Tracking the global coronavirus (COVID-19) response and its impact on international franchising

Franchisors with operations across the globe should be aware of the impacts that COVID-19 has had in each of the jurisdictions in which they conduct business. A survey of colleagues with whom we work and who are located in diverse countries has given us some insights into global trends relative to the COVID-19 crisis, which we thought we would share in this alert.[1] From the closure of non-essential businesses to financial relief provided by local governments, many jurisdictions have taken steps that impact proposed franchise transactions and existing franchise operations.

Argentina

Emergency regulations

The Argentine Executive Power has declared a “sanitary” emergency and issued several executive orders impacting on a wide range of matters. No specific provisions have been enacted for the franchise industry, but many of the emergency regulations, coupled with the provisions of the Civil and Commercial Code of the Nation (the “CCCN”) may impact the franchise industry.

While expressly acknowledging the current crisis as triggering the force majeure clauses in real estate leases, Argentina’s emergency regulations have extended the deadlines of the lease agreements, frozen any increase in rent and/or lease payments, and forbidden evictions until September 30, 2020.

The emergency provisions have also prohibited people from leaving their homes—except to obtain food, medicine, and/or cleaning products. They have also prohibited individuals from going to their workplaces and prohibited companies from conducting business, except for those services and activities considered essential (e.g., supermarkets, drugstores, transport, etc.).

Undue hardship

It is anticipated that franchisees and/or vendors will turn to the undue hardship provisions of the CCCN to terminate their contracts. Specifically, undue hardship is provided for by Section 1,091 of the CCCN. It provides that if contractual performances become excessively burdensome because of an extraordinary alteration o the circumstances existing at the time of its signing, due to causes beyond the control and the risk assumed by the party concerned, the affected party has the right to request the total or partial termination of the contract or renegotiate its terms and conditions.

Restrictions on labor suspensions and lay-offs

As of March 20, 2020, and until April 13, 2020, with the exceptions of those activities and services deemed essential by the emergency regulations, all employees are discharged from attending their workplaces. If it is possible, workers may arrange with their employers to telework. However, all employees are entitled to collect their ordinary salaries, whether they carry out home office activities or not.

Also as of March 31, 2020, and for a 60-day term, employers may not dismiss employees without cause or on the grounds of lack of work or reduction of workforce. Dismissals taking place despite the prohibition will be null and void. During the same term, suspensions (furloughs) due to lack of work and/or force majeure are also prohibited and will not be effective.

However, employers may agree with their employees on a leave of absence from their workplaces as long as employers pay employees a monetary allowance equivalent to a certain percentage of their ordinary salaries.

In short, the performance of several obligations arising out of the franchise agreement may be affected by the emergency, such as mandatory operating hours; payment of royalties and marketing and advertising fees; payment of salaries; payment of leases; provision of supplies and branded goods; and technical assistance.

Brazil

In Brazil, several provisional measures are being issued by the federal government in connection with corporate taxes, labor law, and extending deadlines for legal entities to hold their general meetings for approving balance sheets and, therefore, for paying taxes. These measures may benefit retail and the franchise industry in general.

The New Brazilian Franchise Law nº 13.966/19 (revoking the previous legislation, Law nº 8.955/94) came into force on March 25, 2020. No provisional measure or law has been issued to change any of its provisions or to postpone its legal effects.

Canada

Franchise lobbying groups have been seeking several forms of relief. See open letter to the Canadian Prime Minister. The requested measures primarily take the form of monetary intervention such as tax relief and subsidies. There have been no direct amendments to the Arthur Wishart Act (i.e., Ontario’s franchise laws) or its provincial counterparts. The monetary relief granted by the government, includes, but is not limited to:

• Business Credit Availability Program,
• Federal Wage Subsidies, and
• Changes to tax-filing and payment deadlines.

The most dramatic form of relief sought appears to be commercial rent relief (Commercial Tenancies Act). The Canadian Franchise Association (“CFA”) recommended that governments across Canada place a moratorium on rent payments for businesses that are closed or have seen a drop in sales by more than 25% due to the pandemic. The CFA also recommended that governments place a moratorium on evictions and seizure of property during the pandemic. These forms of relief have not been granted.

