Through these uncertain times, one thing is for sure. You are not alone. The CFA community is here to help.

Last year – when the CFA shifted its strategic focus to creating a strong sense of community amongst its members – the Association called on its members to become active and engaged in that community. It’s during times such as these that the strength of a community is truly put on display.

As the world faces an unprecedented pandemic that is impacting the global economy and day-to-day life on an unprecedented scale, the CFA has made it a mission to provide regular COVID-19 updates and resources for the CFA member community to stay informed and be prepared.

A key strength of the CFA is our unique ability to harness the expertise of franchise leaders from across Canada to provide the best resources and programs for the franchise community. It is only through the participation of members like you that we can fulfill our mission to amplify the understanding and power of franchising in Canada by advocating on issues that impact the dream of building your own business, connecting people with opportunities in franchising, and delivering learning opportunities that make franchising stronger. And it is only through the participation of members like you that we can successfully overcome the curveball COVID-19 has thrown at us.

Here, CFA members and franchising professionals ranging from franchise lawyers and consultants to marketing and communications experts, embrace the power of community to provide insight into various areas to help the Canadian franchising community navigate through these turbulent times.

Quick Links: 

3 Things Franchisors Should Focus on Before and After the COVID-19 Pandemic
What are the Insurance Implications of COVID-19?
Navigating Rent Costs Through COVID-19
How to Protect and Strengthen Your Brand When a Crisis Hits
GET ME OUT OF HERE! Exiting contracts in a COVID-19 world
COVID-19: Managing Workplace Risk
Franchisors and Their Franchisees – All for One and One for All?

 

3 Things Franchisors Should Focus on Before and After the COVID-19 Pandemic

By Clark Lonergan and Lyn Little – BDO

The COVID-19 pandemic has affected franchisors in numerous ways. Despite the disruption, they must work on keeping their business and those of their franchisees afloat.

To achieve this, franchisors should consider these three items:

1. Stress testing

Companies in the financial industry are used to going through stress tests. However, it’s not as common for non-financial companies. A stress test is an important way to measure everyday risks as well as worst-case scenarios.

Franchisors may have receivable impairments that can be found when stress testing the business. Most franchisors receive a percentage of their revenue from franchisees, and many of those franchisees are either closed or operating at a reduced capacity. As a result, receivables may not be collectible and revenue will be down significantly for some time.

Also, many franchisors will have receivables from their franchisees. Franchisors will need to consider the impairment of these receivables when stress testing the business. It’s best to be pessimistic when performing a stress test.

It’s difficult to predict how long the shutdown of non-essential workplaces will last. However, you can estimate how much revenue will be lost over certain periods if your franchisees can’t reopen for another few weeks or months, or if the economy doesn’t recover for another year or two. These types of scenarios can help you with the next step.

2. Cash flow projections

After completing your stress test, you should also determine your cash flow on a weekly basis and look at any ways to maximize liquidity. This may include utilizing available interest-only lines of credit to provide you a cash buffer and additional time to sort out any future problems.

Worrying about profit and losses might not be a priority at this time. But you should identify all variable and fixed costs as well as identifying critical expenses and vendors to help prioritize where your cash resources go.

You will want to make cash flow projections based on the scenarios you’ve created according to baseline (status quo) and worst-case assumptions. These projections can include the impact of temporary layoffs, federal and provincial incentives, deferrals of loan payments, the potential impact of the shutdown on franchisee operations, and franchisee incentives, such as payment holidays, rent abatement, or financing.

Additionally, some thought should be given with regards to providing your franchisees with a standard cash flow template for them to quantify their liquidity road map and provide visibility to you on their financial health and ability to cash flow your royalty stream. All of this information will be needed for the next step.

3. Stakeholder management

Once you’ve conducted a stress test and reviewed your cash flow projections, you should readily share this information with your stakeholders in a managed way (too much information can be a bad thing)—whether they be your private equity owner, shareholders, board, lenders, suppliers, and franchisees. They should be kept up to date on the situation regularly so they won’t be taken by surprise. Also, there may be additional reporting required by your stakeholders that you need to be aware of as soon as possible.

Maintaining a strong relationship with your stakeholders is important when running a business since they have a say in your system’s future. They also have a vested interest in your success. There are many risks if there isn’t a stakeholder management plan in place. This can be done by keeping open lines of communication, consulting with them often, and building a strong relationship.

Franchisors that develop and sustain an active relationship with their stakeholders may lead to better outcomes and increased stakeholder support.

In summary

This is a very difficult time for franchisors and it may take a while before business improves. However, you have to stress test the business, review your cash flow projections, and manage your stakeholders in the meantime.

Clark Lonergan is a Financial Recovery Services partner in BDO’s Toronto office. Lyn Little is BDO’s National Franchise Industry Leader and a Partner in BDO’s Burlington office.

 

What are the Insurance Implications of COVID-19?

By Sandra Colantonio and Geoff Haddock – Brokerlink Inc.

