Chapter 1: Introductory chapter 1.1. Introduction In this ...

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1    Chapter 1: Introductory chapter 1.1. Introduction In this day and age, people may have come across a particular way of doing business where products and/or services are delivered. In many cities across the world, consumers may find American fast-food restaurants, for instance, ‘McDonald’s,’ ‘Burger King’ and ‘KFC,’ easily. Besides, a handful of convenience stores branded ‘7-Eleven’ are very noticeable all over the place in, for example, Japan, Thailand, and South Korea. These phenomena point out some questions: What is this model of doing business? How does it function in markets? In today’s fiercely competitive markets, the process of making products and services available for customers is essential to entrepreneurs who manufactured those goods and services. To achieve the cost advantage or economies of scale, the businessmen need the most efficient and effective distribution channel that makes goods and services reach the end-consumers. Among a variety of distribution methods,1 ‘franchising’ has often been recommended for the entrepreneurs because this method enables them to acquire three essential resources in doing and expanding their empire. Particularly in the early stages of running businesses, the entrepreneurs can employ franchising as a means of (1) raising financial funding and requiring (2) informational and (3) managerial resources.2 First, from a financial resource’s point of view, the entrepreneurs (franchisors) can acquire additional capital by selling their franchise. In joining franchise networks, purchasers (franchisees) are required to pay entrance fees and membership fees. That is, they have to pay initial franchise fees upfront

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Producers of goods and services can reach their customers either directly via direct sales, online marketing, and

telemarketing, or indirectly through a number of intermediaries such as wholesalers, retailers, and agents. See Marian Burk Wood, Essential Guide to Marketing Planning, (4th edn, Pearson Education Limited, 2017) 164-165. 2

Rajiv P. Dant and Patrick Kaufmann, ‘Structural and strategic dynamics in franchising’ (2003) 79 Journal of Retailing

63, 64-65. ; Steven C. Michael, First mover advantage through franchising’ (2003) 18 Journal of Business Venturing 61, 64.; Anna Watson and others, ‘Retail franchising: an intellectual capital perspective’ (2005) 12 Journal of Retailing and Consumer Services, 25-26. And Arto Lindblom and Henrikki Tikkanen, ‘Knowledge creation and business format franchising’ (2010) 48 Management Decision 179, 180. DRAFT CHAPTER1_11MAY2018 

 

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2    and ongoing royalties, which are usually to be paid on a monthly basis. This way enables the franchisors to raise their funding by not depending much upon the financial institutions. Second, from an informational point of view, the franchisors can acquire information about geographical locations and local communities through their franchisees, operating franchised units in those specific areas. Because of this benefit, the franchisors can effectively market their products and services in local and dispersed areas where they know very little. For instance, local franchisees can provide information with regard to desirable locations, and preferred products or services. Third, from a managerial resource’s viewpoint, the franchisor can shift managerial labor to each franchisee in each area. That is, in franchising, a franchisee is responsible for seeking his own labor supply. Moreover, the franchisee is in the best position to find the labor supply in the area as he retains the information relating to the territory. Thus, this kind of management can reduce the franchisor’s payroll costs as he does not have to hire his franchisees’ employee himself. Franchising has not only proved advantages for those who are selling their goods and services, but also for new start-ups who plunge into doing business through joining in franchised chains. Without having prior business experience, the start-ups can operate their business unit as the owners and get periodic assistance and support from experts in specific business areas. When encountering some problems in running franchised businesses, they can also get helpful advice from their fellows within the franchised networks, who might have faced the same problem and can recommend solutions to it.3 Because of these proven advantages, it is safe to say that franchising is increasingly becoming the mainstay of economies and making a considerable contribution to economic growth in a number of countries worldwide. Taking the USA4 and Australia5 as illustrations, in 2016, there were over 801,000

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William G. Nickels, James M. McHugh and Susan M. McHugh, Understanding Business, (11th edn, The McGraw-Hill

Companies, 2016) 134. 4

Based on the report provided by PricewaterhouseCoopers LLP (PwC). See The Economic Impact of Franchised

Businesses: Volume IV, 2016. accessed 1 June 2017 DRAFT CHAPTER1_11MAY2018 

 

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3    franchised establishments operating in the USA, while around 79,000 franchise units were operating in Australia. By that year, American franchise businesses created nearly 9 million jobs and accounted for more than 541 billion US dollars of GDP. At the same time, over 470,000 people were directly employed in franchise businesses in Australia, and the annual sale turnover was estimated at 144 billion AUD dollars. Moreover, by 2020, the number of franchise units and the total employment outcome in Australia were predicted to grow to 90,500 units and 508,000 respectively, and the sale turnover was forecasted to increase to 160 billion AUD dollars. In the following Sections, I will first give an overview of characteristics of franchising (Section 1.2). Then I will provide a factual background of the perceived problems inherent in franchise relationships (Section 1.3) and develop research questions thereof (Section 1.4). After having determined the research questions, I will clarify the objectives of the thesis (Section 1.5) and choose a research methodology that will lead to the achievement of the goals (Section 1.6). In the end, I will give an overview of the structure of the research (Section 1.7).

1.2. Characteristics of franchising 1.2.1. Introduction When it comes to a question as to unique attributes of a franchising relationship, I reckon that it is a formidable task to give a precise answer as there has hitherto been no uniform and robust description of franchising. Thus, the meaning and description of franchising may potentially vary among countries today. For example, in the state of California, the USA, a franchise is defined as a contract between two or more persons by which a franchisee is granted the right to engage in the business of selling and distributing goods or services under a marketing plan or system which is substantially associated with the franchisor’s trademark or tradename, and the franchisee is required to pay a franchise fee.6

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Based on the survey conducted by researchers from Griffith University. The survey can be downloaded at

https://www.franchise.edu.au/home/research/franchise-australia/franchising-australia-2016 6

Business and Professions Code, Section 20001. See

http://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=BPC§ionNum=20001. Moreover, definitions of franchising will be dealt with in Chapter 2. DRAFT CHAPTER1_11MAY2018 

 

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4    Despite the absence of the uniform description, it is possible to display main characteristics that encompass appearances of franchising. From two different viewpoints, franchising consists of two components, namely, franchising is a business arrangement (Subsection 1.2.2), and franchising is a contractual arrangement (Subsection 1.2.3). 1.2.2. Franchising as a business arrangement One of the common misconceptions about franchising is that it is a business association, which has a single legal entity.7 However, franchising is a business model that an individual industry employs to distribute its goods or to provide its services. Therefore, franchising is considered a system of marketing and distribution of products and services.8 As it is a business model, franchising can be adopted in various business segments, for example, retail stores, financial services, health services, hotels and motels, and automotive industries.9 The sample of the well-known convenience store franchise is 7-Eleven, which has been founded in America and recognized worldwide.10 The franchise business model can be divided into two types, namely, (1) product and trade name franchising and (2) business format franchising.11