With that being said, the Ontario government has suspended limitation periods and procedural deadlines, which would, in effect, grant more time to disclose or rescind (depending on what side you are on). On March 20, 2020, O. Reg 73/20 was enacted, which temporarily suspends limitation periods under any provision of a statute, regulation, rule, by-law, or order of the Government of Ontario for the duration of Ontario’s state of emergency. The Regulation also states that any provision of any statute, regulation, by-law, or order of the government which establishes a period of time for any steps to be taken in any proceeding is suspended for the duration of the emergency, subject to the discretion of the court, tribunal, or other decision maker responsible for the proceeding. In a Canadian franchise context, this would be relevant for the time period during which the franchisee may rescind the franchise agreement— where in Ontario it is no later than 60 days (after receiving deficient disclosure) or no later than two years (after entering into the franchise agreement and receiving no disclosure or disclosure with egregious deficiencies).

Indonesia

Indonesia’s Ministry of Trade (“MOT”) has not issued a regulation or policy in response to COVID-19 related to franchise arrangements.

However, practitioners should be aware that on 5 February 2020, the MOT has issued MOT Regulation No. 08 of 2020 regarding Integrated Electronic Licensing Services in the field Trade (“MOT Reg 08/2020”). Pursuant to this MOT Reg 08/2020, the submission of an STPW (Franchise Registration Letter) application should be made online through the Online Single Submission (OSS) system. There is no requirement to present the original documents or be physically present or meet with an officer of MOT. There are also no official fees for the purpose of applying the STPW.

The MOT confirmed that, to date, the STPW applications are still received (online) and processed without any difficulties. Nonetheless, currently, MOT’s employees are working from home and have limited working hours (for those who are still required to go to the office). Consequently, it is foreseeable that there will be very limited MOT services and reduced productivity at this time.

Korea

There are two noteworthy actions taken by the Korean Fair Trade Commission (“KFTC”), the regulatory agency with oversight of the Korean franchise industry.

De facto extension on updating registered disclosure documents

Franchisors with registered FDDs are required to update their FDDs within 120 days after the fiscal year end (“FYE”). Because December 31st is the most common FYE, the applicable filing deadline for updating the registered FDDs is April 29, 2020.

In light of COVID-19, the KFTC is allowing franchisors to submit incomplete updates to the FDDs so long as they prepare an explanatory statement detailing the reasons for providing incomplete updates (i.e., COVID-19). Franchisors will then need to complete the updates within two weeks.

The vital point to note is that the April 29th deadline is still valid; franchisors must make a filing regardless of whether they have all information needed to update their FDDs.

Financial incentives for franchisors to alleviate/waive certain franchisee obligations

The KFTC announced that franchisors would be eligible to receive benefits if they implement measures that “reduce the financial burden” of their franchisees. This could mean any of the following:

• Reducing/exempting royalty payment: at least a 50% reduction for at least two months or one month of full exemption, or other equivalent measures applied to all franchisees.
• Reducing the price of “essential” items: at least a 30% reduction for at least two months or other equivalent measures applied to all franchisees.
• Reducing advertising/sales promotion costs: at least a 20% reduction for at least two months applied to all franchisees.
• Subsidizing franchisee operations: for franchised units operating in regions most severely affected by COVID-19 (e.g., Daegu and Gyeongsangbuk-do province), limiting the reduction in sales by 20% or more for at least two months.
• Cash flow support: payment to all franchisees in an amount equivalent to any of the above measures.

To be eligible, franchisors must have implemented any of the above measures after January 20th, the date of the first confirmed case of COVID-19 in Korea. Eligible franchisors may take advantage of any of the following benefits, mostly related to receiving loans:

Kuwait

Kuwait authorities implemented restrictions to reduce the spread of COVID-19, which may have an adverse impact on the operations of franchises.

All Kuwait government ministries and authorities have been temporarily closed. The closure is expected to last until April 26, 2020. However, the situation remains fluid and constantly evolving and it remains unclear if government ministries and authorities will re-open for business on this date. This is the third extension of the closure period. In the short term, it is not possible to undertake any activities relating to franchise arrangements that involve directly interfacing with government ministries and authorities.

Under the Commercial Agencies Law, all “commercial agencies” (which are defined to include franchises) and any amendments must be registered with the Commercial Agencies Registry at the Kuwait Ministry of Commerce and Industry. An unregistered “commercial agency” is invalid and no claim may be brought based on it. The Law also imposes certain sanctions (including monetary sanctions and temporary or permanent closure of premises) if a local party purports to represent a foreign principal based on an unregistered “commercial agency.” It is unclear if authorities would be prepared to impose such sanctions because of the current inability to comply with the registration obligations due to closure of government ministries and authorities. It is anticipated that authorities may be more sympathetic as the general trend has been for the government to lift sanctions for violations caused due to inability to transact with government ministries and authorities. For example, it has been announced that no penalties are to be imposed on individuals whose residencies and driving licenses expire during the period when the government authorities and ministries are closed.

