Emily Sadler and Tom Fish | 15th November 2021

Force majeure clause tested in recent franchising case

SHARE

Emily Sadler and Tom Fish | 15th November 2021

Force majeure clause tested in recent franchising case


During the pandemic, we have received many queries relating to the operation of force majeure clauses in franchise agreements and whether they might provide a franchisee with some relief from its contractual obligations during what has been very testing times for businesses.

Franchise agreements are fixed term commitments between a franchisee and a franchisor and should not be entered into lightly or without having taken proper advice. Generally, a franchisee will be unable to bring the agreement to an earlier end ‘for convenience’ simply because they have changed their mind or the business isn’t doing as well as expected. We have covered termination options for franchisees in previous blogs “Can I terminate my franchise agreement?” and “Terminating a franchise agreement- a COVID-19 update“.

What does force majeure mean?

By way of a recap, the term force majeure refers to a contractual clause in a contract that is invoked when an event outside the reasonable control of either party prevents the performance of contractual obligations. Under English law there is no general concept of force majeure and to be able to rely on it, the contract in question must expressly provide for it. Most franchise agreements do contain such a clause but they are often drafted very differently and contain varying amounts of detail. Such a clause generally seeks to permit the termination or suspension of obligations that would otherwise constitute a breach if such a force majeure event occurs. Force majeure style events include (without limitation) earthquakes, flood, fire, war, terrorism, governmental action, pandemics etc, which render continuing with contractual obligations impossible or at the very least extremely difficult.

It is important to look carefully at the exact rights granted in the force majeure clause and see if it can assist your position. It may be that it is one sided, permitting only one of the parties to invoke it, or grants reciprocal use by either party. Some clauses may only permit a suspension of certain obligations whilst the force majeure event is ongoing and others will allow eventual termination if the event carries on for a specified period of time. Some require the affected party to give written notice to the other party that they are so affected by the force majeure event.

Recent franchising case relating to a force majeure clause

Such clauses had never before received so much attention and not before been tested in the context of a global pandemic. We now have a recent franchising case to provide some guidance on events occurring at the beginning of and during the COVID-19 crisis.

Facts of the case

Dwyer (UK Franchising) Ltd v Fredbar Ltd [2021] considered a force majeure clause within a franchise agreement. Dwyer the franchisor of Drain Doctor, entered into a franchise agreement with Fredbar to provide plumbing and drain repair services exclusively within nine postcode areas within the Cardiff region for 10 years, in October 2018. The agreement included the following force majeure clause:

This Agreement will be suspended during any period that either of the parties is prevented or hindered from complying with their respective obligations under any part of this Agreement by any cause which the Franchisor designates as force majeure including strikes, disruption to the supply chain, political unrest, financial distress, terrorism, fuel shortages, war, civil disorder and natural disasters.

In March 2020, when the COVID-19 pandemic impact was felt throughout the UK, Fredbar was urged by the NHS to isolate for 12 weeks due to his son been considered clinically vulnerable. Initially Fredbar wrote to Dwyer enquiring whether he could invoke the force majeure clause due to a drop-in demand. A few days later, he emailed requesting the agreement to be suspended on the grounds that he had to self-isolate to care for his son. On both occasions Dwyer refused, noting that the plumbing trade were considered key workers and the reduction in work did not amount to a force majeure event. However, he did offer to waive Fredbar’s obligation to pay certain fees whilst Fredbar was self-isolating, provided he did not work in that time. Several weeks later Fredbar accepted this offer.

In July 2020 Fredbar sought to terminate the franchise agreement on various grounds, including Dwyer’s prior refusal to suspend the agreement, misrepresentation, undue influence and breach of contract. He further purported that even if he were not entitled to terminate, he no longer intended to be bound by its terms. Dwyer contested all the allegations and warned that Fredbar would be in breach of the agreement. In August 2020 Dwyer terminated the agreement and brought a claim for damages asserting that Fredbar’s actions led to a repudiatory breach.