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P. Ronald Stephen and Robert G. House, ‘A perfect on franchising: The Design of an effective relationship’ (1971)

14 Business Horizons 35, 36. 8

Dennis D. Palmer, ‘Franchises: Statutory and Common Law Causes of Action in Missouri Revisited’ (1994) 62

UMKC Law Review 471, 472.; Dean T Fournaris, ‘The Inadvertent Employer: Legal and Business Risks of Employment Determinations to Franchise System’ (2008) 27 Franchise Law Journal 224 And Robert W. Emerson, ‘Franchisees as Consumers: The South African Example’ (2014) 37 Fordham International Law Journal 455. 9

William G. Nickels, James M. McHugh and Susan M. McHugh, Understanding Business, (11th edn, The McGraw-Hill

Companies, 2016) 134. 10

There are around 60,000 7- Eleven franchised units located around the world. See http://corp.7-

eleven.com/corp/about 11

U.S. Department of Commerce, Franchising in Economy 1978-1980, (1980) 1-3. I rely on the United States Department of Commerce’s description because it has been widely recognized in

some legal literature. For example, Donald P. Horwitz and Walter M. Volpi, ‘Regulating the Franchise Relationship’ (1980) 54 St. John's Law Review 217, 222.; Olu Ojo, ‘Franchising: Hybrid Organisational Arrangement for Firm DRAFT CHAPTER1_11MAY2018 

 

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5    First, product and trade name franchising is a traditional type of franchising where a manufacturer (franchisor) licenses to a distributor (franchisee) the right to sell products manufactured or supplied by the former, under the franchisor’s trademark or trade name.12 It is typically found in specific business segments, namely, automobile, truck, farm equipment, gasoline service stations, and soft drink and beer distributors.13 However, to date, the traditional franchising is far less prevalent than the second type: business format franchising. Business format franchising, which is the second type of franchising, is much more familiar to people than the first one.14 It involves the way of doing business that the franchisor licenses to franchisees the right to operate a business under the franchisor’s trademark, trade name and logo, as well as the franchisor’s marketing system. Compared to the traditional franchising, a distinctive element of business format franchising is that the franchisor provides its franchisees with a ‘blueprint’ for running franchised businesses.15 Therefore, in the business format franchise, the franchisor not only licenses franchisees distributing goods and services under its trademark, trade name and logo but also provides the latter with a uniform method for operating the franchised units.

                                                                                                                                                                                                  Growth and National Development’ (2008) 15 Lex ET Scientia International Journal 113, 115. And Francine Lafontaine and Roger D. Blair, ‘The Evolution of Franchising and Franchise Contracts: Evidence from the United States’ (2009) 3 Entrepreneurial Business Law Journal 381, 383-384. 12

Michael Seid, ‘Product and Trade Name Franchising (Traditional Franchising), The Balance (25 February 2017),
accessed 30 May 2017 13

U.S. Department of Commerce, Franchising in Economy 1978-1980, (1980) 1.

14

Donald P. Horwitz and Walter M. Volpi, ‘Regulating the franchise relationship’ (1980) 54 St. John’s Law Review

217, 223. 15

Anna Watson and others, ‘Retail franchising: an intellectual capital perspective’ (2005) 12 Journal of Retailing and

Consumer Services, 25. DRAFT CHAPTER1_11MAY2018 

 

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6    1.2.3. Franchising as a contractual arrangement From a legal point of view, a franchising relationship is created by a franchise agreement.16 The agreement establishes a legal bond between a franchisor and a franchisee; it generates legally enforceable rights and obligations of the contracting parties. Thus, the agreement plays a vital role in shaping and governing the business relationship. For instance, the contract may contain a covenant that describes the territory where the franchisee operates its business unit or one that prevents the franchisee from competing with the franchisor after the contract expires.17 Even though franchise agreements may differ in contents, the central elements of the contracts are: (1) a franchisor agrees to confer on a franchisee the right to sell products or to provide services under the franchisor’s trademark and/or trade name and under a uniform method of running a business. (2) The franchisee agrees to pay an initial payment or a franchise fee, typically in combination with ongoing payments or royalties in exchange for the right.18 Generally speaking, the franchise contract can be regarded as an obligatory contract (Subsection 1.2.3.1), two-party contract (Subsection 1.2.3.2), bilateral contract (Subsection 1.2.3.3), contract in a network (Subsection 1.2.3.4), innominate contract (Subsection 1.2.3.5), and adhesion contract (Subsection 1.2.3.6). 1.2.3.1. Obligatory contracts A franchise agreement is an obligation-creating contract; hence, it plays a significant role in the creation of respective obligations of the contracting parties.19 In the agreement, for example, a franchisee

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P. Ronald Stephen and Robert G. House, ‘A perfect on franchising: The Design of an effective relationship’ (1971)

14 Business Horizons 35. And Francine Lafontaine, ‘Agency theory and franchising: some empirical results’ (1992) 23 The RAND journal of economics 263, 264. 17

Rick Grossman, ‘The 19 Covenants of a Standard Franchise Agreement’ Entrepreneur (13 January 2017)

https://www.entrepreneur.com/article/286680 accessed 3 September 2017 18

Richard E. Caves and William F. Murphy II, ‘Franchising: Firms, Markets, and Intangible Assets’ (1976) 42 Southern

Economic Journal 572, 578-579. And Roger D. Blair and Francine Lafontaine, The Economics of Franchising, (Cambridge University Press, 2010) 56-69. 19

Jeroen H.G.A.J. Janssen, ‘The Legal Nature of the Franchise Agreement in the Netherlands’ in Reiner Schulze

(Hrsg), Franchising im Europäischen Privatrecht, (Nomos Verlagsgesellschaft, 2001) 93. DRAFT CHAPTER1_11MAY2018 

 

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7    owes a franchisor a payment of franchise fees, and the franchisor has an obligation to give the right to a franchise business to the franchisee. If one party in the contract fails to fulfil its obligation, the other party may claim for performance and/or damages arising from not fulfilling the obligation. 1.2.3.2. Two-party contracts20 Generally, a franchise contract is a two-party contract in the sense that a franchisor and a franchisee conclude the agreement. Because of this type, the doctrine of privity of contract steps in, that is, only the franchisor and the franchisee themselves can enforce and be bound by the contractual terms. In other words, a person who is outside the contract, or ‘a third party’, cannot claim performance from one of the contracting parties, nor can perform obligations imposed on one of the parties.21 1.2.3.3. Bilateral contracts22 Given each of contracting parties in a franchise contract assumes duties and entitles rights towards the other side, the agreement is bilateral or reciprocal. According to general principles of contract

