Thanks to the coronavirus pandemic, force majeure is a contractual term currently experiencing fifteen minutes of fame. It is now something franchisees tend to consider far more when becoming engaged in franchise disputes.
The expression literally means “an act of god”; in legal contractual terms it “means unforeseeable circumstance(s) that prevent someone from fulfilling a contract”. It is a clause which, generally, excuses parties of a contract from the performance of a same on the occurrence of certain events outside a party’s control. The defaulting party will not be liable for failure to perform its obligations.
Due to the limited nature of the remedies available, under English common law, it is a not common mechanism which either a franchisor or franchisee rely upon. The coronavirus pandemic, together with the accompanying national lockdown, led to an increase in the number of franchise disputes concerned with force majeure
Dwyer (UK Franchising) Limited -and- (1) Fredbar Limited (2) Mr Shaun Rowland  EWHC 1218 (Ch) is perhaps the only significant reported case on the force majeure issue in a franchising context.
This case dealt with a number of popular franchise dispute issues too, including: misrepresentation, enforceability of restrictive covenants, termination, the consequences of termination, repudiatory breach, and misuse of confidential information. It, provides some useful authority on the issue of force majeure in franchise dispute cases.
Dwyer (UK Franchising) Limited was the franchisor which entered into a franchise agreement with Fredbar Limited, as the franchisee, and Mr Shaun Bartlett as the guarantor. The franchisor issued a claim, following an alleged repudiatory breach by the franchisee for terminating the franchise agreement. The franchisor sought damages for the breach of the franchise agreement and injunctive relief for delivery up of the Franchisor’s property and to restrain the Franchisee from breaching the restrictive covenants contained within the Franchise Agreement.
In the Dwyer case, both franchisor and franchisee agreed that there would be a suspension of their obligations during any period the franchisor designated a force majeure event to be in existence.
As set out in other case law, franchisors must exercise contractual powers (which extends to the designation of force majeure events) “honestly, in good faith and genuinely”, taking account of all relevant factors. The court may set aside the exercise of a contractual power where that power is not properly exercised, being for example, one which no reasonable franchisor would have reached, applying a test which is akin to that in an administrative context in judicial review proceedings.
In Dwyer, the parties had agreed that if the period of suspension (of the franchise agreement) exceed 180 days, then the franchisor would, upon written notice, be able to require that:
- the franchisee paid all monies owed to the franchisor immediately;
- the franchisee immediately cease to trade until further notice from the franchisor; and
- the franchise agreement be terminated, without liability on the part of the franchisor, to the franchisee.
On 27 March 2020, the director of the franchisee requested the franchisor agree to suspend the their franchise agreement as the coronavirus pandemic was impacting upon the turnover. On 30 March 2020, the director of the franchisee made a further request for suspension on the grounds that due to the director’s son being considered vulnerable, the director of the Franchisee would need to self-isolate for 12 weeks.
The franchisor refused to exercise its rights, pursuant to the force majeure clause. In setting out its reasons for refusing, the franchisor set out that the force majeure did not apply but in doing so only addressed the effect of coronavirus’s effect on turnover.
The franchisee argued that by failing to consider the need for the director of the franchisee to self-isolate for safety, the franchisor did not exercise its discretion in accordance with an implied term that the franchisor should consider all relevant factors, and furthermore, that such discretion must be exercised “honestly, in good faith and genuinely”. As such the franchisee argued that the approach adopted by the franchisor was in breach of the franchise agreement.
In its judgment, the court held that the force majeure clause was a fundamental term of the franchise agreement and whilst the application of it “would only arise in exception circumstances”, it did not mean that that the exercise was “not essential when those circumstances occurred”. The court held that the decision by the franchisor ignored an important consideration when deciding whether or not to exercise its discretion and, as such, would “commercially and objectively be considered a breach of an important term which went to the root of the commercial purpose” of the franchise agreement. As such, the franchisee would be entitled to terminate the franchise agreement.
Due to further correspondence between the franchisor and the franchisee, however, whilst the court considered the franchisor to have breached its franchise agreement, it held ultimately that the franchisee had affirmed the breach and thus agreed to continue the franchise agreement. The franchisee had therefore waived its rights to walk away from the franchise agreement.
In respect of force majeure, therefore, Dwyer has demonstrated the following in franchise disputes:
- the courts consider the exercise of discretion inherent in force majeureclauses to be of “fundamental” importance, and the failure to consider the exercise of any inherent discretion contemplated by the clause may be a repudiatory breach of the franchise agreement;
- that cases will often turn on the wording of the clauses within the franchise agreement and the acts of the parties once a breach has been identified;
- that franchisors should consider carefully all relevant factors – including the personal life of the Franchisees; and
- that franchisees must be careful when liaising with franchisors, following purported termination of the franchise agreement, not to affirm the franchise agreement and thus allowing it to continue.
Please note that this decision made in dealing with this dispute is being appealed and an update is expected in mid 2022.