Coronavirus emergency in Italy: what should franchisors do?

The spread of the COVID-19 pandemic and the adoption of urgent government measures to contain it are having a huge economic impact on all businesses in Italy, and franchise networks have not been immune from this emergency. From a legal point of view, the Coronavirus emergency is having a direct impact on contractual obligations within the franchise networks, as it can make it impossible, or at least extremely difficult, to perform some services (both for franchisors and franchisees) and to fulfill the payment of royalties. Under Italian Law, the measures adopted to prevent the Coronavirus epidemic may constitute a cause for exemption from liability for contractualbreach, regardless of the contractual provisions in force. but beyond the strictly legal profiles, there a number of steps that franchisors should take to prepare their network as possible for dealing with the pandemic, and to safeguard their franchisees. These steps can be summed up in this: franchisors must develop a strategy as to how they deal with the impact of Coronavirus, in order to keep the confidence of their franchise network. Many Italian franchisors have reacted very positively to the epidemic, considering it as an opportunity to improve the organization of their network and even obtaining a competitive advantage towards their competitors.

1.Coronavirus emergency in Italy and its impact on franchise networks

The spread of the COVID-19 pandemic and the adoption of urgent government measures to contain it are having a huge economic impact on all businesses in Italy. The difficulties that this unprecedented situation creates for companies are serious and manifold.

First of all, the epidemic puts operators in difficulty by directly affecting the health of their employees and collaborators or by preventing them from carrying out normal work (which may not always, or in any case not with the same effectiveness, be made remotely, with smart working mode).

Secondly, recent government measures have prevented a large part of the commercial sectors from carrying out their activity, requiring the closing of many commercial businesses to the public.

Finally, the same provisions imposed a series of increasingly stringent restrictions on the freedom of movement of people (impediment of movement, slowdown in transports, etc.), causing a dramatic drop in the demand for the consumption of goods and services in many sectors.

Of course, franchise networks have not been immune from this emergency; on the contrary, they have been invested in full, in all the many and varied sectors in which franchising is used in Italy.

As Coronavirus continues to wreak havoc, long-term business implications are likely for franchisors in terms of their supply chain and consumer demand. Franchise networks which operate in the F&B, leisure, hospitality and retail sectors have been particularly impacted by this emergency.

2.The impact on contractual obligations within the franchise networks

From a legal point of view, the Coronavirus emergency had a direct impact on the contractual obligations within the franchise networks, as it can make it impossible, or at least extremely difficult, to perform some services (such as delivery of goods or services to the public), or, in any case, may delay the execution of the services beyond the contractually established terms.

This occurs in a twofold direction:

on the one hand, with reference to the contractual obligations of franchisors have towards franchisees (such as delivery of products, performance of assistance and training services, etc.);
on the other hand, with reference to the contractual obligations of franchisees towards the franchisor (such as payment of royalties, purchase of products, etc.) and towards customers (such as sale of products, provision of services, etc.).

3.The emergency measures as exemption from liability

The recent emergency measures fall within the case of the so-called “Factum principis”, that is, a case of force majeure that occurs when certain provisions, issued after the signature of the contract for general interests (such as the protection of public health), and unpredictable at the time of their adoption, make objectively impossible the execution of the service, temporarily or permanently, regardless of the will of the obliged parties.

Therefore, under Italian Law the measures adopted to prevent the Coronavirus epidemic may constitute, in general terms, a cause for exemption from liability for contractual breach, regardless of the contractual provisions in force, for both parties (franchisors and franchisees), pursuant to art. 1256 of the Italian Civil Code. It being understood that they will be required to perform the service when the cause of the impossibility ceases, provided that the same has not become useless for the other party.

Furthermore, it is necessary to verify, case by case, whether the extent and duration of the restrictive measures adopted to limit the spread of Coronavirus is actually such as to make it impossible to perform the obligation, taking into account all the reasonable diligence measures that the subjects must in any case adopt to make compliance possible and to mitigate delays (such as smart working).

Different is the case when the emergency situation and the related government bans make a contractual performance not impossible, but more expensive. In this case, the contract could be terminated, according to art. 1467 of the Italian civil Code, since the epidemic is an extraordinary and unpredictable event, in case such event imposes to the obliged party an economic sacrifice such as to exceed the normal scope of the contract.