                                                                                                                                                                                                  Considering branches of law by which the agreement is governed, the law of obligations and the law of contract apply to franchise contracts. For example, in Dutch law, the law of obligations, as well as contract law, apply to the franchise contract because it is an obligatory contract in the sense of the Dutch Civil Code Art. 6:213. See Jeroen H.G.A.J. Janssen, ‘The Legal Nature of the Franchise Agreement in the Netherlands’ in Reiner Schulze (Hrsg), Franchising im Europäischen Privatrecht, (Nomos Verlagsgesellschaft, 2001) 93. 20

Considering the number of parties who primarily lead to the formation of a contract, there are two-party contracts

and multi-party party contracts, with more than two parties. See Giovanni Criscuoli and David Pugsley, Italian Law of Contract (Casa editrice Jovene, 1991) 18. 21

However, many legal systems make an exception to the doctrine of privity of contract. A right to enforce a contract

may be conferred to the third party, or even a duty can be transferred to the third party as well. Thus, the contracting parties in a franchise agreement can transfer their rights or obligations insofar as the legal systems allow them to do so. 22

A contract is bilateral if it gives rise to reciprocal obligations in which each party has both rights and obligation in the

contract, while it is unilateral if the contract only creates one-sided obligations. See Bary Nicholas, An Introduction to Roman Law, (Oxford University Press, 1962), p. 162. DRAFT CHAPTER1_11MAY2018 

 

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8    law, parties may refuse to perform their obligations unless the other party performs due obligations.23 Besides, any failure of the parties to perform obligations entitles the other party to seek remedies such as termination of the contract.24 In general, a franchisor is entitled to rescind the contract if a franchisee has failed to pay due royalties, or the other way around the franchisee is entitled to refuse to pay membership fees if the franchisor has failed to perform his obligation. However, it should be borne in mind that franchise contracts may deviate from such default rules using imposing certain pre-requisite conditions for obtaining rights to terminate the contracts. 1.2.3.4. Contracts in a network A franchise contract is a contract in a franchise business network, consisting of a nexus of distinct, independent and unrelated franchise contracts.25 Taking a spoked wheel as an example, the wheel represents the franchise network where a franchisor and franchisees are represented by a hub and spokes, respectively. Each spoke linked to the hub refers to a franchise contract entered into by the franchisor and the individual franchisee. Therefore, this example clearly illustrates that the franchise

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For instance, Article 262 of Book 6 of the Dutch Civil Code, and Section 369 of Book 2 of the Thai Civil and

Commercial Code. 24

For instance, Article 265 of Book 6 of the Dutch Civil Code, and Section 387 of Book 2 of the Thai Civil and

Commercial Code. 25

According to Gulati, Klein and Zolt, ‘connected contracts’ refers to the interrelating contracts and relationships

among all participants in an economic venture. In connected contracts, all participants will affect and be affected by the rights and obligations of others. See G. Mitu Gulati, William A. Klein, and Eric M. Zolt, ‘Connected Contracts’ (2000) 47 UCLA Law Review 887, 894-898. Nevertheless, although there can be multiple franchise contracts that create contractual relationships between a franchisor and its franchisees in a single franchise network, I do not label those franchise contracts as ‘connected contracts’ because the contracts lack the main feature of the connected contracts. That is, there is no specific interrelationship among franchisees engaged in the network. Using the example of the spoked wheel, each of spokes, which represents a distinct franchisee, only connects to the franchisor as the hub in the center of the wheel. There is no interaction among the spokes in the wheel. If one spoke disappears, other spokes will not be affected and still function. Therefore, I prefer considering the franchise network as a nexus or group of contracts but not connected contracts. DRAFT CHAPTER1_11MAY2018 

 

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9    network consists of a number of franchise contracts that the franchisor entered into with its franchisees. In other words, an individual franchising agreement forms franchise businesses such as fast-food restaurants, hotels and retail stores into the uniform network. 1.2.3.5. Innominate contracts26 Generally speaking, a franchise contract is regarded as an innominate contract in terms of not being governed by a set of specific rules prescribed by the civil codes.27 As a result, by the principle of

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This categorization of contracts is inherent in legal systems that are influenced by the Roman law of contract. The

lists of special contracts in Roman law are sale, hire, partnership, commission (mandatum), loan for consumption (mutuum), loan for use (commodatum), deposit, and pledge. See Peter Birks, The Roman Law of Obligations, (Eric Descheemaeker Ed, Oxford University Press, 2016) 30. Influenced by the Roman law, most of codified legal systems such as Germany, France, Italy and the Netherlands accept standard types of contract in their civil codes, thereby each of specific contract types has its own rules. Nevertheless, the specific types of contract in the legal systems are far from comprehensive. Contracts that cannot be categorized as any specific contract are called ‘innominate contracts’. 27

For example in Germany, France, Spain, Switzerland, the Netherlands, and Greece. See Penelope Agallopoulou,

Basic Concepts of Greek Civil Law, (Youlika Kotsovolou Masry Tr, Ant. N. Sakkoulas Publishres, 2005) 364. ; Basil Markesinis, Hannes Unberath and Angus Johnston, The German Law of Contract: A comparative treatise, (2nd edn, Hart Publishing, 2006) 163 ; Gerhard Robbers, An Introduction to German Law, (Michael Jewell Tr, 6th edn, Nomos, 2017) 165. ; Odavia Bueno Díaz. Franchising in European Contract Law: A comparison between the main obligations of the contracting parties in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and Spanish law, (sellier. european law publisher, 2008) 36, 43. ; Von Thomas Koller and Beat Zirlick, ‘Rechtliche Einordnung, vorvertragliche Phase und Durchführung des Franchisevertrages im schweizerischen

Recht‘

in

Reiner

Schulze

(Hrsg),

Franchising

im

Europäischen

Privatrecht,

(Nomos

Verlagsgesellschaft, 2001) 84. And Jeroen H.G.A.J. Janssen, ‘The Legal Nature of the Franchise Agreement in the Netherlands’ in Reiner Schulze (Hrsg), Franchising im Europäischen Privatrecht, (Nomos Verlagsgesellschaft, 2001) 93. Even though English law does not adopt the idea of specific contracts in the same way as civilian jurisdictions does, the result does not fundamentally differ from civilian traditions as English law does not provide any particular rule for the franchising contract. Thus, the general law of contract is applicable to the contract. See P.S. Atiyah and Stephen A. Smith, Atiyah’s Introduction to the Law of Contract, (6th edn, Clarendon Press, 2005) 2-3, 24DRAFT CHAPTER1_11MAY2018 

 

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10    party autonomy and freedom of contract,28 a franchisor and a franchisee are free to create contents of the franchise contract. Lack of the explicit agreement on certain situations would lead to gaps in the agreement because the civil codes do not supply any default rule for those situations.29 Nevertheless, in some countries such as France and Spain, franchise contracts may be regulated, to a certain extent, by specific franchise laws even if they are considered innominate contracts.30 As a result, rules prescribed by the franchising legislation preclude those of the general law of contract and the law of obligations. For example, franchise-specific laws may impose the duty of pre-contractual disclosure of information on franchisors, whereas the general contract laws are silent on such a duty. 1.2.3.6. Contracts of adhesion31 In practice, a franchise agreement is an adhesion contract32 because, from a franchisor’s viewpoint, using a standardized contract helps the process of making the franchise contract more efficient.

