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Franchising : Eliminating Agency Costby Applying Fiduciary Duties

Hirantha Imesh de Silva

A/1/!!"/#

!A$ %#

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RANCHISE

RANCHISE

Contract between two legally independent partieswhich gives a person or group of people(franchisee) the right to market a product orservice using the trademark or trade name

(branding) of another business (franchisor);

The Franchisee the right to market a product orservice using the operating methods of the

Franchisor (use of the System !knowhow");

the Franchisor the obligation to provide rights andsupport to Franchisees

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&'ns (or has the right to use the)trademar* or trade name

+ses trademar* or trade name+ses the System

E,ercises continuing control

-rovides support E,pands business 'ith.ranchisors support

0eceives .ees -ays .ees

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AGENCY COST

GENCY COST

General View

The sum of monitoring e#penses by the principals; bondinge#penditures of the agent and residual loss from

uncontrollable deviation of the agent from his promise

Agency Cost in Franchise

Franchisees may not work as to forward the franchisors

interests as the franchisor would$ or worse$ franchiseesmay pursue their own interests at the franchisors e#pense%

&ence to monitor franchisors have to bear a cost

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Modes of Eliminating AgencyModes of Eliminating Agency

CostCost

Gathering Information

Paying Incentives

Monitoring

Restricting powers

Fiduciary Duties to liminatee Agency

Cost

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Fiduciary utyFiduciary uty

Fiduciary duty is identi'ed as a legal obligation ofFiduciary duty is identi'ed as a legal obligation ofone party toone party to

act in the best interest of another%act in the best interest of another%

Agency has often !eenAgency has often !een

descri!ed asdescri!ed as

"duciary relation"duciary relation

McKenzie v McDonald[1927] VLR 134

Pedersen v Larcombe[2008] NSWSC 1362

Beach Petroleum NL v Abbott Tout Russell Kennedy(1999)

33 ACSR 1

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Fills contractual gapsFills contractual gaps

Reduces deviancesReduces deviances

Effect of Fiduciary utyEffect of Fiduciary uty

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Fiduciary dui!" c#u$d %! u"!d a" a&u'%r!$$a # r!duc! a!&cy c#"

* i" !c#'ic +#r ,! +ra&c,i"#r a-ar +r#'

,! #,!r '#d!" # r!duc! a!&cy c#"

N#&.c#'-$ia&c! /i, +iduciary dui!" ,a!%#, $!a$ a&d & $!a$ dra/%ac"

,i" ",#u$d %! u"!d a" a '#d! #+-r!!&i#& ra,!r ,a& a '#d! # r!dr!""

ConclusionsConclusions

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!i"liogra#$y!i"liogra#$y

Si#++ R#%!rAn Economic Theory of

Aency La! 2014

R#dric 5u&dayAency la! and

Princi"les#2010 au+'a&& arica& Rai $ranchisin%

&ontem"orary 'ssues and Research#N!/ :#r;

,! a/#, r!"" *&c 199