However, in this case, unlike the impossibility, there is no automatic termination of contract, since – in the absence of agreement between the parties – the party whose performance has become excessively burdensome must request the termination of the contract in court, and the Judge, based on his evaluation, ascertains and declares the resolution. The other party can avoid the pronunciation of termination, offering to modify the conditions of the contract equally.

4.How can franchisors behave in this health emergency?

What should franchisors do to deal with Coronavirus? There is no silver bullet, but there are a number of steps that franchisors should take to prepare their network as possible for dealing with the pandemic, and to safeguard their franchisees. These steps can be summed up in this: franchisors must develop a strategy as to how they deal with the impact of Coronavirus, in order to keep the confidence of their franchise network.

First, of course, franchisors should take internal organizational measures to limit delays, inconvenience and disservices to their affiliates as much as possible, by equipping themselves in any way reasonably possible to cope with the emergency. Therefore, if possible, continue to provide them with the contractually provided assistance services, using all available and reasonably possible technological means.

Second, franchisors need to work to understand the likely supply chain exposure of the franchise network and develop appropriate contingency plans. This inevitably involves reviewing their contracts with suppliers, and in particular the “force majeure” clauses, that may not specifically include epidemics as a force majeure event.

To this purpose, some brands that have created Whatsapp and Telegram groups to communicate more quickly, while others have organized video calls with the franchisees in order to respond as soon as possible to their various needs.

Thirdly, and more importantly, franchisors should have a proactive and far sighted attitude vis a vis their franchisees. In fact, franchisors know, or should know, that the most valuable asset of the franchise is their franchisees. Franchisees are the beating heart of a franchise network; and as such, they should be safeguarded as much as possible.

Therefore, never as at this time, it is appropriate to increase contacts with franchisees, by responding adequately and timely to their request, so as not to ensure closeness and not make them feel abandoned to their destiny. At the same time, it is appropriate to communicate continuously and constantly with affiliates, updating them on the progress of the situation and on current initiatives, sending them instructions and recommendations to better cope with the situation and updating the operating manuals with new safety standards.

Moreover, it is highly indicated for franchisors to have a collaborative, flexible and supportive approach to affiliates, not only from a human point of view (which is of course important), but also from a financial point of view. This can result in a series of concrete decisions, such as:

• temporary reduction/suspension of royalties;
• temporary price discounts or bonuses for the purchase of products;
• temporary suspension of payment terms, collection of bills and checks, etc.

It is therefore appropriate to prevent the (inevitable) requests of franchisees, especially of those whose business has been closed by law, meeting them with suspensions or deferment of payments, helping them concretely in securing employees and sanitizing the premises, processing alternative methods and programs to ensure the supply of goods and the provision of services, planning extraordinary intervention strategies and recovery plans, etc.

This is above all in order to prevent affiliates from withdrawing from franchise contracts and from closing their stores, given the situation of force majeure and the deterioration of their economic situation, which would put in crisis, or even compromise, the survival of the entire network and irreversibly prejudice brand reputation.

5.How Italian franchises have reacted

Have Italian franchisors taken such steps? It is premature to tell. But the first signals seem to be quite promising.

Many Italian franchises have estabilished a task force – sometimes including some of their franchisees – organized as a multi-disciplinary team to deal wiith all different issues related to the virus, such as:

franchisors’ and franchisees’ employees health and welfare;
supply chain monitoring;
financial contingency planning;
marketing and sales response.

Franchisors have invested in their customers, trying to anticipate their likely behaviours in reacting to coronavirus. For example, since many customers have moved to online shopping and home delivery, many franchisors have supported franchisees to build their omni-channel distribution capability.

Franchisors have been working with their franchisees to draft and implement plans based upon conservative predictions and government guidelines. Most of them have shown leadership so that franchisees and their employees have confidence in the franchisor and its coronavirus strategy.

Indeed, many franchises are facing the emergency in a very positive and proactive way, considering it as an opportunity to change their activity and improve the organization of their network. And some of them are even obtaining a competitive advantage towards their competitors.

Avv. Valerio Pandolfini

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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.