                                                                                                                                                                                                  25. And John Adams, ‘The Franchising Contract in English Law’ in Reiner Schulze (Hrsg), Franchising im Europäischen Privatrecht, (Nomos Verlagsgesellschaft, 2001) 86. 28

Giovanni Criscuoli and David Pugsley, Italian Law of Contract (Casa editrice Jovene, 1991) 19. ; Basil Markesinis,

Hannes Unberath and Angus Johnston, The German Law of Contract: A comparative treatise, (2nd edn, Hart Publishing, 2006) 163. And Gerhard Robbers, An Introduction to German Law, (Michael Jewell Tr, 6th edn, Nomos, 2017) 174-175. 29

Legal systems, for example, England, Germany and the Netherlands, may provide different approaches to filling the

gap in the contract. See Nicole Kornet, Contract Interpretation and Gap Filling: Comparative and Theoretical Perspectives, (Intersentia, 2006) 30

Odavia Bueno Díaz. Franchising in European Contract Law: A comparison between the main obligations of the

contracting parties in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and Spanish law, (sellier. european law publisher, 2008) 33,36, 39-43. 31

Contracts of adhesion or standardized contracts are contracts whose contents and terms have been formulated in

advance, especially by business enterprises. In this regard, it only gives the other party, who did not formulate the contract, a choice between ‘take it’ or ‘leave it’, without a possibility of tailored-made changes to the contract. See Edwin W. Patterson, ‘Delivery of a Life-Insurance Policy’ (1919-1920) 33 Harvard. Law Review 198, 222. And Friedrich Kessler, ‘Contracts of Adhesion--Some Thoughts about Freedom of Contract’ (1943) 43 Columbia Law Review 629, 631. DRAFT CHAPTER1_11MAY2018 

 

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11    That is, the franchisor can avoid separately negotiating the contractual terms with each of the prospective franchisees, which are time-consuming activities. Consequently, franchisors rarely do negotiate the terms of franchise contracts33 and they tend to offer a standardized contract to its potential franchisees. 1.2.4. Conclusions On the one hand, from a business’s point of view, franchising is considered a marketing method, which a distinct industry segment (franchisor) employs to distribute his products and services to the end customers, through business operations of legally and financially independent partners (franchisees). From an organizational viewpoint, industries using the franchise model can be seen as a network of the economic activity. On the other hand, from a legal perspective, a franchise network is a nexus of franchise contracts that creates legally binding relationships between a franchisor and its franchisees and plays an important role in organizing legal affairs of the entire network.

1.3. Setting the scene 1.3.1. Introduction In most situations, franchised chains are sound - perhaps franchisors and franchisees are truthful, sincere and dependable, which results in the healthy relationships. The soundness of the chains could

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Michael Seid, ‘Negotiating a Franchise Agreement’ The Balance (19 October 2016)
accessed 1 June 2017 However, compared to a consumer contract which is a prototype of an adhesion contract, it is argued that a franchise contract is not a contract of adhesion. See James V. Jordan and Judith B. Gitterman, ‘Franchise Agreement: Contract of Adhesion?’(1996) 16 Franchise Law Journal 1, 41-42. 33

Robert W. Emerson, ‘Fortune Favors the Franchisor: Survey and Analysis of the Franchisee's Decision Whether to

Hire Counsel’ (2014) 51 San Diego Law Review 709, 717. Nevertheless, in some business sectors such as a hotel franchise business, it is argued that there is a possibility of negotiating the terms of a franchise agreement. In other words, the terms in relation to franchise fees, guarantee, transfers of interests, or areas of protection are often negotiable. See Ormend G. Yeilding, ‘United States: Actually, Hotel Franchise Agreements Are Negotable’ Mondaq (29 March 2017) < http://www.mondaq.com/article.asp?articleid=580850&email_access=on&chk=2135704&q=1554854> accessed 23 May 2017 DRAFT CHAPTER1_11MAY2018 

 

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12    drive both franchisors and franchisees to succeed in running their franchise business. On the one hand, the franchisees, who have invested a considerable amount of money, are able to recoup such investment at the end of relationships. On the other hand, the franchisors, who have gained capital through selling their franchise business, are able to increase profitability and establish a recognized brand. Due to the healthy franchising relationship, many franchise businesses have been successful and recognized not only at a national level, but also at an international level, for example, franchise businesses branded McDonald’s, KFC, Burger King, SUBWAY, and 7-Eleven.34 Unfortunately, not every franchise business is as successful as are those US-based franchise companies; some franchise networks may have failed. Theoretically, and practically, there are many causes of the franchise business failure. One of the major causes that contributes to the failure is a threat of ‘opportunism’.35 According to Williamson, opportunism is defined as self-interest seeking with guile.36 This misbehavior includes misrepresentation, cheating, deception, withholding or distorting information, and failing to fulfil obligations.37 In essence, opportunism is a dishonest and deceitful attribute. In franchising relationships, the threat of opportunism probably comes from misbehaviors of both the franchisee and the franchisor. From a franchisor’s perspective, the franchisees’ misconducts can manifest in forms of free-riding, cheating, inaccurate reporting, and withholding information.38 For example, in cases of a free-riding and cheating problem, an individual franchisee may supply products that are of poor and undesirable quality. In this case, it is possible that consumers who bought those

                                                             34

Among 100 international franchise industries, they take the reins of the top five franchise brand of the Top 100

Global Franchises Ranking in 2017. See http://www.franchisedirect.com/information/2017top100report/?r=5752 35

Courtenay Atwell and Jenny Buchan, ‘The Franchise Fulcrum: The Legal System’s Contributions to Research about

Power and Control in Business Format Franchising’ (2014) 21 Journal of Marketing Channels 180. 36

Oliver E. Williamson, ‘The Economics of Organization: The Transaction Cost Approach’ (1981) 87 American Journal

of Sociology 548, 554. 37

George John, ‘An Empirical Investigation of Some Antecedents of Opportunism in a marketing Channel’ (1984) 21

Journal of Marketing Research 278. And Erin Anderson, ‘Transaction Costs as Determinants of Opportunism in Integrated and Independent Sales Forces’ (1988) 9 Journal of Economic Behavior and Organization 247, 248. 38

Elizabeth Crawford Spencer, The Regulation of Franchising in the New Global Economy, (Edward Elgar, 2010) 72.

