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Keep rational and carry on: designating Covid-19 as force majeure

20 May 2021

A franchisor’s designation of Covid-19 as force majeure was subject to an implied duty of rationality. Failure to take a relevant factor into account breached this duty and entitled the franchisee to terminate the contract.

In Dwyer v Fredbar, as part of a lengthy judgment, the court considered a franchisor’s discretion to designate Covid-19 as force majeure in a plumbing franchise agreement, which would have suspended the contract. 

The relevant provision stated: "This Agreement will be suspended during any period that either of the parties is prevented or hindered from complying with their respective obligations under any part of this Agreement by any cause which the Franchisor designates as force majeure including strikes, disruption to the supply chain, political unrest, financial distress, terrorism, fuel shortages, war, civil disorder, and natural disasters."

Exercising its discretion, the franchisor, Dwyer, refused to designate Covid-19 as force majeure. The franchisee, Fredbar, alleged that, in doing so, Dwyer had breached an implied duty of rationality, entitling Fredbar to terminate the contract.

Duty of rationality

The court agreed that there was an implied duty of rationality governing Dwyer’s discretion to designate COVID-19 as force majeure. Following the principles in Braganza

  • the discretion must be exercised honestly, in good faith and genuinely;
  • it must not be exercised arbitrarily, capriciously, perversely or irrationally; and 
  • Dwyer must have taken account of the matters which were relevant and not those matters which were irrelevant. 

Providing that was done, the court would only set Dwyer’s decision aside if no reasonable decision-maker could have reached it.

Relevant matters

The court found that Dwyer had breached its duty of rationality by basing its decision solely on the effect of COVID-19 on demand and turnover for Fredbar’s business. Dwyer had failed to take a relevant factor into account: as a small plumbing business, Fredbar's ability to supply had been directly affected by its owner’s need to isolate at home to protect his son from COVID-19.

Right to terminate

Dwyer’s breach entitled Fredbar to terminate the contract. It was either a fundamental term going to the root of the commercial purpose of the contract, or an intermediate term entitling termination depending on the seriousness of the breach. However, Fredbar had affirmed the contract before seeking to terminate.