During these critical pandemic times, many businesses have been shuttered due to governments ordering shutdown of non-essential businesses. Along with many hardships the shutdowns bring, the shutdowns also have potential insurance implications both for these businesses and their landlords.  Some of these  implications include:

Vacant Buildings

Commercial property insurance policies typically have exclusions that apply when the insured premises is vacant, unoccupied, and shut down for more than 30 consecutive days. It is important to inform your insurance provider of your intent to shut down your business or in the case where you own a commercial property, your tenant(s) has (have) shut down their business as a result of the COVID-19 pandemic. Your insurance company may be willing to extend or remove the exclusion during the pandemic, as long as the cause for the closure is due to a shutdown order resulting from COVID-19. Of course, your insurer will want to be assured of continuing diligence in the protection of the property, such as working sprinkler systems, security monitoring, and periodic physical inspections.

Keeping Insurance Premiums in Check During the COVID-19 Induced Economic Slowdown

Contact your insurance provider to determine ways in which to reduce or maintain your insurance costs. Since early 2019, the property and casualty insurance industry has been applying rate increases on most types of insurance policies due to worsening loss experience. These pressures are likely to continue throughout 2020. Needless to say, many businesses are looking to reduce expenses at an unprecedented time when for many, revenues are dropping, at least temporarily.

If you can reasonably project lower sales than last year, or your stock values will decrease, or your rental income on your investment property will reduce, or some of your vehicles will be parked out of use, contact your broker to take advantage of reducing premiums. Insurance companies may not agree to adjust premiums during the policy year, but will often do so at renewal time.

Additionally, if you have been paying your premiums upfront, request options for payment plans. This will help defer insurance costs and avoid balloon payments.  And businesses may be able to write off interest charges as a business expense.

Declaration of Emergency

Many insurance companies have subscribed to the Insurance Bureau of Canada-approved “Declaration of Emergency” endorsement, now added to many commercial insurance policies. Ask your broker if one or more of your policies has had this added. The COVID-19 pandemic qualifies as an emergency. This endorsement:

• Extends the term of an expiring policy, or suspends the notice period for a pending cancellation, after the declaration of an emergency.
• The extension is triggered by the declaration by a civil authority, rather than by an otherwise insured occurrence.
• The extension period is tied to the length of the emergency itself, with a corresponding recovery stage allowed for the resumption of normal business. There is a maximum total time of 120 days (90 days, plus up to 30 days’ recovery period).
• Cancellations cannot be initiated by insurers during the extension period, since termination notice periods are suspended.
• For the extension to be triggered, the declared emergency must directly affect the business, the insured premises, the business’s insurance broker or their insurer’s operations. Premium continues to earn at the same rates as the expiring policy on a pro-rated basis.

Business Interruption

With your business being shut down, you may ask if your standard business policy or business interruption policy will cover you for interruptions and loss of income due to COVID-19.

Business Interruption (BI) coverage is an add-on to an existing business insurance policy.  In the event of a business temporarily needing to shut down, BI covers continuing expenses or replaces lost profits.

Generally, commercial insurance policies and traditional business interruption policies do NOT offer coverage for business interruption or supply chain disruption due to pandemic such as COVID-19.  BI policies are not standardized and include many variants, but most contain language indicating that the insurer will pay for the actual loss of “business income” due to the “necessary suspension” of operations during “the period of restoration.” Several concepts and nuances come into play, including:

• Physical damage requirement: Most policies require proof that the insured premises sustained physical damage (for example, from fire, water damage, vandalism) that was covered under their property policy, which caused an interruption that resulted in a loss of business income.
• Civil Authority: Most commercial policies include coverage for interruption by civil authority for both property and business interruption coverage. However, coverage is triggered only when such an order of civil authority is given as a direct result of direct physical loss or direct physical damage to neighbouring premises by a peril insured against under this policy.  Again, if there is no physical damage to property, no coverage would apply.

Some organizations may have purchased specialized contingent business interruption coverage, standalone business interruption coverage, and supply chain disruption coverage which may be triggered as a result of the World Health Organization’s declaration of a pandemic.

Commercial General Liability

Liability would be fairly difficult to prove if businesses act in a responsible manner to protect or safeguard  individuals/third parties from harm. However, coverage could be triggered if liability is legally established.  (i.e.: The business was negligent.)

General liability policies may respond to pandemic events if a business has been negligent in, or found to be liable for, failing to protect people/third parties from infection where it is considered they have a duty:

• Commercial General Liability (CGL) – Most CGL policies agree to pay sums that the Insured becomes legally obligated to pay as compensatory damages because of bodily injury or property damage, and the definition of bodily injury includes:
  • A key piece in determining legal obligation is negligence. The business must be negligent to trigger coverage under the CGL, or alleged to have been negligent for legal defence to be covered.  So if the business is deemed to have been negligent in the causation of bodily injury (disease), coverage may be afforded.

Important to remember:  Not all CGL policies are created equally, and some insurers may actually exclude spread of disease or infection.

Navigating Rent Costs Through COVID-19

By Darrell Jarvis – Partner, Fasken Martineau DuMoulin LLP

As I write this article, it has been 10 days since the Ontario government issued the revised Order restricting the operation of non-essential businesses under the Emergency Management and Civil Protection Act. Similar directives have been issued throughout Canada. Most retail is closed in Ontario. Apart from grocery and pharmacy, any retail that remains open is operating through alternate means, such as curbside service. While retailers may not be restricted from operating through e-commerce, (and by all accounts e-commerce is exploding), many retailers are finding bottlenecks in their online systems’ capacity to handle the increased volume. Restaurants are restricted to take-out and delivery. Some service franchises are permitted to continue, while many others are not. Franchisors are finding that their systems can continue to operate fully in some provinces, but must be shuttered or operate through alternate means in others.