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13    goods blame the entire franchise network, affecting not only a franchisor but also other fellow franchisees.39 However, the solution to these problems could be relatively straightforward. By way of example, franchisors can draft contractual terms of a franchise agreement to protect themselves against such risks.40 That is, they can retain the right to terminate the contract at will in order to address the franchisee’s free riding.41 Besides, the franchisors may also require higher initial fees equal to the estimated short-run benefits gained by cheating franchisees.42 Therefore, in my opinion, the threat of franchisee misconducts may be comparatively easier to deal with because the franchisors often hold the stronger economic power in the franchise relationship. Thus, they are able to prevent and deter the potential misbehaviors such as free-riding and cheating by way of stipulating favorable contract terms, provided that they inspect the possibility of those conducts. Instead, the manifestation of opportunism in the franchising relationship is typically made by franchisors’ conducts. Many franchisees are more likely to be exposed to risks of the franchisor opportunism that could occur, at some points, during a franchise relationship. It is because some franchisors are, generally speaking, larger, and more powerful than their affiliates.43 Besides, they are

                                                             39

Benjamin Klein, ‘Transaction Cost Determination of “Unfair” Contractual Arrangements’ in Donald A. Wittman(Ed),

Economic Analysis of the Law: Selected Readings, (Blackwell Publishing, 2003) 136. And Benjamin Klein and Lester F. Saft, 'The Law and Economics of Franchise Tying Contracts.' (1985) 28(2) Journal of Law & Economics 345, 34950. 40

Elizabeth Crawford Spencer, The Regulation of Franchising in the New Global Economy, (Edward Elgar, 2010) 72.

41

Luis Vázquez, ‘Determinants of contract length in franchise contracts’ (2007) 97 Economics Letters 145, 146

42

Benjamin Klein, ‘Transaction Cost Determination of “Unfair” Contractual Arrangements’ in Donald A. Wittman(Ed),

Economic Analysis of the Law: Selected Readings, (Blackwell Publishing, 2003) 136. 43

Nirmalya Kumar, Lisa K. Scheer and Jan-Benedict E. M. Steenkamp, ‘The Effects of Supplier Fairness on

Vulnerable Resellers’ (1995) 32 Journal of Marketing Research 54. And Ateeque Shaikh, ‘Conceptualizing fairness in franchisor–franchisee relationship: Dimensions, definitions and preliminary construction of scale’ (2016) 28 Journal of Retailing and Consumer Services 28, DRAFT CHAPTER1_11MAY2018 

 

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14    more experienced and sophisticated than franchisees.44 The asymmetric relationship can potentially lead to a situation that the dominant franchisor exploits advantages of, or even abuses its franchisees.45 In this research, I regard the franchisor opportunism as the most serious risk inherent in the franchising context and I will deal with this issue throughout the thesis. From my viewpoint, the franchisor opportunism can manifest in two stages of the franchising relationship, namely, the phase of a pre-contract (Subsection 1.3.2) and the contractual stage (Subsection 1.3.3). 1.3.2. Pre-contractual stage The main risk that potential franchisees are exposed to during a negotiation of a franchise contract is related to information asymmetries. In negotiating a franchise contract, potential franchisees may face the risk of a franchisor’s deliberate withholding of information. The franchisor may opportunistically withhold material information that prospective franchisees need. Furthermore, the franchisor may, intentionally or negligently, make a false statement regarding specific information to the potential franchisees, which at last induces them to conclude the franchise contract. Material information is crucial to all prospective franchisees as it enables them to predict and weigh risks of, and profits from, the investment. As franchising is the way of doing business, it involves investing the capital into setting a new business, particularly from a franchisee’s standpoint. In other words, franchising is not gambling that the investment can be made without careful consideration as to losses and profits made from the investment. Therefore, the potential franchisees need some accurate

                                                             44

Gillian K. Hadfield, ‘Problematic Relations: Franchising and the Law of Incomplete Contracts’ (1989-1990) 42

Standford Law Review 927, 991. According to empirical studies, it is explained that a franchisee typically has no prior business experience because of the nature of business format franchising and the fact that a franchisor prefers inexperienced franchisees. That is, first, franchise business format provides the franchisee with assistance, training, and operational manuals. Second, the inexperienced franchisee is relatively easy to control. See Robert W. Emerson and Uri Benoliel, ‘Are Franchisees Well-Informed: Revisiting the Debate over Franchise Relationship Laws’ (2012) 76 Albany Law Review 193, 203-209. 45

Nirmalya Kumar, Lisa K. Scheer and Jan-Benedict E. M. Steenkamp, ‘The Effects of Supplier Fairness on

Vulnerable Resellers’ (1995) 32 Journal of Marketing Research 54. DRAFT CHAPTER1_11MAY2018 

 

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15    and material information about the franchisor and the franchise business itself to evaluate opportunities and risks involved in operating franchised units.46 Lack of material and accurate information may lead the franchisees to a severe economic loss in doing their business.47 1.3.3. Contractual stage Once a franchise contract has been concluded, there are some possible scenarios of a franchisor’s misconduct. For the purpose of this research, I consider two conducts of a franchisor as opportunistic behaviors that may occur during an ongoing franchise relationship (Subsection 1.3.3.1), and the other three misbehaviors that may occur with regard to the end of the relationship (Subsection 1.3.3.2). 1.3.3.1. During the ongoing relationship First, franchisees may face a risk of lack of adequate assistance and guidance.48 That is, the franchisor may purposely neglect to provide appropriate support and guidance to the franchisees, including a proper advertisement of the franchise business.49 It is probably because some franchise contracts do not impose obligations to provide the continued assistance on the franchisor.50 The lack of adequate assistance and guidance often leads to complaints made by many franchisees. For example, in

                                                             46

Luciana Bassani and others ‘Court Decisions on Pre-Contractual Disclosure: A Minefield for Franchisors’ (2014) 12

International Journal of Franchising Law 9. 47

J. Howard Beales, ‘Prepared Statement of the Federal Trade Commission on “The Franchise Rule”’ (25 June 2002)

accessed 25 May 2017 48

Due to possible inexperience and lack of prior business knowledge, many franchisees need assistance, guidance,

and advice from a franchisor so that they can, duly and successfully, run their franchised outlets. Particularly in the early stages of operating, the franchisees have to rely on the franchisor to support and to provide assistance. 49

John Adams, ‘The Franchising Contract in English Law’ in Reiner Schulze (Hrsg), Franchising im Europäischen

