The Olympics and Force Majeure clauses: the effect on franchisees

Ed Savory, an Associate in Leathes Prior’s Franchising Team, considers whether business disruption caused by the Olympics is a force majeure event and provides some useful tips to franchisees

While the 2012 London Olympics will undoubtedly provide great opportunities for many businesses, for some they will cause significant problems. The Games themselves will last for three weeks from 25th July to 12th August 2011 although the disruption area will be significant in the lead up and during the Paralympics which follow. It is not inconceivable that some businesses will experience months of disruption.

There are many different issues which businesses will face during the Olympics, the following being a couple of examples of the more obvious ones:

Road closures/congestion – businesses in areas affected by the Olympics may find themselves cut off from suppliers and customers, as well as their own staff

Supply problems/higher prices – logistical issues coupled with high demand for all kinds of goods wanted by the huge number of people descending on London (estimated at 5.3 million) will likely drive up some prices, especially in respect of hotels and catering.

If, for example, you are operating a man and a van or a fast food franchise in the South East your business could be severely hindered. Taking one of these examples, the man and a van franchisee may fail to meet certain KPIs (key performance indicators) and the franchisor may be unable to supply products in a timely manner. In such circumstances either party may have the right to terminate the franchise agreement.

Fortunately, however, a professionally drafted franchise agreement should include a suitable force majeure clause. Such clauses vary, but their purpose is to ensure that a party is not in breach of a contract where it is unable to meet its obligations due to circumstances outside of its control. Unless the clause provides an exhaustive list of applicable situations, the Olympics are likely to qualify as a force majeure event.

Franchisees should carefully consider whether the Olympics are likely to affect their franchise (for example, check out www.london2012.com for information on the Olympic Route Network) and, if so, raise the issue with the franchisor as early as possible. This way the parties can together plan a strategy for dealing with the disruption. The franchisee could, for example, consider increasing its stockpile so that the effects of supply chain delays are minimised and if the franchisor is the major supplier, agree favourable terms to assist with cash flow during the Olympic period. Of course, this may not be possible if the franchise in question is in the food and drink sector where permeable food stock cannot be held for long periods.

It is also worth briefly considering the law of frustration. This will be more relevant to short term franchise agreements, since it only applies where a supervening event makes performance of the contract impossible, illegal or radically different from how it was contemplated on forming the contract, and is so fundamental to strike at the root of the contract. However, the law of frustration will not apply simply where business costs are increased, nor will it apply if the contract was formed in the knowledge that the Olympics were coming to London during the period. The effect of a contract being frustrated would be to bring it to an end and release both parties from any future obligations.

Like most things, the Olympic Games can be handled smoothly through forward planning and open communication. For further information on this article or indeed any legal advice in the context of franchising please contact Ed Savory or any other member of Leathes’ Prior’s Franchising Team.

Ed Savory, Leathes Prior
esavory@leathesprior.co.uk
Tel: 01603 281124