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Franchising contract is a relational contract A relational contract is defined as one which involves not merely an exchange but a relationship between the contractual parties.. Expectati

In essence, franchise is commercial activity and can be regulated by commercial law However, because of some special characteristics, there are debate in the relation to the appropriate law to regulate franchising relationship

To express my opinion on this issue, I will analyze the topic: “Is it better to regulate franchising or leave it to the general laws of a country to control the relationship of the parties?”

ANALYSIS

1 Franchising contract is a relational contract

A relational contract is defined as one which involves not merely an exchange but a relationship between the contractual parties The parties are not

“strangers” in the accepted sense and much of their interaction takes place “off the contract” requiring a deliberate measure of communication, co-operation, and predictable performance based on mutual trust and confidence

Expectations of loyalty and interdependence mark the formation of the contract and become the basis for the rational economic planning of the parties.1

Franchising presents as the typical example of a relational contract

because much of the franchisor- franchisee interaction takes place off the

contract, mediated not only by invisible terms but a particular balance of co-operation and coercion, communication and strategy

Hence, the contractual obligations are often modified, supplemented or completely overridden by the norms of the on-going relationship

2 Franchising contract has the standard form dimensions and the weak position of the franchisee

1 Thomas J, dissenting, in Bobux Marketing Limited v Raynor Marketing Limited [2002] 1 NZLR 506,

Unlike other commercial relationships, franchising relationship is

imbalance relationship The first imbalance is information balance The

franchisee can sign the franchising contract while he/she does not or cannot know anything useful information about business activities of the franchisor such as business experience, existing franchises, financial details Because of this, franchisee enters the relationship without fully- understanding the potential risks

The second balance is power imbalance The franchisor has far greater power than the franchisee and may exert their power and discretion

opportunistically Since the existence of imbalances power between the

franchisor and franchisee, there are a high possibility for franchisors to use their control opportunistically for financial gain at the expense of franchisees One of the typical example is the use of termination clause The franchise termination clause is an essential part of the franchise contract that can be heavily weighted

in favor of the franchisor The Opportunism Report described franchisor

opportunism as: “predatory conduct and strong-arm tactics by franchisors

involving the exploitation of a pre-existing power relationship between the franchising parties, which makes the franchisee vulnerable or economically captive to the demands of the franchisor There is an inherent and necessary imbalance of power in franchise agreements in favor of the franchisor, but abuse

of this power can lead to opportunistic practices including encroachment,

kickbacks, churning, non-renewal, transfer, termination at will, and

unreasonable unilateral variations to the agreement.”

The third issue is the loss of independent In actual practice, a franchisee

is dependent of a franchisor in its operation He/ she is strictly controlled and supervised by the franchisor regularly In addition, the franchisee depends on the supply of goods or services to operate

These imbalances prove that the franchisee is the weak party in the

relationship with the franchisor, although at the first sight, it seems equal to both parties

3 The rights and interests of small and medium business in franchising relationship

The above imbalance happens to small and medium business as a

franchisee much more severely The ability to deal the clauses in the contract depends on the bargaining power, so to get a good deal, the contracting party need have a strong bargaining position However, it is not likely to happen to small or medium business Even in a purchase and sale contract, where two parties are equal, the small or medium enterprise usually have lower voice than the other, let alone in the imbalance relationship like franchising relationship

The foregoing reasons show that the franchising relationship has unique characteristics which can be fully regulated by the general laws In fact, relying

on the underlying commercial laws of general application to regulate the

franchise sector has raised many legal problems when the franchisees realize that franchising benefit for franchisor much more than for them They feel like they had been treated unfairly Hence, it is necessary for the legislators to

introduce specific law regulating franchising

CONCLUSION

The assignment clarified the unique characteristics of franchising

relationship, so found out the issues when regulating franchise by the general law Hence, it is better to regulate franchising relationship by specific law

1 Andrew Terry and Des Giugni, Business and the Law, 5th edition, Law Book Co of Australasia Publishing House, 2016

2 Elizabeth Crawford Spencer, Balance of power, certainty and

discretion in the franchise relationship: An analysis of contractual terms, Bond University, 2008.

3 Yun Zhang, The information imbalance in the franchising

relationship: a best practice model for prior disclosure and an

evaluation for China’s regulatory regime, Doctor thesis, University of

New South Wales, 2011

4 Andrew Terry, Global trends in franchise regulation and the

Australian experience: lessons for New Zealand, in Franchise Law

Reform Symposium, New Zealand Governance Conference,

University of Auckland, 25 June 2009, retrieved from

http://docs.business.auckland.ac.nz/Doc/Global-trends-in-franchise-

regulation-and-the-Australian-Experience-Lessons-for-New-Zealand.pdf