Privatrecht, (Nomos Verlagsgesellschaft, 2001) 87-88. 50

Jeffry M. Goldstein, ‘Don’t Expect Support from Franchisors’ Goldstein Law Firm (7 May 2015)
accessed 15 June 2017 DRAFT CHAPTER1_11MAY2018 

 

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16    the US case Burger King Corp v. Hilton,51 Inc., the franchisee refused to pay royalties and other expenses with a claim that the franchisor had failed to provide support, services, and assistance. Second, opportunistic conduct may exist in one form of intra-brand competition, which is called ‘encroachment’ or ‘cannibalization’.52 Most franchise contracts allocate geographical locations of franchised units for franchisees; thereby they have specific areas of doing business. Nevertheless, the franchisor may, motivated by a desire of maximization of economic profits, operate its company-owned outlet, or license other franchisees to develop their franchise stores, in the vicinity of incumbent franchisees’ units.53 According to the empirical finding, the entry of the new franchised units into the incumbents’ vicinity could result in the loss of revenue of the incumbent franchisees.54 1.3.3.2. The end of a franchise relationship Even though the franchise contract is generally expected to exist over a long period,55 it may come to an end on many occasions. Here I consider three main events that may bring the franchise contract to an end, namely, (1) assignment of the franchise contract, (2) non-renewal, and (3) termination of the contract. Then I will identify the franchisor’s misconducts that may occur in each situation. First, concerning an assignment of the franchise contract, a franchisor may opportunistically withhold consent to transfer of a franchise contract proposed by a franchisee. Although most franchise

                                                             51

Burger King Corporation v. Hinton, Inc., 203 F. Supp. 2d 1357 (S.D. Fla. 2002)

52

Rober W. Emerson, ‘Franchise Encroachment’ (2010) 47 American Business Law Journal 191, 193-194. And Peter

C. Lagarias and Edward Kushell, ‘Fair Franchise Agreements from the Franchise Perspective’ (2013) 33 Franchise Law Journal 3, 13. 53

Marc A Wites, ‘The Franchisor as Predator: Encroachment and the Implied Covenant of Good Faith’ (1996)

7 University of Florida Journal of Law and Public Policy 305, 306. 54

Arthurs Kalnins, ‘An Empirical Analysis of Territorial Encroachment Within Franchised and Company-Owned

Branded Chains’ (2004) 23 Marketing Science 476-489. 55

Consequently, some commentators define a franchise relationship as a long-term relationship.

See Christian

Joerges (ed), Franchising and the Law: Theoretical and Comparative Approaches in Europe and the United States, (Nomos Verlagsgesellschaft, 1991) DRAFT CHAPTER1_11MAY2018 

 

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17    contracts contain a clause that confers the franchisor the right to consent to transfer,56 the problem may arise when the term is silent on the standard as to how to exercise the right to consent.57 This situation opens the door to the opportunism. According to Darrel Jarvis, a transfer of a franchise is a source of conflict between a franchisor and a franchisee.58 For example, in the US case De Walshe v. Togo's Eateries, Inc.,59 the franchisee claimed that the franchisor had unreasonably withheld consent to transfer of franchise to buyers. Second, most franchise contracts are fixed for a period of time and expire at the end of that period. The contracts may contain no terms explicitly related to the right to renew, or they may give power over the right to renew to the franchisor.60 In this respect, the franchisee may risk arbitrary non-renewal. For instance, as conditions for the renewal, the franchisor may introduce new terms which could benefit them at the considerable expenses of the franchisee.61 If the franchisee refuses the new terms, then the franchisor declines to renew the contract. Furthermore, the franchisor may not renew the contract without reasonable cause. Third, franchise agreements frequently contain termination clauses, which impose conditions or situations where the agreements may be brought to an end. Given that the franchisor normally drafts the contract himself, there is a possibility that the franchisor incorporates the termination-at-will clause in the

                                                             56

F. James Helms, ‘Limiting the Franchisor’s Power to Withhold Consent to a Transfer by the Franchisee’ (Spring

1972) 47 Indiana Law Journal 559 57

Terrence M. Dunn, ‘The Franchisor’s Control over the Transfer of a Franchise’ (Spring 2008) 27 Franchise Law

Journal 233, 236. 58

Darrel Jarvis, ‘Legal and Business Issues Affecting Franchise Transfers’ a paper presented at the Ontario Bar

Association's 10th Annual Franchise Law Conference: What We Can Expect in the Next Decade. 59

De Walshe v. Togo's Eateries, Inc., 567 F. Supp. 2d 1198 (C.D. Cal. 2008)

60

Charles S. Modell and Genevieve A. Beck, ‘Franchise Renewals - You Want Me to Do What’ (2002-2003) 22

Franchise Law Journal 4. 61

See e.g. David P. Valentine v. Mobil Oil Corp., 789 F.2d 1388 (9th Cir. 1986) and Unified Dealer Group v. Tosco

Corp., 16 F.Supp.2d 1137, 1139 (N.D.Cal. 1998) DRAFT CHAPTER1_11MAY2018 

 

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18    franchise agreement so that he can terminate the contract without cause.62 Therefore, before the contract expires, the franchisor may act opportunistically by rescinding the contract for the purpose of, for instance, expropriation the franchised outlet and resell it to other franchisees.63 1.3.4. Conclusions The franchisor opportunism is perceived in this research as the most significant risk inherent in franchising relationships. As the franchisor typically possesses superior bargaining power, the risk of franchisor misbehavior is likely to be exposed to franchisees, and the latter may not prevent and overcome with their own power. The franchisor’s opportunistic conducts often lead to conflicts between the franchisor and the franchisee; sometimes it ends up in courts. These disputes will deteriorate soundness of a franchisorfranchisee relationship. The outcome of franchise-related disputes will affect the whole of franchising network. Therefore, there will be a growing need for certain strategies that can be deployed to deter such opportunistic behaviors and reduce possible disputes that may arise thereof. As this is legal research, I will only focus on legal frameworks that are used to deal with the issue.

1.4. Research questions 1.4.1. Introduction Concerning the risks described in Section 1.3, in this Section, research questions will be developed based on the three key stages of the whole of a franchising relationship: the pre-contractual negotiation (Subsection 1.4.2), the ongoing relationship (Subsection 1.4.3) and the end of the relationship (Subsection 1.4.4). I will identify the central questions and sub-questions in each stage.