Decision

The court applied the principles set out in Braganza v BP Shipping Ltd [2015] to determine whether Dwyer had executed its discretion under the force majeure clause correctly. It is clear that Dwyer had focused solely on the effect of the COVID-19 pandemic on Fredbar’s business rather than from a personal perspective due to the imposition of Fredbar being a key worker and gave no consideration to his parental responsibilities. The court using the Braganza case, considered there to be an implied term with respect to the force majeure that “the power of designation must be exercised honestly, in good faith and genuinely. It must not be exercised arbitrarily, capriciously, perversely or irrationally”. They further asserted that the claimant (Dwyer) should have taken into account all matters which are relevant. Here, this correlates to the small size of Fredbar’s business and his need to isolate due to his son.

The court considered that Dwyer’s lack of consideration to the potential effect upon Fredbar’s family was a breach of an important term permitting termination. However, due to Fredbar accepting Dwyer’s previous offer to waive payments and continuing to isolate in accordance with this, Fredbar affirmed this breach and therefore had no grounds for termination. Further the court construed Fredbar’s intention to terminate the agreement as a repudiatory breach, as he has no right to; therefore, Dwyer could validly terminate the agreement.

Comment

So, what is important to take from this decision? This case is fact specific, but where a party exercises discretion with regards to a force majeure event they should consider the principles from Braganza; namely, they must:

  • exercise their power to designate a force majeure event honestly, in good faith and genuinely; and
  • consider all relevant matters whether professional or personal (particularly where it concerns a smaller sized party).

Also, the case highlights the importance of keeping a record of events and correspondence in connection with disputed events and potential claims. Further, if you are the party seeking to rely on the force majeure clause, caution should be had before accepting a proposed solution. As was shown in this case, Fredbar’s acceptance of Dwyer’s offer affirmed Dwyer’s breach nullifying the claim that Fredbar had.

Now is a good time with the benefit of hindsight for franchisors to review their force majeure clauses and check that they are fit for purpose.

Post-termination restrictive covenant

The Dwyer case is also of interest to those in franchising as it considered the reasonableness of a fairly typical 12-month post-termination restriction which prevented the franchisee from being engaged in a business similar to or competitive with what was referred to in the franchise agreement as “the Drain Doctor Business” within either:

  1. the territory for which the franchisee had been granted exclusivity (in Cardiff) or
  2. a radius of five miles from that territory.

The term “the Drain Doctor Business” was not expressly defined in the agreement, but the judge decided that, as a matter of interpretation, the restraint of trade provisions referred to the business of “plumbing and drainage”.

The High Court Judge held that the restriction was unreasonable and unenforceable. The first restriction would prevent the franchisee company and its owner from engaging in any plumbing or drainage business within the Cardiff territory without exception. This would mean that the franchisee company could not act as a subcontractor and/or its owner could not be employed by a plumbing or drainage company or use the franchisee company as his service company for that purpose. The unreasonableness of this was obvious in the circumstances known to the claimant at the time the agreement was made, in particular when it was reasonably foreseeable that the restriction would seriously increase the risk of the franchisee’s owner being unemployed and he and his family facing mortgagee possession proceedings for want of income.

The second prohibition extended the prohibition to an unreasonable radius. There would be no goodwill to protect because the franchisee had not provided services within the extended area (even though the agreement permitted the franchisee to work outside its territory in limited circumstances).

As with all cases concerning the application of restrictive covenants in franchise agreements, the decision turns on its own facts, but it is worth adding to the list of cases that illustrate the application of the relevant principles in different circumstances. The restriction here is very similar to those included in many franchise agreements and franchisors should be reviewing such clauses on a frequent basis to check they remain well-drafted and stand the best chance of being enforceable within the parameters of the law in this area.

If you have any queries relating to this blog or franchising in general either as a franchisor or franchisee, please contact Emily Sadler.