The Kuwaiti authorities have mandated closure of certain businesses, including shopping malls. This closure directly impacts the revenue of franchisees and their ability to pay royalties and amounts payable to franchisors under their agreements. Considering that royalties under most franchise agreements are calculated by reference to gross sales of the franchisee, franchisees may be able to assert that their obligation to pay royalties should be reviewed at least until the COVID-19 pandemic ceases and they resume operations. Further, depending on the governing law of the franchise agreements, franchisees may be able to invoke force majeure and “extraordinary circumstances” relief rules based on the adverse impact that COVID-19 and decisions taken by the government in this regard have had on their businesses.

Similar to other countries, Kuwait restricted commercial flights. This could impact franchise agreements that require movement of the franchisee and franchisor’s personnel such as training requirements and the exercise of inspection and audit rights granted to franchisors. Cargo flights have been exempted from these restrictions. It is expected that the flow of products should not be completely interrupted, although restrictions could potentially result in significant delays in deliveries being made.

Malaysia

Malaysia has enforced the Movement Control Order since March 18, 2020. The initial period from March 18, 2020, until March 31, 2020, has since been extended to April 28, 2020. Malaysia is now in the phase of what is called the Enhanced Movement Control Order. Under this Order, businesses offering non-essential services (including legal services) must close their respective premises. Some service providers continue to operate and work from home.

While the various ministries under the Malaysian government have issued various guidelines and FAQs, none has been issued insofar as franchises are concerned. In fact, the government franchise portal, namely, https://myfex.kpdnhep.gov.my/ posted a general statement indicating that the online payment module is closed and not accepting payments during this time. Because the office is closed, it is assumed that any deadlines imposed under the Franchise Act 1998 such as submission of annual reports by franchisors, etc., which are due during this period will be extended until the day after the end of the Order. There is no expectation of any release of FAQs vis-à-vis franchises. However, there could well be one if the Movement Control Order is further extended.

Mexico

Article 142 of the Mexican Industrial Property Law states that disclosure must be provided to the prospective franchisee “at least thirty days prior to entering into the corresponding agreement.” According to Article 184 of the Industrial Property Law, all time periods provided for in the Industrial Property Law must be calculated in business days (considering the calendar or calendars published from time to time by the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial or “IMPI”). Recently, IMPI published in the Mexican Official Gazette that all terms in connection with the Industrial Property Law shall be suspended from March 14, 2020, until April 19, 2020 due to the sanitary emergency of COVID-19; thus, such time period shall not be considered as business days for purposes of disclosure periods.. As a result, parties to any pending franchise transaction in Mexico must calculate the applicable disclosure period in light of these recent developments and the revised IMPI calendar.

Nepal

The Government of Nepal has not yet made any executive decision in light of COVID-19 addressing franchise arrangements. The Parliament has not taken any legislative action in this regard.

The current status is that there is a nationwide lock-down order in effect from March 24, 2020, until April 15, 2020. This means that the Government offices are not open for regular business. The government has taken various decisions since March 24 in relation to tax reporting requirements, corporate compliance, employment, banking, and finance but we do not see the decisions as being relevant to this topic.

With respect to franchising, we would expect the regulatory agency, the Department of Industry to issue exemptions with respect to regulatory compliance. This is likely to happen in the future once the more emergent concerns are addressed.

South Africa

Pursuant to the declaration of a national state of disaster by the President of South Africa on March 15, 2020, a nation-wide lockdown was announced, which is to operate from the 26th of March until the 16th of April 2020. This initial lockdown period may be extended for a considerable time period.

The lockdown is pursuant to section 27(2) of the Disaster Management Act 57 of 2002 and prohibits certain activities, including the continued business operations of non-essential businesses. None of the regulations under the Act are franchise specific but they impact franchise operations:

• During the lockdown, every person is to be confined to their place of residence. The only persons who are exempted from the operation of this provision are those persons who are involved in essential services, or where a person is either obtaining essential goods, collecting a social grant, or seeking emergency or chronic medical attention. All gatherings are prohibited, except for funerals, which are subject to a maximum number of 50 persons in attendance.
• During the lockdown all businesses, except those involved in the supply, manufacturing, or provision of an essential good or service, are prohibited from continuing with business operations and trade, unless these can be provided from the employees’ normal place of residence.
• Retail outlets selling non-essential items are to be closed during the lockdown. Where a retailer sells essential items, further restrictions are in place and these include that a distance of at least one metre must be kept between persons.
• The regulations do, however, make provision for the care and maintenance of business premises. This is to ensure that destruction or significant impairment of the premises, plants, machinery, and inventory is prevented.
• All of the borders of the Republic are closed while the lockdown persists, with the exception of ports of entry that have been designated for the transportation of fuel, cargo, and goods during the lockdown
• Any person found to be in violation of the regulations is liable to be fined or imprisoned for a period not exceeding six months.