Although franchised businesses that remain open can access a significant level of wage subsidies, for businesses that remain open or that have closed, a major issue is fixed costs. One of those fixed costs is rent.

The past month has seen a sudden flurry of lease reviews. Tenants discovered, to their disappointment, that while some of their lease obligations were relaxed by ‘force majeure’ clauses, their obligation to pay rent continued unabated. Lawyers have considered obscure legal concepts like “frustration” (where, loosely speaking, a party to a contract is released from its obligations because the object of the contract is no longer in existence), and generally advised that they will not help, particularly if the tenant does not intend to walk away from its lease for good. Whatever our understanding of business interruption insurance may have been, tenants discovered that it was not triggered by a pandemic.

Reports are that landlords are generally not forgiving rent. Currently, the best case for tenants is a rent deferral for a few months, which must be repaid over future months, with or without interest. While this may constitute much needed temporary relief, it essentially results in tenants carrying more debt. Operating costs (CAM) should decrease to some extent, although some costs to landlords, like fixed service contracts, insurance, and some taxes, will continue. Some cities have deferred payment of municipal taxes, which landlords should be passing on to their tenants. Landlord efforts to preserve their contractual rights is a double-edged sword, however, as landlords may find themselves with fewer tenants in the future.

Construction of commercial premises has largely stopped. The scheduled completion and opening of new units is delayed. To franchise businesses struggling to preserve capital, this may be a blessing. Landlords are generally able to invoke force majeure provisions of leases to avoid any financial obligation to tenants resulting from such delays. Whether franchisors and franchisees are released from their financial obligations to each other, resulting from failure to construct and open new units on time, will depend on the force majeure provisions of their franchise agreements.

When I try to consider what’s ahead of us, it’s hard to not recognize how much has changed in so little time. A month ago I was riding a chair lift with no concern of social distancing (before receiving an abrupt announcement that lifts would be closing for the season on three hours’ notice). Yet, at a press conference last week, federal government representatives predicted that we will be physical distancing for at least three more months, to the end of the ‘first wave’. That’s three times the length of time in front of us as behind us. Will the rate of change continue unabated for the next several months, or will it plateau or flatten (we are all statisticians now), as we all hunker down in our homes. How much of this can business withstand?

Last night I drove past a ‘for lease’ sign over the pizza franchise that has occupied a prominent corner in my neighbourhood for at least the 25 years that I have lived here. I can’t say for sure when it went up; I have been stuck inside for a while now.

One of the outcomes of COVID-19 will be fewer businesses still standing when all is said and done. There will be greater retail, restaurant, and office vacancies. If the law of supply and demand prevails, rents may even fall. The personal tragedies of some will create opportunities for others. Those that survive, however, will likely have lower equity, higher debt, and less capital to draw upon to take advantage of those opportunities. There is a franchised coffee business operating in a prominent downtown Toronto location because when the lease deal was done during the 2008-2009 recession, the ‘corporate’ coffee chain competitor set for that space placed a moratorium on development in Canada.

I heard a lawyer say recently that franchised businesses may be better placed for survival. She meant that franchised businesses should be better resourced than independent small businesses to survive because of the strength of their franchise system. I think that is true. However, I think franchised businesses may be better placed for survival against businesses with corporate locations, because of the power of franchisees. I have a client that constantly uses the expression, “think like a dealer.” What’s inherent in that statement is that franchisees find innovative solutions to problems to overcome obstacles, in a manner that corporate managers may not. For instance, I have noticed that despite a prohibition on open houses in Ontario, “sold” signs continue to appear in front of houses in my neighbourhood; someone is finding an innovative solution to overcome those obstacles. The power of ‘thinking like a franchisee’ is going to help franchisees survive where corporate locations may fail.

How to Protect and Strengthen Your Brand When a Crisis Hits

By Lisa Raffaele – Fishman Canada

At a time when businesses are forced to shut down to halt the spread of the coronavirus (COVID-19) pandemic, the last thing on their mind should be to have their communications program end as well.

Before, during, and after a crisis, communications can be one of the most valuable tools in your franchise toolbox when it comes to protecting and strengthening your brand.

During a crisis, communications can help you maintain positive brand reputation, something that can be trickier for franchises in particular after you factor in multiple franchise units into the mix. Increasing both internal and external communications during a crisis can help solidify the connection employees and customers have with your brand.

Accelerating your communications efforts during crisis allows you to stay in control of your messaging, limit rumours, and keep your employees connected. All businesses rely heavily on their staff to deliver their brand promise, so making sure they are up to speed is essential, especially when a brand or in this case, the world, is impacted by a crisis.

What about when the smoke clears? Investing in the right, forward-thinking communications strategy can make all the difference in terms of what the impacts of a crisis can have on your business in the future. It could mean the difference between taking three months to get back to normal and bringing back laid-off staff versus nine months, or worse, not at all.