                                                             62

Benjamin Klein, ‘Transaction Cost Determination of “Unfair” Contractual Arrangements’ in Donald A. Wittman(Ed),

Economic Analysis of the Law: Selected Readings, (Blackwell Publishing, 2003) 137. 63

J. Howard Beales III and Timothy J. Muris, ‘The foundations of franchise regulation: Issues and evidence’ (1995) 2

Journal of Corporate Finance 157, 168. DRAFT CHAPTER1_11MAY2018 

 

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19    1.4.2. The pre-contractual stage64 Here, the main question is, before concluding a franchise agreement, whether and to what extent the franchisor has an obligation to provide material information to the potential franchisee so that the latter can make an informed decision? If the answer is affirmative, then I will suggest how to determine who the prospective franchisee is and which kind of information the franchisor has to provide. I will also recommend proper remedies for breach of this obligation. 1.4.3. The ongoing franchise relationship65 1.4.3.1. Duty to assist The central question is whether and to what extent the franchisor has an obligation to provide the franchisee with the guidance and assistance needed? If the answer is affirmative, I will determine what kind of the advice and support the franchisor has to provide, and how long the franchisor has such an obligation. Also, the question as to what remedies for breach of such a duty needs to be answered. 1.4.3.2. Duty not to compete Concerning the encroachment phenomenon, the main question arises as to whether and to what extent the franchisor has a duty not to compete with its existing franchisees. In other words, does the franchisor has to refrain from operating its company-owned outlet, or licensing third parties to develop their franchise units, in the vicinity of the incumbents’ franchised stores? What are remedies for a violation of such a duty? I will set out the criteria that should be used in determining the encroachment issue. 1.4.4. The end of the franchise relationship66 1.4.4.1. Assignability of franchise contracts The question is whether and to what extent the franchisor can withhold consent to transfer the franchise contract, proposed by its franchisees. Before answering the main question, I will answer as to what is the requirement of transfer and what is the consequence of the assignment.

                                                             64

See Subsection 1.3.2

65

See Subsection 1.3.3.1

66

See Subsection 1.3.3.2

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20    1.4.4.2. Non-renewal of franchise contracts The central question is whether and to what extent the franchisor can decide not to renew the franchise contract. Does the franchisor have to have a reasonable ground for non-renewal? If the answer is affirmative, I will find the definition and scope of the reasonable ground. And I will determine the effect of non-renewal without the reasonable ground and appropriate remedies for non-renewal without the reasonable ground. 1.4.4.3. Termination of franchise contracts The question is whether and to what extent the franchisor can terminate the contract at will. Does the franchisor have to have a reasonable ground for the termination? 1.4.5. Conclusions In brief, the research questions have been developed to focus on certain scenarios of the perceived franchisor opportunism in connection with the whole life of franchising relationships. For the purpose of the study, the research questions have been proposed in three stages of the relationship, namely, (1) the pre-contractual stage, (2) the stage of an ongoing relationship, and (3) the end of the relationship. These three stages are the backbone of the research, as they contain research questions to which I will answer for the goals identified in the following Section.

1.5. Objectives of the research 1.5.1. Introduction To stimulate healthy franchise businesses in countries, Andrew Terry opined that it requires appropriate political, economic, commercial and legal frameworks.67 Specifically speaking, the thesis aims to address only the issue of the legal framework. Therefore, it is not my intention that an economic and political analysis of the research questions will be conducted. In doing this research, I seek to achieve two primary goals, which are divided into theoretical (Subsection 1.5.2) and practical aims (Subsection 1.5.3).

                                                             67

Andrew Terry, ‘A Census of International Franchise Regulation’ a presentation presented at the 2006 China

Franchise International Summit, International Franchise Academy, Beijing Normal University 11-12 November 2016 DRAFT CHAPTER1_11MAY2018 

 

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21    1.5.2. A theoretical aim Based on the research questions, this research aims to conceptualize and thereby recommend a general legal framework that regulates a franchising relationship, from its birth to its end. The proposed general legal framework is intended to prevent the risks of perceived franchisor opportunism, while not to overprotect franchisees against such opportunism. It is my intention that the framework will suggest not only a set of substantive rules regarding the franchising relationship but also proper legal remedies that aggrieved franchisees may claim in the case of violation of such rules. The franchising legal framework will be proposed because I do believe that the risk of a franchisor’s opportunistic behaviors may not be reduced by contractual arrangement and by application of the general contract law. The reasons are as follows. First, as indicated in Subsection 1.2.3.6, most franchise contracts are offered in the form of adhesion contracts, and the franchisor usually formulates contractual terms in its favor. In this respect, the terms may be drafted in the sense that allows the franchisor to exploit benefits at the expense of the franchisee. For instance, the encroachment issue is not addressed properly in the franchise contract as the franchisor is unwilling to restrict its ability to exploit the market, which competes with its franchisees.68 Moreover, the franchisor may be allowed to terminate the contract at will. Second, to some degree, the general contract law might not deal with the perceived franchisor opportunism appropriately. For instance, in the pre-contract stage, the law does not require a franchisor, as well as a franchisee, to provide material, truthful information to each other. Moreover, because the franchise agreement is an innominate contract,69 the law allows the parties to decide the content of a relationship themselves. This will bring back the situation that the franchisor may behave opportunistically. 1.5.3. A practical aim It is my intention that novel findings of the research are not placed only on libraries’ stacks or in bookcases; it is intended that the results of the research study will contribute towards legislative initiatives in jurisdictions across the world. Legislators in a country where there has been no specific franchise legislation can make use of this research as academic support in drafting their franchise regulation.

                                                             68

Mark Abell, The law and regulation of franchising in the EU (Edward Elgar, 2013) 78.

69

See Subsection 2.3.4

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22    Here I will give an example of a legal situation in my home country - Thailand. There has been hitherto no dedicated franchise law that regulates franchising relationships; hence, it is the general principle of contract law that governs the relationship. Even if, as far as I am aware, there has been no franchise-related dispute end up in Thai courts so far, it does not imply that the franchise-specific law is unnecessary. Instead, I am of the opinion that Thailand needs a set of self-evident rules that lays down a normative standard because the rules can help reducing potential conflicts and providing more protection to franchisees. Therefore, solutions recommended by the research may help Thai legislators in terms of providing ideas and guidelines when they need to introduce the new, dedicated franchise law in Thailand. 1.5.4. Conclusions The ultimate goal of the study is, based on the research questions, to put forward the general legal framework for the purpose of law reform or enactment of dedicated franchise laws in countries that lack franchise-specific laws and need to regulate franchising relationships. It is my intention that legislators can make use of the findings of the research as guidelines in the process of making the laws. However, it is beyond my purpose that the research provides a complete legal framework on every aspect of a franchise relationship. Thus, the proposed legal framework must be understood to deal only in relation to the research questions.

1.6. Methodology: A comparative analysis of law 1.6.1. Introduction The research undertakes a comparative legal study to achieve the objectives of the research set out in Section 1.5. The main reason is, apart from a means of expanding knowledge and a better understanding of the law, that comparative law can be a means of improving national legislation; it is useful for legislators in the process of legislative reform.70 Thus, a comparative legal study serves a purpose of making a proposition of a franchising legal framework.

