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31 March 2020
Crisis management and developing business continuity plans
Communicate and collaborate with your network
Temporary (or potentially permanent) system changes
Force majeure applicability and other effects of COVID-19 on key commercial contracts
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.
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:
BCPs for consumer-facing businesses typically fall into the following vertical categories:
The BCP should consider how the following horizontal areas cut across the above vertical categories:
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.
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.
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:
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.
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.
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:
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:
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:
For further information on this topic please contact Gordon Drakes or David Bond at Fieldfisher LLP by telephone (+44 20 7861 4000) or email (email@example.com or firstname.lastname@example.org). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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