It is clear that various franchises, of which restaurants, coffee shops, cafes, and bars are expressly excluded from the list of essential services, may not operate during the duration of the lockdown. This has a number of implications notably in the context of contractual performance and lease agreements:

• As a consequence of the regulations, various retail tenants have difficulty with rental payments.
• Where a lease contains an express force majeure clause, parties would have to have regard to the definition that is attributed to force majeure and see whether an act of government would trigger the operation of the force majeure clause.
• In the absence of an express force majeure clause, the common law principle of supervening impossibility of performance may avail itself to retail landlords and tenants in the case of non-performance of obligations. Where performance is objectively impossible through no fault of either of the parties and no reasonable person can perform as a result of a force majeure event then the contracting parties may be able to successfully argue that their performance has been precluded by the force majeure event. Consequently, the obligations under the contract may be temporarily suspended. Where the temporary supervening impossibility endures for an unreasonably long period, either contracting party may elect to cancel such agreement.
• It is well-established in South African law that an act of government, such as the presently contemplated lockdown regulations, would constitute a force majeure event and therefore a tenant may be entitled to a remission of the rental during the initial lockdown period.
• In this regard, there is a doctrine that is specific to lease law in South Africa and it clearly sets out that an act of the legislature, in this case the lockdown, constitutes a vis major event and therefore, under this doctrine where a tenant has, as a direct result of the force majeure event, experienced a reduction in their beneficial use and enjoyment of the premises, such tenant may be entitled to a remission or reduction of the rental, proportionate to their reduced enjoyment. The onus will be on the tenant to establish to what extent their use and enjoyment has been influenced.
• Given that the nature of the supervening impossibility is (currently) temporary, it would seem that a retail tenant, who is not allowed to trade and is thereby deprived of the full beneficial use and occupation of the leased premises, is entitled, under the common law, to ask for a remission of the rental. There is no set formula for the amount of remission and consequently this will need to be determined on a case-by-case basis.
• It should be noted that tenants will remain liable for the payment of charges such as municipal rates and taxes, electricity, water, and waste removal.

As set out above, the impact of South African government legislative acts mostly, in the context of franchises, relate to the prohibition on trading by non-essential businesses. This consequently has the effect of leading to a downturn in the financial position of the company with the result that some companies may not be able to comply with their rental obligations.

Vietnam

For franchise and other filings, government offices in Vietnam are still working routinely, but delay is definitely expected for a few weeks as the country is now in a 15-day period of compulsory social distancing, which is expected to end on April 15, 2020.

The most viable impact is that shops, restaurants, and service establishments (except for grocery stores and certain essential services) must be closed. It is not clear whether the closings will be extended after the 15-day period of social distancing.

For more information on international franchising across the globe, please refer to International Franchising 2016: Legal and Business Considerations, a book edited and co-authored by Kendal H. Tyre, Jr. Executive Editor, as well as Diana V. Vilmenay-Hammond and Keri A. McWilliams, Managing Editors. To view a video book trailer of the book, click here. An updated edition is planned for publication in fall 2020. For more information on the content of this alert, please contact our Coronavirus Response Team.

1. The author would like to thank the following friends and colleagues who assisted with the writing on this Alert: Argentina—Mario Eduardo Castro Sammartino (Castro Sammartino & Pierini); Brazil—Luciana Bassani (Gameleira Pelagio Fabião e Bassani); Canada—Tanya Walker (Walker Law); Indonesia—Nurdin Adiwibowo (ABNR Counsellors at Law); Korea—Terry Kim (Lee & Ko); Kuwait—Ezekiel Tuma (ASAR—Al Ruwayeh & Partners); Malaysia—Michelle C.Y. Loi (Shearn Delamore & Co.); Mexico—Miroslava De Olaguibel (Rangel y Rangel, S.C.); Nepal—Shirshak Ghimire (Pradhan & Associates); South Africa—Lawrence Helman (ENSafrica) and Vietnam—Mai Thi Minh Hang (Russin & Vecchi).
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