Updated: Dec 17, 2020
What first started out as reports of “pneumonia” has since claimed more than 1.4million human lives around the globe. But what is most unexpected about the COVID-19 virus is its potential to infect and destroy far beyond its host. The pandemic has left scars on the economy, communities and businesses – with yet no end in sight.
From departmental store stalwarts like Robinsons, with a 160 year history in Singapore, to local neighbourhood haunts such as BooksActually, businesses have been ravaged and left in the wreckage. Small and medium-sized businesses are hit particularly hard – the Global State of Small Business Report reported that 61% of such businesses in East Asia & Pacific have experienced a decline in sales volume, with the hospitality, transport, manufacturing and services sectors taking the brunt of the hit.
For businesses which remain standing, COVID-19 is likely to have radically changed the assumptions upon which commercial agreements are based. To facilitate a quick and fair way for businesses to realign their existing contractual obligations, the Singapore Government has proposed to implement a new Re-Align Framework – to allow businesses to renegotiate, agree on a repayment scheme, or end the contractual relationship as desired. It is hoped that commercial parties may then quickly pivot or downscale to adapt to the changing landscape, and move forward in a manner that is most productive for the economy in the long-run.
This new Framework was announced by the Government on 2 November 2020, as outlined in the COVID-19 (Temporary Measures) (Amendment No. 3) Bill. Although the eligible criteria and available reliefs have already been announced (see our earlier article for an overview), the Bill has not come into force to date. Ahead of its commencement, we discuss how this set of new measures may be relevant for franchisors and franchisees in Singapore.
Renegotiating with the future in mind
We are living in a whole new world. At a time when health and safety are threatened, it is no surprise that the average person now spends more time at home, taking advantage of the convenience of having their shopping, work and social activities done online. While economies around the world have been taking cautious steps to re-open, uncertainty and apprehension remains. Recurring waves of infection constantly remind us of the perils of opening up too fast, too soon.
As the current situation looks set to be the new “normal”, renegotiation of existing contractual obligations could provide a much-needed opportunity for franchises to pivot and adapt their businesses to the changing landscape. Some key aspects of franchising agreements that could be adjusted under the Re-Align Framework are:-
Change in business models and branding strategy: With the move towards online consumption, brick-and-mortar brands that were hitherto unknown in the online space can consider innovating and building omni-channel distribution capabilities. Small conveniences, like being able to buy online, pick-up in store or to request same day on-demand delivery, tend to score well amongst consumers as the market becomes increasingly competitive. For niche businesses facing weak demand, it may be worthwhile to consider a rebranding exercise to capture new following. In a franchise situation, however, implementing a new business strategy can be tricky. Franchisors and franchisors need to speak with one voice, to ensure that any new brand message is strongly and consistently conveyed to maintain the core brand integrity. The best results are achieved when both parties engage in open dialogue, combining the franchisor’s industry expertise with the franchisee’s market familiarity to decide how best to reposition the brand.
Relaxing performance targets and financial terms: As COVID-19 continues to take a toll on all business owners, it may be reasonable for franchisors to consider relaxing financial terms and KPIs which were based on market assumptions from the pre-COVID era. Franchisees remain the most in touch with operations on the ground and will be the first to feel the heat from slowing consumer demand in their respective markets. Shifting the focus to collaborative solutions, rather than insisting on legal rights and obligations, could go a long way in sustaining the franchisor-franchisee relationship in the long-run and in building the relationship. Possible compromise arrangements include royalty holidays and stand-still agreements, or a reduction of revenue and roll-out targets while the economy rides out the headwinds.
Alternative sourcing to ease supply chain woes: Proponents of the open economy have built up incredibly complicated, complex global supply chains in the past 25 years. But as borders close and countries enter lockdown, the very foundations of these systems have come under threat. Businesses at the end of the line are not spared. Franchisors who rely heavily on foreign manufacturing bases have suddenly found themselves at the mercy of unpredictable government-mandated shutdowns, while others have been inundated with stockpiles as a result of slowing consumer demand. In these circumstances, instead of making decisions unilaterally, franchisors should recognise that franchisees can be an invaluable partner when managing supply chain woes. With extensive knowledge of the local market, franchisees are in the best position to propose alternative local suppliers or devise ways to offload surplus inventory. Ultimately, it remains in the interests of both parties to resolve these issues in a cooperative and communicative fashion, to secure adequate resources to continue the business.
Repayment scheme to manage third party obligations
Apart from renegotiation, the Re-Align framework also provides an opportunity for renters of commercial equipment and vehicles to agree on a fresh repayment scheme for outstanding arrears. By extending the repayment period by up to 18 months, franchisees who intend to continue using commercial equipment under a renegotiated franchise agreement will have one extra shot to test a fresh business strategy. Even for franchisees who have chosen to withdraw from the business altogether, the additional time afforded (as opposed to immediate termination) would provide some buffer to comply with contractual phasing-out periods.
Termination as the last resort
If all else fails, termination is still available as a last resort. The new framework recognises that existing contracts may not be equipped to deal with extenuating circumstances of such an unprecedented scale. It therefore superimposes a force majeure mechanism, allowing parties to escape their obligations even before expiry of the contractual term. Finances and resources that could otherwise be used to save a sinking ship could then be directed towards other more profitable ventures, or simply saved up to weather this storm.
Time is of the essence
There are tight timelines once the pistol is fired. Depending on which path parties decide to take going forward, notice of the intended course of action (renegotiation or termination) must be served on the counterparty within 6 weeks of the Act coming into force. It would therefore be prudent for franchisors and franchisees to begin evaluating their options, recalibrating expectations, and even commencing informal negotiations – in anticipation of setting forth into a whole new world.
For further information, please contact:
Lorraine Tay, Partner, ATMD Bird & Bird