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Law360 (April 28, 2020, 7:53 PM EDT) -- A franchisee of the KidZania child-based amusement parks urged a New York federal court on Tuesday to stop its Mexican franchisor from terminating a $3 million agreement allowing the franchisee to run at least 10 facilities in the United States, saying the COVID-19 pandemic forced it to cease operations.
Texas-based franchisee E2W LLC urged the court to grant it a temporary restraining order and preliminary injunction saying that KidZania Operations SARL of Mexico City must agree to arbitrate their dispute over E2W's failure to build and open the first U.S. facility on time.
The parties' franchise agreement states that they will arbitrate disputes with the International Chamber of Commerce in accordance with the ICC Rules of Arbitration, according to the franchisee.
E2W said it will suffer irreparable harm if the court doesn't halt KidZania's termination of the franchise agreement based on E2W's alleged nonpayment of a $750,000 settlement to make up for its delayed opening of its first facility. That Frisco, Texas-based facility — a $33 million "themed replica of a realistic city environment" for children — was scheduled to launch in March 2018 but didn't open until November, according to E2W's April 6 complaint.
KidZania's sole basis for terminating the franchise agreement was E2W's nonpayment of the settlement, according to E2W. But the franchisor can't rely on that claim to end the agreement, because E2W is excused from paying under the pact's force majeure clause, which extends to the COVID-19 pandemic, E2W said.
"Franchisor does not dispute (and therefore concedes) that the COVID-19 pandemic is a force majeure event under the force majeure clause," E2W said. "Franchisor rather contends that E2W cannot rely on the force majeure clause because the settlement payment was originally owed before the COVID-19 crisis and that the force majeure clause carves out payment obligations from its protection. Franchisor's contentions are baseless and unavailing."
E2W argued that KidZania continued to grant numerous extensions for repayment of the $750,000 through March, meaning the franchisor was "fully aware" of various financing deals to cover E2W's settlement, working capital and rent.
The most recent deal involved a funding package that the parties agreed to with Brookfield Properties on March 17, four days after President Donald Trump declared a national emergency in the U.S. due to the novel coronavirus outbreak, according to the complaint.
The franchisor claimed on April 20, in opposing E2W's bid for an injunction, that it learned last winter that its franchisee was over its head in debt. Not only was E2W unable to pay minimum guaranteed royalties to KidZania, but it was unable to pay its vendors and landlord and was facing $8 million in liens.
"When Jan. 31 came and went without E2W paying the minimum guaranteed royalties, KidZania felt it had no choice but to initiate the termination process," the franchisor asserted, adding that it wasn't until April 3 that E2W for the first time claimed that its performance was excused under the agreement's force majeure clause due to COVID-19.
E2W countered on Tuesday that it has paid off all its debts, including its royalties owed to KidZania, but that the franchisor has refused to accept payment.
"E2W reached settlements to satisfy the various creditors associated with the Frisco facility, including the landlord, and has been able to extinguish the liens. And E2W paid franchisor the settlement payment," the franchisee said. "While franchisor has endeavored to refuse the payment, that payment prevents it from now terminating."
Counsel for E2W and KidZania did not immediately respond to requests for comment.
E2W is represented by Gabriel Levinson, Darnell S. Stanislaus and Leonard H. MacPhee of Polsinelli PC.
KidZania is represented by Damien Marshall, Christopher G. Caldwell and Jeanne A. Fugate of Boies Schiller Flexner LLP.
The case is E2W LLC v. KidZania Operations SARL, case number 1:20-cv-02866, in the U.S. District Court for the Southern District of New York.
--Editing by Nicole Bleier.
For a reprint of this article, please contact reprints@law360.com.
