery. To stay connected to customers and generate some revenue, they invested in transportation, packaging materials, an IT structure for processing orders and payments, and made adjustments to the menu. Delivery was previously voluntary, but the franchisor wanted to integrate it into the concept and make it mandatory for all franchisees after the lockdown.

How should this be handled in light of contractual obligations?

The Franchise Act and the Contract

The Franchise Act came into effect on January 1, 2021. This law stipulates that the franchisor must inform the franchisee promptly of any significant interim changes. These can be all sorts of changes. For example, the franchisor may want to start an online store, offer a different product range, or, as in the example above, invest in delivery facilities. They may 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 the changes exceed the threshold stipulated in the contract. This information must be clear and concise. 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's conceivable that the unusual circumstances have forced franchisors to make accelerated decisions. More meetings and consultations would likely have been held earlier. Assume that this decisiveness is necessary to cope with unforeseen circumstances. And be grateful for developments that respond to changing market conditions.

Threshold and consent

This timeliness also applies if the franchisor implements a change that exceeds a previously agreed-upon threshold. A threshold means that the franchisor cannot unilaterally change the franchise formula if the impact exceeds a certain (financial) limit. The law also stipulates that changes the franchisor wishes to implement above the threshold value may only be implemented with the franchisee's consent.

The franchisor can obtain this consent in two ways. If there are multiple franchisees within a franchise, this can be done by a majority vote of the franchisees. The other option is for the franchisor to arrange this individually with all franchisees affected by the changes. It is therefore essential to include threshold values ​​that are reasonable and workable for both the franchisor and the franchisees.

Read more about how we can help you update your franchise agreement at: Franchise Act Update

Force majeure provisions

What this pandemic has also taught us all is that the future is inherently unpredictable. Many of the measures taken and their impact on businesses were unimaginable before the pandemic. The impact this has on businesses falls under force majeure. However, the language on this matter in the Civil Code is very limited. Only one article, as follows:

"A breach cannot be attributed to the debtor if it is not due to their fault, nor is it their responsibility under law, a legal act, or generally accepted principles."

Practice has shown that this is insufficient in many cases. Therefore, it may be wise to include a separate force majeure provision in the franchise agreement. For example, the rin states that the relevant obligations are suspended for the duration of the force majeure and then automatically resume. This prevents a legal gray area.

Communication is key!

Especially in times of crisis! We have received many stories and experiences from the franchise sector. Where there was intensive communication from the first day of the crisis, we see that franchisors and franchisees have benefited greatly from each other, and have emerged stronger as a result. The daily sharing of best practices, personal videos from the franchisor, and the establishment of a COVID-19 task force committee are just a few examples of how they have stood side by side. It's a cliché, but a sorrow shared is a sorrow halved. Even more complex matters such as legal changes and their proper documentation do not have to lead to a contract crisis.

Finally

A question you, as a franchisor, should definitely ask yourself: are the contracts drawn up in different, perhaps better times still adequate? Or are changes necessary? When you, as a franchisor and franchisee, enter into an agreement at a certain point, you can't know whether those agreements will still be valid later. This crisis has taught us that previously made agreements can change drastically due to the consequences of a pandemic.

More information?

Would you like more information or support in reviewing your franchise agreement? Contact us using the form below!

Koelewijn en Partners helps franchise organizations achieve growth, in every phase of their development. We advise you on how to approach issues, or we can do it for you, either alone or with professional partners. We can also support you if you're considering starting a franchise.