Introduction

The spread of COVID-19 is arguably the biggest global health crisis since the 1918 Spanish flu pandemic. In recent weeks, the virus has disrupted the global economy and societies around the world are now facing social and economic upheaval and disruption on an unprecedented scale.

Consumer-facing businesses – particularly those in the travel, retail, leisure and hospitality sectors – are facing a crisis of existential proportions. The UK government has announced an unprecedented package of measures, designed to give businesses breathing space and a chance of survival. They include grants and funding, a job retention scheme and a moratorium on lease forfeiture. However, there is a lack of clarity around how these schemes can be accessed, and it will take time to implement them.

In these unprecedented times, there is no one-size-fits-all plan for how businesses should respond. However, this article provides some guidance for businesses which are primarily consumer-focused and use franchise and distribution networks to sell their products and services in order to help them to respond to the challenges ahead and hopefully even emerge on a stronger footing than before.

Crisis management and developing business continuity plans

Any business, regardless of whether it uses a franchise or distribution system, will need to bring stakeholders together across its organisation, form a crisis management team and develop a business continuity plan (BCP) to deal with the COVID-19 crisis.

The purpose of the BCP should be to carry out operations, such as:

  • identifying risks and scenarios;
  • modelling the financial impact of those risks and scenarios; and
  • forecasting the business's liquidity.

BCPs for consumer-facing businesses typically fall into the following vertical categories:

  • front office – this covers customer engagement across the various channels, understanding their needs and expectations in this crisis and maintaining strong communication;
  • middle office – this covers operational support, logistics, warehousing, inventory planning and supplier relationships; and
  • back office – this covers call centres and tech and warehouse facilities.

The BCP should consider how the following horizontal areas cut across the above vertical categories:

  • supply chains and operations;
  • workforces (which must factor in franchisees and distributors);
  • finance and external factors in the wider economy; and
  • business impacts.

BCPs should be kept under constant review. Depending on the significance of the franchise or distribution network to the business as a whole (for the purposes of this article, it is assumed to be substantial), franchisors and suppliers should consider making the BCP or relevant parts of it available to their networks. Most franchisees and distributors will be looking for leadership and guidance on how they should organise themselves and respond to the COVID-19 crisis and having the network come together and follow the same BCP is likely to be an efficient and practical step.

Communicate and collaborate with your network

Although they are independent businesses, franchisors and suppliers should consider consulting their franchisees and distributors (or a representative body) in the formulation and evolution of the BCP – not to try to reach a consensus on each issue, but rather to help bring the network along with them as they respond to an ever-changing situation. There may be some innovative ideas which flow up the chain of command as opposed to down.

Establishing an association of franchisees or distributors as a formal conduit of information between a franchisor or supplier and their network seems sensible and numerous large networks already have this infrastructure in place.

Cascading useful external information across the network is going to be useful in the foreseeable future. Franchisors, suppliers and their network all have a mutual interest in ensuring that they make the most of the new financial measures which the government is introducing. The British Business Bank is a good source of information for small and medium-sized enterprises regarding the Coronavirus Business Interruption Loan Scheme.

Temporary (or potentially permanent) system changes

As consumers face disruption in their daily buying habits, there is an inevitable increase in online activity. Franchisors and suppliers should consider how franchisees can participate in the online strategy if they do not already do so.

Numerous franchise and distribution networks have been hesitant about ceding control over the online channel to their franchisees and distributors, but it does not have to be a zero-sum game; now is as good a time as any to start thinking innovatively and collaboratively and create a multi-channel network.

It may be necessary to change or limit the level of service or product offering available to customers for a period and make changes to:

  • brand standards;
  • supply chains;
  • inventory management; and
  • operational manuals.

Depending on how the supply chain is disrupted by the crisis, franchisors and suppliers may need to consider relaxing any exclusive supply obligations. These changes should be documented and communicated effectively.

Contractual waivers

Franchisors and suppliers should consider waiving performance targets (eg, turnover targets or opening targets). Taking proactive steps now will undoubtedly generate goodwill in the relationship with the network going forward.

Equally, networks still need to be managed as before the COVID-19 crisis, so if a franchisor or supplier intends to waive a breach or take action, this needs to be documented properly and communicated through the appropriate channels.

Force majeure applicability and other effects of COVID-19 on key commercial contracts

Depending on the circumstances, a franchisor or supplier may wish to invoke a force majeure clause or deny its applicability to a supplier, franchisee or distributor which is seeking to rely on it. A franchisor or supplier should also review the various obligations that apply to them under the relevant franchise, distribution or supply contract, carry out a risk assessment and consider mitigating steps.

Force majeure clauses

If a force majeure clause exists, some of the questions to consider include the following:

  • Do the express words of the clause cover a global health crisis such as the COVID-19 pandemic?
  • What does relief look like (eg, a right to terminate or a suspension)?
  • Is relief contingent on anything, such as a party having exercised its BCP?
  • Does the wording require a causal link between the event and the party's delay or failure to perform the contract?
  • Are there any other requirements, such as written notices or a duty to mitigate?

If a force majeure clause does not exist, the concept will not be implied (under English law). As such, the common law doctrine of frustration may be available, but this is a high hurdle. Another possibility is illegality if performance would be contrary to legally binding government restrictions. Otherwise, a party will have to look at other express terms in the contract, such as an adverse change in law or a termination clause.

Franchisors or suppliers should also consider the following key points:

  • Exercising contractual rights during the COVID-19 crisis comes with risks. If a party that seeks to rely on a right to terminate a contract gets it wrong, this could give the other party grounds for a claim for damages and loss of profit.
  • Mitigations and alternative supply should be considered where possible to reduce the impact of COVID-19.
  • The shortage of component materials may have an impact on pricing now and in future months, and the scarcity of such parts may drive prices upwards if demand remains stable. Parties should review their contracts to ensure that protection against price rises is included or determine whether they otherwise need to agree new terms or flex other parts of their supply chains to ensure adequate provision of stock at commercially sensible prices.
  • There has already been increased volatility in the currency markets, so it is advisable to check cross-border contracts to understand where foreign exchange risk lies and how this can be hedged.

Comment

The world did not seize the opportunity to make fundamental changes to the economic system following the last financial crisis. Governments of the time simply applied quick solutions and the recovery has been slow as a result. In its wake, there has been a populist backlash, which has bred distrust and polarisation in society, as well as wage stagnation and depressed living standards.

The COVID-19 crisis presents a fresh opportunity to bring about fundamental, lasting and positive changes to the way in which business is done.

If every business is a microcosm of the wider economy, as a business ramps down over the short term, it should also be looking ahead to how it can ramp back up once the worst of this crisis has passed. That should involve looking for lessons which can be learned from this crisis and using some of the temporary measures on a permanent basis.

Businesses should aim to emerge from the COVID-19 crisis with:

  • a more flexible and disaggregated supply chain;
  • better and more collaborative relationships with their networks and suppliers;
  • a larger, more loyal customer base; and
  • a more agile, tech-savvy and sustainable platform.