Creating a post-pandemic communications strategy does not come in a one-size-fits all solution, but spending time to develop one that is thoughtful and progressive is essential for a franchise system’s success post-crisis.

Here are three reasons why communications should be part of your COVID-19 practices:

Don’t Assume

One of the first questions to ask yourself is how are you protecting your franchise after the dust settles? Better yet, how are you explaining this to your franchisees?

Investing in an internal communications strategy will allow you to stay in control of your messaging, limit rumours, get employees feeling confident again in the brand, and help them adjust to coming back to work. Franchises rely heavily on their staff to deliver a consistent brand promise, so communicating with them regularly, before, during and after a crisis is extremely important in ensuring they feel safe and there is no gap in service once business resumes.

Utilize any downtime to assess the situation and explain what has happened and next steps as best as you can. Don’t be afraid to let your team ask questions. Don’t skirt the answers, but also don’t exaggerate. Be direct. It’s OK to tell them what you do know, even if it’s only 10% of the information, as the situation is changing so rapidly. Be honest and let them know you’ll share more details when they become available, and consistently work to keep that promise.

A company is only as good as the sum of its parts, so getting those parts to work together, especially during a crisis, will only strengthen the connection employees have with your brand.

Don’t Fade Away

One of the most common misconceptions surrounding a crisis is that a business should stay radio silent and the crisis will eventually fade away. This is one of the most damaging responses to a crisis a business can have. During and after a crisis, more so than any other time, your franchise needs to “show up” for staff, suppliers, and customers.

Another misconception is that messages need to be lengthy. This is not always the case. In the example of Chipotle, a brand recognized for its bold and outspoken Twitter personality, as much as its cuisine, @ChipotleTweets: “There’s a lot going on rn. If anyone wants to hang, we’re going live on Zoom here…”

It’s important to simply let people know you’re still there.

Once that strategy is aligned, what’s your road map for the future? How will you keep your franchisees, their employees, and your customers safe? Make sure your employees, as well as your customers, know there is light at the end of the tunnel. When a brand disappears without a trace, you are begging for the world to fill in the blanks and explain on your behalf – you’ve lost visibility and you risk being forgotten altogether.

That said, be sensitive with the communications you are putting out into the world. Elect for messaging that inspires and educates, rather than sells. If you can, look for ways to improve your online offerings and fine-tune your digital capabilities for future growth.

Looking Ahead

It may not feel like it now, but this too shall pass. And, when it does, you should be ready to move forward.

Whether you are looking to pick up where you left off, or simply drive awareness back to your location and recoup the loss from weeks in quarantine, communications can be your best tool for getting your “open for business” message out – quickly and efficiently.

Create a strategy that is well thought out, thoughtful, reaches your key stakeholders, and acknowledges this devastating crisis which will inevitably change how consumers want to do business with you.

Your communications strategy should have your trailblazers leading the conversation and showing how your franchise is managed by smart, forward-thinking leaders, as well as how it has pivoted and strengthened in the wake of COVID-19. Share new policies, how you’ve adjusted and adapted your business, and are safeguarding customers and staff – maybe COVID-19 has forced you to take your offerings online – share this!

And don’t be afraid to explore your options. The media is just one of your conduits to reaching customers. A good PR firm that focuses on franchisor growth expansion and brand reputation will provide recommendations on all the ways to get you seen and heard, including digital and social amplification.

Lisa Raffaele is the Vice President of Fishman Canada, the premier PR firm for franchise brands, focused on franchisor growth expansion and brand reputation.

GET ME OUT OF HERE! Exiting contracts in a COVID-19 world

By Clark Harrop – Partner, Dale & Lessmann LLP

I am writing this in the middle of the fourth week of social distancing and working from home. A couple of months ago few would have predicted that the world would be in the midst of a global pandemic, with dire implications for our citizens, health care system, and economy. While most of us willingly embraced the call to “flatten the curve” and take measures to prevent the spread of the novel coronavirus that causes COVID-19, the sheer magnitude of the impact on our economy is only now beginning to be fully understood.

In the past four weeks, I have had countless phone calls with clients and colleagues to work through some of the challenges of the pandemic. While many industries and sectors of the economy have been hit hard by COVID-19, our franchising community has been amongst the very hardest hit. Restaurants, retailers, and personal service businesses make up a large share of franchise systems. Many of these businesses have had to close entirely and those that continue to operate have had to introduce new procedures and pivot their service model to delivery or curbside pickup. Other franchised businesses have been declared essential services and continue to operate but have seen their revenues decline significantly. Even those franchises that have not endured a decline in sales have needed to change the way they operate and create new procedures on the fly.

We’ve all had to make difficult business decisions in the past few weeks. We’ve cancelled our conventions and offsite meetings. We’ve pulled back on traditional advertising and promotions and allocated more attention to digital marketing. We’ve received calls from important suppliers who are unable to perform critical services, or provide an adequate and timely supply of some products. This has caused many people to ask: “Can I get out of this contract?” In some cases, the question is: “What can I do if my supplier can’t deliver?”

