So far, there haven’t been many franchise-specific COVID-19 legal issues making their way to the courts. In the recent Legal Eagles coverage, however, franchise attorneys say the chaos of the past 16 months will certainly have some legal effects.
Two key issues highlighted by many Legal Eagles were the force majeure clause and how to make financial performance representations in light of the pandemic.
Sam Khajeei, a partner at Canadian firm Nerland Lindsey, said the force majeure clause was one of the first places the industry looked for contractual relief. The clause essentially says contracted parties can renegotiate or nullify a contract based on “acts of God” or unforeseeable issues, but the language is pretty broad.
“The FDD language was an early place where I looked when the pandemic hit, and it seems that force majeure clause largely didn’t apply,” said Khajeei, who sees that vague language as a point of contention. “How do you see people clarifying that very standard language? I imagine franchisees want looser language and franchisors want more strict language. And for businesses that couldn’t survive COVID, does force majeure apply or is that something that will be tested in the courts?”
He thinks there will be some litigation there, but also some changes to franchise disclosure documents. If anything, COVID-19 was a reminder that seemingly boilerplate language can have a bigger impact.
“A force majeure clause is really boilerplate, and the problem with calling something boilerplate it appears to be something that cannot be changed, you chuck it in and don’t think about it. The problem is, when you do that and something like COVID happens, I think you realize what a clause like that can be. As far as what the litigation looks like, it really comes down to what the langue looks like in the actual clause,” said Khajeei.
Financial performance representation issues are also likely to arise. The last fiscal year was a mess—some companies had dismal sales, others had a great year. How that is portrayed in the FDD is a big question mark at this stage as the guiding documents are just rolling out.
“People are just starting to deal with the realities of how do you convey the financial performance of this time. I think that will be something to work on for a long time. The decisions people make on that will reverberate on their newly opened franchises,” said R. Henry Pfutzenreuter, a lawyer at Minnesota-based Larkin Hoffman (and one of the younger Legal Eagles).
It’s not just what to include for the 2021 FDD, but how do finances continue to change as things reopen, adding a little more chaos to the numbers.
“When will COVID be over? I don’t know that it will be the flick of a switch. I can’t wait for my vaccine, but the pandemic won’t end with a shot in the arm,” said Pfutzenreuter. “I think there’s going to be a long tail of issues.”
Those issues could also be brewing now. Financial performance representations made prior to the pandemic may not hold up. That could lead to litigation or legal issues from franchisees looking to get out of their contract.
Stay tuned to Franchise Times throughout April as we’ll be exploring some of the potential and actual COVID-era legal ramifications through the month.