Franchise and Fiduciary Relationship

The operations of the fiduciary duty under the agency can be used in a franchise relationship to eliminate the agency cost generated under a franchise systemR. Sashikala

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Question A critical evaluation from an agency point of view on the extent to which the operation of the fiduciary duty under the agency theory can be used in a franchise relationship to eliminate the agency cost generated under a franchise system

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Content1. Agency

2. Agency as a fiduciary relationship

3. Fiduciary duty of an agent

4. Franchise system

5. Operation of fiduciary relationship in Franchise system

6. Judicial decisions;

• Franchise relationship is a Fiduciary relationship

• Franchise relationship is not a fiduciary relationship

7. Agency cost

8. How operation of fiduciary duty eliminate the agency cost under franchise system

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Agency

“Agency is the fiduciary relation which results from the manifestation of consent by one person (principal) to another (agent) that the other shall act on behalf and subject to his control, and consent by the other so to act.”

Types of Agency

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Agency as a Fiduciary relationship,

Recognized by many judicial decisions

E.g. Mothew (t/a Stapley & Co) v Bristol & West Building Society

It is a legal obligation of agent to act in the best interest of principal.

Fiduciary relationship involves duties of,

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Fiduciary duty

Fiduciary duty is a legal duty to act solely in another party’s interest

Three main duties

1. Good faith

• Agent must act in good faith for the benefit of principal

• [Keech v Sandford]

2. No conflict of interest

• Agent should make a full disclosure of any self interest which makes conflict with the duty to his principal

• [Willson & another v.Hurstanger Ltd]

3. No secret profit

• Agent must not make any secret profit out of any transactions related with his agency

• [Willson & another v.Hurstanger Ltd]

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Agency can be made by three ways

1. Expressed agreement

2. Implied agreement

3. Operation of law

Expressed: Mostly, nature and content of the contract between parties decide whether there is fiduciary duty or not.

If it is Implied, Identifying fiduciary duty by

• Fact

• Law

• Custom and

• Usage and sufficient time period to dealing between parties

• Implied duty to act in good faith identified by Performance and general nature of commercial contracts

[Central Exchange Ltd v Anaconda Nickel Ltd] 

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Franchise system

Franchise system is contract of a buying right to use specific trade mark or business

It is governed by the principles of contract law in Sri Lanka

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Operation of fiduciary relationship in franchise system can be used by

Expressed agreement

• Franchise contract; Included as appointing franchisee as an agent expressly.

Implied agreement

• Facts and circumstances that show there is an agency relationship

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Identifying fiduciary relationship and imposing fiduciary duties in franchise relationship [Implied]

Many Judicial decisions; franchising relationship is a business relationship between franchisor and franchisee and considered as only contract where there is implied agreement. It cannot be impose fiduciary duties;

[Mein hard Vs. Salmon]

• However, Some jurisdictions recognize, “fiduciary duties might be arisen in a franchising system where there is a interaction between

parties and which makes confidential relationship between them”[Crim Truck & Tractor Co. v. Navistar Int'l. Transp. Corp.]

Agency Cost• Agency cost is an internal cost arises in a firm which should be paid to

agent acting on behalf of a principal.

• It arises due to conflict of interest between principal and agent occurs where agents’ acts on their own self interest rather than best interest of firm and principal is uncertain about the behavior of agent.

The operation of the fiduciary duty can be used in a franchise relationship to eliminate the agency cost generated under a franchise system.

1. Good faith: • Bryne J, “there is to be implied into every franchise agreement a

term of good faith and fair dealing that obliges each party to exercise the powers conferred on it by the agreement in good faith…”

[Far Horizons Pvt Ltd v McDonalds Australia Ltd] 

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“Good faith comprised with three notions;

• An obligation on the parties to cooperate in achieving the contractual objects,

• Compliance with honest standards of conduct, and

• Compliance with standards of conduct which are reasonable, having regard to the interests of the parties”.

[Burger King Corp v Hungry Jack’s Pty Ltd and Hughes Aircraft Systems International v Air services Australia]

Franchisee agreed to promote the trade mark in the contract and this led him to act best interest of Franchisor.

Agency cost is not needed to be spent for promote Confidentiality, care and skill, not delegate, account and obedience of franchisee because of this implied duty of good faith.

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2. No conflict interest:

• In the franchise contract, the agent has residual rights and that alien his personal interest with interest of principal.

• It makes interest of franchisor and franchisee is equal

• Franchisor ; No need to spend monitor cost to check effort of an agent (Monitoring Cost).

3. No secret profit:

• Separation like other corporate sector as property and management is not in franchise system.

• It can be set common goals and both share.

• No need pay for audit and control management for maximizing ownership wealth.

• Higher profit from business is gained by franchisee.

Bonding cost:

• It reduces the payment of compensation for financial losses due to dishonest acts by agent

Opportunity cost:

• Franchisee bears the cost of get over from the inability of the business to respond to new opportunities as providing local market expertise

Structuring cost:

• Freedom of individual choice of franchisee reduces structuring managerial issues

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Conclusion

• Franchise relationship is a contract.

• it includes fiduciary duty impliedly.

• The operation of the fiduciary duty eliminates the agency cost.

• Good faith

• No secret profits and conflicts of interest between franchiser and franchisee can be seen

• Because franchiser is able to expand his/her products’ trade mark while franchisee is getting high profits.

• Thus the operation of the fiduciary duty can be function well.

• There is no need to spend a separate cost (agency cost) by the franchiser and it will be eliminated.

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ReferencesBooks

Cathy A. E. (2010) Cornell School of Hotel Administration Handbook of Applied Hospitality Strategy, SAGE publications; New Delhi

Daniel V. Davidson, B. E. (1987). Business Law principles and cases (2nd ed.). Boston: PWS-KENT Publishing Ccompany.

Harron, T. Business Law. united states: Allyn and bacon,inc.

Tulsian. (1998). business law. new delhi: tata McGraw-Hill pblishing company limited .

Case laws

Mothew (t/a Stapley & Co) v Bristol & West Building Society [1996] EWCA Civ 533, [1998] Ch 1 (24 July 1996)

Keech v Sandford [1726] EWHC Ch J76

Willson & Another V. Hurstanger(2007) Ewca Civ 299

Central Exchange Ltd v Anaconda Nickel Ltd [2001] WASC 128

Mein hard Vs. Salmon164 N.E.545(N.Y. 1928)

Case Laws…

Crim Truck & Tractor Co. v. Navistar Int'l. Transp. Corp

Far Horizons Pty Ltd v McDonalds Australia Ltd [2002] VSC 310

Burger King Corp v Hungry Jack’s Pty Ltd  [2001] NSWCA 187

Hughes Aircraft Systems International v Air services Australia (1997) 76 FCR 151.

Website articles

Brown, H. (1982). Franchising: the Duty to Perform in Good Faith and Fair Dealing. Journals of the Forum Committee on Franchising , 2, 17-21.

<http://www.jstor.org/stable/29541>

Douglas C. Berry, D. M. (2007). Open Price Agreements: Good Faith Pricing in the Franchise Relationship. Franchise Law Journal , 27, 45-56.

<http://www.jstor.org/stable/29542179>

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Thank you