In almost every instance, it has caused us to pull out our contracts and look at a section that in all likelihood we spent almost no time focusing on when the contract was written. I’m talking about the force majeure provision. As recently as a month ago I would predict that few (outside of lawyers) would be familiar with the spelling of force majeure, let alone understand the impact and meaning of this provision.

A little history: ‘Force Majeure’, from the French meaning “superior force”, is a legal concept that originated in French civil law and excused a party from performing an obligation where events outside the parties’ control, which could not have been foreseen at the time of contracting and which could not have been avoided by appropriate measures, prevent the performance of the obligation. Commonly referred to as an ‘Act of God’ provision, it is now a commonly found component of the “boilerplate” clauses that are found in most contracts. Perhaps because these boilerplate provisions are so common – or perhaps because they are typically found at the end of the contract following the business terms – they are often overlooked and rarely are the subject of substantive negotiation between the parties.

Force majeure provisions in contracts are typically drafted to accomplish the same goal of the original French civil law concept, namely to excuse a party from performing an obligation that has been rendered impossible or impractical as a result of an intervening event beyond the control of the parties. Force majeure clauses can vary widely, so it is critical to read each one carefully. The list of events that trigger a force majeure often include natural disasters and war. They may also include civil disorder, labour unrest and outbreaks of disease. Some force majeure provisions may also include some generic, catch-all language following the list of specific force majeure events that also extends force majeure to “other similar intervening events.” Most importantly, the specific force majeure event may excuse non-performance (or a delay in performance) where a force majeure event has made performance impossible, but may also apply where the performance would be impractical or onerously expensive. A careful reading of your specific force majeure provision is critical to understanding whether performance could be excused.

The COVID-19 pandemic is complex, in that it is not a single event but is in fact a series of interconnected events. This may itself impact whether it falls within the specific triggering event found in your force majeure provision. At the centre of it is the novel coronavirus itself (now referred to by the the World Health Organization as SARS-CoV-2). In many cases, however, it is not the SARS-CoV-2 virus or the disease it causes (COVID-19) which makes performance of a contract impossible or impractical. The ability of a party to perform its obligation may be prevented by a voluntary closure or pursuant to a government order. In the pasts few weeks we have seen examples of both. Many of the initial directives issued by public health authorities were recommendations only and were not compulsory. Subsequently, most provinces have declared states of emergency and mandated the closure of non-essential businesses and issued compulsory public health directives that prevent the performance of many contractual obligations. The situation has evolved quickly over the past weeks and will likely remain fluid and unpredictable for the foreseeable future.

Force majeure provisions will often include the obligation to take reasonable steps to prevent or mitigate the impact of a force majeure event, meaning that parties will only be excused from the performance of their obligation to the extent they are prevented from performing their obligations after taking reasonable steps to lessen the impact of the event or find alternative means of performance. The provision may also provide that the performance of the obligation is merely delayed and must resume when the force majeure event is over. This may be of little help to you if you are looking for a means to terminate and end a contract altogether. Also, keep in mind that many force majeure provisions require that the party who is unable to perform their obligation give notice to the other party. Even if your contract does not include this requirement, it is often advisable to communicate with your customers and suppliers and letting them know if you are unable to perform your obligations as a result of the COVID-19 pandemic.

One final note on this topic is that many force majeure provisions state that payment obligations are unaffected by the intervening force majeure event. This type of language is common in leases and excuses the performance of all obligations, except the payment of rent which remains an obligation during a force majeure event. For obvious reasons, this can be an incredibly onerous provision for a party whose business has closed and is currently receiving no revenue from which to pay its obligations.

So where do you stand if your contract doesn’t have a force majeure provision – or if it has a force majeure provision where the list of triggering events doesn’t include either a global pandemic or government orders to close non-essential businesses or restrict the operation of essential businesses as a result of the pandemic? This is where the concept of frustration comes into play. Frustration of contract is a common law concept and applies when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract.” In that respect it is a similar concept to force majeure. The leading Canadian case on frustration is the Supreme Court of Canada’s decision in Naylor Group Inc. v. Ellis-Don Construction Ltd. This decision confirmed that a contract will only be frustrated if there has been an intervening event that could not have been anticipated by the parties and occurred without the fault of either party. Generally, the presence of a force majeure provision in a contract will be a barrier to pursuing a claim for frustration of contract, because the very presence of a force majeure provision is an indication that the parties turned their minds to the parties’ inability to perform during an intervening event. It may be possible that a contract containing a force majeure provision may still be frustrated if the intervening event (i.e., the COVID-19 pandemic) was not one of the triggering events stated in the force majeure provision, but the presence of the force majeure provision is likely to make arguing frustration significantly more difficult.

The important distinction between force majeure provisions and the concept of frustration is their result. Under a force majeure provision in a contract, the result of a force majeure event is that a party is often temporarily excused from the performance of their obligations. The contract remains in effect, however, and is not terminated. Frustration of contract, on the other hand, leads to the termination of the contract because the intervening event has radically changed the nature of the contractual obligations. For that reason, frustration of contract may be very useful to argue when cancelling an event contract with a hotel, or seeking the return of sponsorship fees for an event that has itself been cancelled. It may not, however, be terribly useful when dealing with contracts for long-term relationships.