                                                             70

Konrad Zweigert and Hein Kötz, Introduction to Comparative Law, (Tony Weir Tr., 3rd edn, Oxford University Press,

1998) 15-17. ; H. Patrick Glenn, ‘The aims of comparative law’ in Jan M. Smits (ed), Elgar Encyclopedia of Comparative Law, (2nd edn, Edward Elgar, 2012) 65-72. And Mathias Siems, Comparative Law, (Cambridge University Press, 2014) 2 - 4. DRAFT CHAPTER1_11MAY2018 

 

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23    According to Zweigert and Kötz, comparative law is a comparison of different legal systems.71 This statement implies that law or a legal system is an object of the comparison. In addition, as the comparison must be conducted between different legal systems; hence, at least two legal regimes must be chosen. Thus, the following section will identify which of legal systems that are selected as objects of this research study. 1.6.2. Choice of legal systems At the outset, to make choice of legal systems, I consider two main criteria of choosing legal systems, which will be objects of the research study. First, legal resources, both primary and secondary resources, of the chosen systems must be readily available and easily accessible.72 In this respect, these resources must be entirely in English which is the language that I can read and understand. Moreover, they must be made available in either hard copy or online databases. Second, the legal systems should offer franchise-specific regulations which directly address the subject matter of the thesis. This criteria will ensure the achievement of the aims of the research, which are described in Section 5. Moreover, it is my intention that the choice of legal systems in this research is not specific to particular regions such as Mark Abell’s research73 and Odavia Bueno Díaz’s research74 that obviously focused on franchise law and regulation in the European Union. Thus, I will select legal systems that can offer advanced franchise-specific legislation and can represent major regions worldwide. Based on the criteria set out above, the comparative study of franchise regulations deployed in this research will focus on the Draft Common Frame of Reference (hereinafter called ‘the DCFR’),

                                                             71

Konrad Zweigert and Hein Kötz, Introduction to Comparative Law, (Tony Weir Tr., 3rd edn, Oxford University Press,

1998) 2. 72

Mathias Siems, Comparative Law, (Cambridge University Press, 2014) 15.

73

Mark Abell, The law and regulation of franchising in the EU (Edward Elgar, 2013)

74

Odavia Bueno Díaz. Franchising in European Contract Law: A comparison between the main obligations of the

contracting parties in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and Spanish law, (sellier. european law publisher, 2008) DRAFT CHAPTER1_11MAY2018 

 

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24    compared with two existing legal systems, namely, the USA and Australia. The main reasons for choosing these systems to be studied are as follows. 1.6.2.1. The Draft Common Frame of Reference (DCFR) Firstly, principles, definitions, rules, as well as corresponding commentaries of the DCFR are offered in English texts and can be easily accessed. Secondly, the DCFR devotes its space in Book IV: Specific contracts and the rights and obligations arising from them to principles and rules dealing with a franchise relationship. Chapter 4 of Part E of the Book consists of principles and model rules that govern the franchise relationship, from the pre-contract stage to the ongoing relationship.75 Thirdly, as it is a result of an extensive research conducted by two groups of European scholars76 and is drafted for the purpose of Europeanization of private law, the DCFR is said to be of a European background.77 Consequently, I consider that the DCFR can well represent the European notion of a franchise regulation.78

                                                             75

This aspect of the DCFR makes it preferable, compared to the UNIDROIT’s Model Franchise Disclosure Law. First,

the Model Law that the Institute offers to national legislators in any legal system is just a disclosure law, consisting of ten articles. The Model Law only provides a means to ensure that prospective franchisees receive material information in a pre-contractual stage. Thus, the ten articles of the Model Law does not even cover the whole of a franchising relationship as the DCFR does. Second, the Model Law was released in September 2002 and has not been revised until now. Accordingly, it is possible that some ideas proposed in the Model Law are outdated. 76

The DCFR was presented by the Study Group on a European Civil Code (the ‘Study Group’) and the Research

Group on Existing EC Private Law (the ‘Acquis Group’). See Christian von Bar, Eric Clive and Hans Schulte-Nölke (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR): Outline Edtion, (sellier European law publishers, 2009) 3. 77

Christian von Bar, ‘THE DRAFT COMMON FRAME OF REFERENCE: SCOPE AND PURPOSE,’ in Vincent

Sagaert, Matthias Storme and Evelyne Terryn (eds), The Draft Common Frame of Reference: national and comparative perspectives, (Intersentia, 2012) 5. 78

I choose the DCFR instead of national laws or European laws because of two reasons. From a national

perspective, franchising legal regimes in Europe are, generally speaking, inconsistently fragmented. Several countries such as Italy, France, Spain, Belgium and Lithuania enacted their specific legislation which regulates franchising to a DRAFT CHAPTER1_11MAY2018 

 

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25    The choice of the DCFR could be criticized by traditional comparatists, whose core interest is in the state laws.79 Because the DCFR itself is neither the existing EU Community law nor state law, comparing the DCFR with the law of states could lead to what is called ‘comparison between apples and oranges’.80 However, it is not necessarily the case. I argue that the DCFR can be used as an object of a comparative legal study for two reasons. The first reason is related to the structure and function of the DCFR, and another reason is in relation to the contemporary practice of legal research. First, in some sense, the DCFR resembles official law of legal systems; it can play the same role as the official law of states. That is, the DCFR can be used as an applicable law of contractual disputes in the light of conflict of law rules. In some conflict-of-law regimes, for example, Rome I Regulation,81

                                                                                                                                                                                                  certain extent, whereas other states such as Germany and the UK rely on general rules of contract law and law of obligations. See Odavia Bueno Díaz. Franchising in European Contract Law: A comparison between the main obligations of the contracting parties in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and Spanish law, (sellier. european law publisher, 2008) 20. and Knut B. Pißler, ‘Franchising’ In Jürgen Basedow and others (eds), The Max Planck Encyclopedia of European Private Law: Volume I, (Oxford University Press, 2012) 728-729. Moreover, from a regional perspective, there has hitherto been no European Community law – be it regulations or directives - which regulates franchising relationships, in particular, from a private law’s perspective, in the European Union. Despite this phenomenon, the DCFR may be regarded as a representative of European countries in the field of franchise law and private law. 79

O. Kahn-Freund,‘On Uses and Misuses of Comparative Law’ (1974) 37 Modern Law Review 1, 2. ; Konrad Zweigert

and Hein Kötz, Konrad Zweigert and Hein Kötz, Introduction to Comparative Law, (Tony Weir Tr., 3rd edn, Oxford University Press, 1998) 4.; John C. Reitz, ‘How to Do Comparative Law’ (1998) 46 American Journal of Comparative Law 617, 618.; A. Ch. Saidov, