This article explores three important contractual and statutory provisions related to franchise fee relief during the COVID-19 economic crisis. Two are franchise contract clauses: a force majeure clause, and a Business Interruption insurance clause. The third is the “impracticability” provision of the Uniform Commercial Code. This article is not intended to provide legal advice, and franchisees are encouraged to explore their options with the guidance of an attorney.
Force Majeure clause
Some contracts contain a Force Majeure—“Act of God”—clause that excuses one or both parties from performing their obligations when an event occurs that is beyond the ability of either party to control and makes performance of the contract impossible. These clauses sometimes enumerate the covered circumstances; common inclusions are acts of terrorism, natural disasters, acts of government or war, and strikes or labor disputes.
If “epidemic” or “pandemic” are not mentioned in the clause, state law varies as to whether the clause can still be invoked. Law firm Akerman LLP published an article outlining force majeure clauses in the context of the COVID-19 economic turmoil, including variations in relevant state law.
The article stated, “Businesses seeking to invoke the force majeure clause of their contracts likely have a strong argument that the coronavirus outbreak is an unforeseen event, unless the parties entered into the contract after the outbreak of coronavirus.” In order to invoke a force majeure clause, a contracting party must also demonstrate that performance under the contract is impossible, and the precise scope of this standard varies by state.
Business Interruption Insurance
Hotel franchise contracts often require a hotel owner to maintain certain types of insurance, sometimes including business interruption insurance. Depending on how the clause is written, if the pandemic is covered by business interruption insurance, the clause may limit your fees to the amount of proceeds from the payout of an insurance claim.
One such clause in a 2013 Aloft hotel’s franchise agreement reads:
Business Interruption. If the operation of the Hotel is interrupted, Owner shall nevertheless pay to Starwood Companies all fees and other amounts that would be due to them under this Agreement had such interruption not occurred, regardless of whether any business interruption insurance proceeds are available to Owner to cover such amounts. All amounts payable to Starwood Companies shall be calculated based on then-accepted practices in the hotel and insurance industries for such matters. However, if the business interruption insurance obtained by Owner satisfied the Insurance Requirements, Owner’s obligation to pay License Fees shall be limited to the insurance proceeds Owner receives provided that Owner pursues its claim with diligence and good faith. (emphasis added)
Impracticability under the Uniform Commercial Code
The Uniform Commercial Code § 2-615 is titled “Excuse by Failure of Presupposed Conditions,” and franchisees having difficulty affording franchise-related fees and charges may want to ask an attorney if the code can provide relief.
The code states,
“Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.”