But what if your problem isn’t about a delay in performance, or you’re not looking to get out of a contract altogether? What if you’re dealing with a critical supplier who as a result of the COVID-19 pandemic and the impact on supply chains is unable to deliver the critical product or service that your system needs? In that case, you need to dig deeper and review your contract for additional relevant terms.

The first thing you’d want to do is to see whether the contract provides for exclusivity. At first blush, if you have appointed someone to be your exclusive supplier of a product or service, you may not have the right to put a secondary source of supply in place as a result of a disruption to supply. As a practical matter, however, I would expect that any critical supplier who is concerned about the relationship and supporting the long-term success of your business would be prepared to accept the temporary use of an alternate product or supplier in the event they are unable to deliver a timely and adequate supply of critical products. I have even seen suppliers work hand-in-hand with a competitor to ensure that a customer receives an adequate supply of critical products.

If your contract doesn’t provide for exclusivity, take a look to confirm whether you (or the supplier) owns the formula or specification for your product. You’re in a much better position to transition some, or all, of your volume to an alternate supplier if you own the formula or specifications for the product. A resilient supply chain with a comprehensive business continuity plan will typically include having multiple (or alternative) sources of supply that can be called upon to fill volume requirements on relatively short notice. That is much easier if you have maintained ownership over the intellectual property that is used to produce the product. This includes not only the formula and specifications for a product, but also any molds or specialized equipment used in the manufacture of the product, or any proprietary techniques or know-how used in the manufacturing process. Unfortunately, it is often during these critical moments when supply chains are being disrupted that we discover we have not taken appropriate steps to acquire or retain ownership over the intellectual property that is used in our critical products and services. While that is no comfort today, it is a “call to arms” to identify and implement changes in your procurement practices to protect your supply chain down the road.

Another provision to look for is to see whether you have guaranteed purchase volumes to your suppliers. Many franchises (and franchise systems) have seen their sales decimated in the past month. While guaranteeing volume purchases may assist you during negotiations on price, you’ll want to carefully review any contract provisions guaranteeing purchase volumes, as well as the force majeure provision (if any) to see whether you are excused from purchasing the minimum volume during the period of the COVID-19 pandemic.

Finally, many supplier agreements include provisions dealing with the allocation of products between customers in the event the supplier experiences a disruption to production or distribution. In some cases, the provision might say that where the supplier experiences a disruption, they can allocate the available supply of products pro rata between their customers. While this at first blush is a fair and equitable approach, it isn’t entirely helpful if your franchise system is unable to get an adequate supply of a critical product for your entire system. For that reason, many franchise systems will insert provisions in their supply agreements which state that in the event of a supply disruption, the customer will receive preferential treatment and will receive all products ordered and that the supplier’s other customers will be allocated the remainder. This type of provision is typically relevant to larger systems that purchase a significant volume of a supplier’s product and have both the bargaining power and resources to negotiate supply agreements to protect their supply. In some cases, this can also be handled by having the supplier dedicate an entire production line or facility to a single customer, although it would be rare for this to happen unless the customer guaranteed a high volume under a long-term supply arrangement, or contributed capital for the construction of the production line.

There is an adage amongst lawyers that once a contract has been negotiated, it is put in a drawer and forgotten about it until something bad happens. Unfortunately, the same “something bad” has happened to everyone at the same time. All around the world millions of drawers are being opened and those contracts are being pulled out and reviewed. In many cases, we are finding that our contracts do not adequately deal with the crisis we currently find ourselves in. With any luck, we will survive this crisis and learn from it.

Regardless of whether your contract is inadequate, or addresses your issues perfectly, it is always good advice to maintain a positive dialogue with your business partners. The COVID-19 pandemic is an unprecedented global event and few were adequately prepared for it. Most business partners are looking to build successful long-term relationships and aren’t looking to take advantage of the current circumstances. Having candid conversations with your business partners will build trust and likely lead to better results. After all, we have a better chance of making it through the market downturn if we support each other.

COVID-19: Managing Workplace Risk

By Matthew Badrov – Sherrard Kuzz LLP

In a matter of weeks, the employment landscape for franchisees across the country has changed dramatically.  Many have been forced to institute temporary layoffs and work-from-home arrangements as Canadians are encouraged to “self-isolate,” and, in many jurisdictions, non-essential businesses have been required to close.

In these unprecedented times, franchisees are grappling with a variety of issues.  This article addresses two key issues:  1. Enhanced franchisee liability that may arise out of the spread of COVID-19 in the workplace; and 2. The legal risks associated with laying off employees and best practices to minimize those risks.

Franchisee Liability That May Arise from COVID-19 in the Workplace

 Health and Safety

Across Canada, a franchisee has an obligation under provincial occupational health and safety and/or workplace safety and insurance legislation to report an occupational illness to the respective ‘Ministry of Labour’ (“MOL”) or other applicable government body.  Generally, this reporting obligation only arises if exposure to the illness occurred in the workplace.  In the case of COVID-19, the source of the transmission may be difficult to determine, particularly in light of community spread.  As such, it is not always clear whether notice to the MOL of a confirmed case of COVID-19 is required.

