a 10 llb 003
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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
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