Franchise and License Agreements: Terms worth revisiting in light of Covid-19
by Pua Siau Kee
6 October 2021
Franchise and license agreements are both business agreements by which certain aspects of a brand are shared in exchange for a fee. While both agreements may contain similar terms such as the grant of intellectual property rights, responsibilities of the respective parties as well as payment obligations, there are distinct differences between these two business models. For instance, licensees are not always required to operate the business in accordance with a strict, specific and uniform system which is generally imposed on franchisees. Irrespective of the differences these models may have, there are common considerations that should be noted for both franchise and license agreements in light of Covid-19. A few of these considerations are outlined below.
- Force majeure clause
Force majeure clauses are generally used to excuse the non-performance of an obligation by a party, if such non-performance is due to a cause that is unforeseeable and beyond the control of the defaulting party. Prior to Covid-19, force majeure clauses were not as widely contemplated, and sometimes not sufficiently tailored to the specific agreement in question. Covid-19 has become the driving factor for the inclusion of a standard force majeure clause as affected parties attempt to rely on this to escape from their contractual obligations. A closer look at force majeure clauses is therefore warranted in the Covid-19 scenario. When drafting force majeure clauses in franchise and license agreements, it would be prudent for the parties:
- to also include an extensive list of possible force majeure events instead of only adopting the general statement “unforeseeable events beyond a party’s control”;
- to clearly specify the consequences of a force majeure event. If necessary, parties should also consider a carve-out of specific obligations beyond the reach of the force majeure clause; and
- to clearly outline the requisite written notice to invoke the force majeure clause, and the consequence of the failure to provide such notice.
- Scope and reservation of rights
With the emergence of Covid-19 and stay-at-home guidelines, many business models are forced to adapt to different operational models which may include one or a combination of different channels such as physical premises, self-owned e-commerce platforms, third party online marketplaces, and delivery services. For example, F&B operators in Malaysia have not been allowed to offer dine-in services during strict lockdown periods and have had to pivot to delivery or take-out models. This has led to the trend of ghost, virtual or remote kitchens being established within the F&B industry. Such challenging times have also witnessed brick-and-mortar brands focusing their capacity on building an omni-channel distribution model. These changes are inevitable and necessary to sustain a business in these unprecedented times.
In view of the foregoing, it is imperative for franchisors and licensors to revisit the scope of rights granted to their franchisees and licensees. For instance, if the franchisors or licensors wish to retain their rights to operate a ghost, virtual or remote kitchen in a certain territory, this should be expressly provided for in the agreements. Similarly, provisions on whether the franchisees or licensees are given the rights to unilaterally manage online orders and deal with any third party services should be clearly spelt out. These may include developing their own mobile applications, online ordering platforms, listing on third party online marketplaces and/or offering self-managed delivery services.
- Variations to the agreement
As Covid-19 continues to take a toll on businesses, many parties to franchises and licenses have renegotiated their existing contractual obligations to adapt to the changing landscape. To address the decrease in revenue, some compromise arrangements to consider include royalty holidays and stand-still agreements, as well as reduced revenue and roll-out targets during the toughest periods of stay-at-home restrictions. In addition, parties who rely on foreign manufacturing bases are also likely forced to resort to alternative supply sources such as engaging local suppliers to overcome the disruptions caused by transportation networks, government-mandated shutdowns, and international trade restrictions. It is important for the parties to make clear whether such agreed arrangements are only applicable during Covid-19, and to vary the original terms of their pre-Covid-19 agreements accordingly. Any agreed variations should be documented in writing and in accordance with the variation clauses in the agreements. If caution is not exercised, any ambiguity may lead to numerous disputes arising from such variations made to the agreements.
- Execution in counterparts
Amidst the social distancing and movement restrictions imposed as a consequence of the Covid-19 outbreak, such safety measures have brought about implications concerning the signing and witnessing of agreements. Given the need to minimise face-to-face interactions, obtaining a wet-ink signature may prove to be challenging during this time. In fact, it has become more commonplace for counterparts to be used for agreements, that is, for each party to sign the document separately and deliver the same to the other by courier or post, or resort to the use of digital signatures. In such circumstances, clauses must be drafted into the agreements to cater to such signing in counterparts.
Undoubtedly, Covid-19 is likely to have radically changed past approaches towards commercial agreements for franchises and licenses. While these agreements are essentially legal contracts between two parties, they are living documents that should provide room for business models to improvise over the life of those agreements. To minimise disruptions surrounding the pandemic, it is thus in the interest of parties to constantly communicate and align their expectations, and thereafter set forth any mutual understandings in the relevant agreements so that the business can move forward in the most feasible manner.
The information provided in this publication is for general information purposes only and is not intended to constitute legal advice. Please consult a legal professional if you require further clarification.
Siau Kee actively advises clients on license and franchise matters, and also assists with franchise registration at the Franchise and Direct Selling Development Division of the Ministry of Domestic Trade and Consumer Affairs. She is also a registered patent agent and is a key contact of the firm for patent prosecution matters.