Because of this lack of clarity (or despite it), the Ontario MOL, has taken the position that any confirmed case of COVID-19 in the workplace must be reported to the Ontario MOL (in addition to the joint health and safety committee or representative, and trade union, if any).

The concern we have with this reporting requirement is that, if a franchisee reports a COVID-19 case to the Ontario MOL, the presumption may be that the franchisee concedes the exposure to COVID-19 occurred at work.  In that case, the franchisee may later have difficulty establishing that the exposure did not occur in the workplace, in response to a workplace safety and insurance claim or other legal proceeding.

To reconcile these two positions, and protect the franchisee’s interests, in Ontario at least, a franchisee should provide notice to the MOL but clearly state that disclosure is being made in accordance with the MOL’s directive; not because it is the franchisee’s position the employee contracted COVID-19 in the workplace (unless there is clear evidence).

Workplace Safety and Insurance

In the normal course, if an employee is diagnosed with an infectious disease as a result of workplace exposure, the employee may be entitled to benefits through the respective workers’ compensation scheme.  This may result in increased claim costs for a franchisee.

In the case of COVID-19, the source of the transmission may be difficult to determine.  The question franchisees have asked is, ‘will this lack of precision make it more difficult for an employee to demonstrate he/she is eligible to receive benefits’?

Thus far, the answer appears to be, “no”.  To the contrary, workplace safety and insurance adjudicators appear to have relaxed the standard, so that now an employee need only demonstrate that the employee’s working environment put him/her at increased risk of contracting the disease as compared to members of the general public. If established, this will generally be considered persuasive evidence the employee’s employment made a significant contribution to the illness.

For example, in Alberta, the Workers’ Compensation Board has indicated “(a) claim is likely to be accepted if an employee contracts the illness and is performing work the province deems to be an “essential service” that puts them in regular contact with the general public. A worker will also likely be covered in the event of a widespread outbreak at their place of work”.   Similarly, in Ontario, the Workplace Safety and Insurance Board has indicated it will assess whether the nature of the employee’s employment created a risk of contracting the disease to which the public at large is not normally exposed.

While a COVID-19 related claim may be compensable, the Ontario Workplace Safety and Insurance Board indicates the costs associated with such a claim will not be allocated at the employer or class level and instead will be allocated on a Schedule-wise basis.   This means there may be an increased potential for COVID-19-related cost increases even where a franchisee has not had a claim filed in its workplace.  It remains to be seen whether other provincial workers’ compensation bodies will take a similar approach.

Legal Risks Associated With Layoffs

The Risk of Constructive Dismissal

Employment standards legislation across Canada recognizes an employer’s right to temporarily lay off an employee for a prescribed period of time, following which the layoff is deemed to be a termination of employment.

Despite the statutory entitlement to lay off an employee, courts have held that, unless an employment contract or other agreement includes an express or implied right to lay off an employee, an employer has no right to do so.  If there is no express or implied right, a layoff may, in certain circumstances, amount to a unilateral, fundamental breach of the employment contract (whether or not the contract is in writing).  In that case the employee is deemed to have been constructively dismissed and entitled to common law reasonable notice of termination (or pay in lieu of notice). Common law reasonable notice requirements are generally considerably higher than requirements under employment standards legislation.

That’s the bad news.  The good news is a constructive dismissal arises only if there has been a unilateral change by the franchisee to terms and conditions of employment.  If an employee agrees to the change in the terms of employment (i.e., the temporary layoff) no constructive dismissal arises.  Similarly, if the change is not imposed by the franchisee but is the result of a government directive (i.e., to shut down operations), an employee may not be able to successfully assert the layoff constitutes a constructive dismissal.

Even if the layoff might be a constructive dismissal, the employee has an obligation to mitigate his/her potential losses. For example, if a laid off employee is recalled to work and declines (and the employer-employee relationship is not so damaged that it would be reasonable for the employee to return), a court may find the employee failed to mitigate their losses (in whole or in part) by failing to return to work. This will reduce the value of the claim against the franchisee.

Practical Considerations

Franchisees are in an unenviable position.  While this pandemic rages among us, business decisions must be made in real time, with imperfect information and under enormous stress.  However, those same decisions will later be scrutinized by adjudicators with the benefit of time, clarity and context.

To minimize the risk a decision made today to lay off an employee will result in a claim for constructive dismissal, consider the following best practices:

• If possible, before laying off an employee, obtain the employee’s consent to do so. This is not always straight-forward, so it’s advisable to consult with experienced employment counsel on how best to proceed.
• Maintain contact with laid off employees, provide them with updates, including when the business may resume operations.
• Even if you do not know when operations might resume, contact with laid off employees will mean they are less likely to listen to rumours and speculation, and more likely feel connected to the workplace and be ready to return.
• If possible, consider whether the business can recall employees earlier than anticipated by taking advantage of the various government initiatives such as the Canada Emergency Wage Subsidy. The Federal Government has indicated the wage subsidy is available to any business, regardless of size, including a non-profit or charitable institution, but will not apply to a public body, and is intended to encourage an employer to maintain employees on payroll even if there is a reduction in work. Additional information on the Canada Emergency Wage Subsidy can be found here.

Frustration of Contract

Even if a franchisee takes all appropriate steps, it may still find itself faced with a constructive or wrongful dismissal claim from a laid off employee.  If the layoff resulted from COVID-19-related reasons, included a government-mandated closure, a franchisee may be able to defend itself by relying on the doctrine of “frustration of contract”.  Frustration of contract arises when an unforeseen event, outside the control of either party, renders the contract impossible to perform.  In that case, the employee is not entitled to any damages under common law or employment standards legislation.

Bottom Line

These are unprecedented times and the ground seems to shift with every passing day.  For these reasons it is important to stay abreast of the issues, plan deliberately, and proceed with caution.  If your organization must “report” a confirmed case of COVID-19 in the workplace, understand what you are reporting and what you are not reporting.  If you have to lay off employees, or have already done so, keep in touch with those employees, and leverage the experience of a skilled employment lawyer to help minimize risk.

Matthew Badrov is a lawyer with Sherrard Kuzz LLP, one of Canada’s leading employment and labour law firms, representing employers.  Matt can be reached at 416.603.0700 (Main), 416.420.0738 (24 Hour) or by visiting www.sherrardkuzz.com.  

The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice, nor does accessing this information create a lawyer-client relationship. This article is current as of April 6, 2020 and applies only to Ontario, Canada, or such other laws of Canada as expressly indicated.  Information about the law is checked for legal accuracy as at the date the article is prepared, but may become outdated as laws or policies change.  For clarification or for legal or other professional assistance please contact Sherrard Kuzz LLP.

 

Franchisors and Their Franchisees – All for One and One for All?

By Peter Viitre – Sotos LLP

As the COVID-19 crisis continues to dominate our news cycles and alter our daily lives, it is clear that economic casualties will begin to mount in addition to the human ones. This will be the case in most industries and economic sectors, regardless of who the market participants are and how they have organized themselves. The franchise business model entails a uniquely interdependent relationship between the principal actors – franchisors and franchisees. This leads to questions regarding the duties that each party owes the other, and whether there is justification in a franchisor seeking “the greater good” over attempting to satisfy the immediate needs of any particular franchisee or group of franchisees.

The answers to these questions lie in both the law and the specific circumstances of each franchise system. As a legal matter, franchisors and franchisees owe each other a duty of fair dealing (at least in the six Canadian provinces with franchise legislation in place) in the performance and enforcement of their respective franchise agreements. That duty includes a duty to act in good faith and in a commercially reasonable manner, which means, in part, that each party has to take the interests of the other into account when they make decisions or exercise their discretion under their franchise agreement.

The presence of this duty has led to calls on franchisors from many franchisees in all types of systems to use financial means to support their franchisees – suspension or deferral of royalties and advertising fund contributions being the most common request – on the premise that the franchisor has the deeper pocket and should thus use some of its comparatively vast resources to help its franchisees in their time of need. This approach may indeed be quite valid in large, mature systems, which have the cash and other resources to weather the storm, and there are a number of such franchisors, including Subway and McDonald’s, who have answered the call, to their credit.

But the above premise does not always hold true, particularly in smaller and emerging systems, where the franchisors may well be in need of assistance themselves. These franchisors are watching their own revenues dwindle as royalties naturally decrease due to the fall in their franchisees’ gross sales. They are also seeing supplier rebates decrease due to the system’s declining purchases of inputs, and the flow of initial franchise fees dry up as new prospective franchisees choose to hold onto their money rather than embark on a new business venture in this time of severe economic uncertainty. At the same time, these franchisors are keenly aware of their obligations as stewards of their brand and their system as a whole. When this current crisis ends – and it will end, eventually – there must still be a brand and system for customers, franchisees, and suppliers alike to come back to.

What this leads to, for many such franchisors, is a delicate balancing act between working to save the businesses of individual franchisees and preserving the system for the good of all. While striking the appropriate balance will depend on the circumstances of each particular system, here are some tips to keep in mind:

1. As you’ve been told countless times when flying, put your own mask on first before assisting another person. A compassionate franchisor will do whatever it can to help its franchisees through this crisis, but not at the expense of its brand’s survival. Keep in mind the duty of good faith and fair dealing, but also remember that the duty is not fiduciary – neither party is required to place the needs of the other party ahead of its own.

2. Help your franchisees help themselves. In addition to providing whatever financial assistance you can afford, help them put together business plans and proposals to present to landlords, lenders, and suppliers. Provide them with guidance on government assistance programs that they can access. Help them to understand their duties to their employees, including on questions surrounding potential layoffs. Be flexible around letting them reduce hours of operation and shifts. Continually share news and best practices with them.

3. Create and implement systems and procedures to guide you through not just the next few weeks and months, but the next emergency. Use what you have learned to create a crisis management plan for the future, so that you and your franchisees come out of this stronger than before.

This is an unprecedented crisis that is presenting heretofore unseen challenges to both franchisors and franchisees – challenges that they will need to work together to solve. But each side needs to be realistic and recognize the other’s limitations: “All for one and one for all” may indeed be a laudable rallying cry, and it may work in the short term, but there is also something to be said for “living to fight another day.” Franchisors need to keep both of these maxims in mind, for their own sake, for the sake of their franchisees, and for the sake of their systems.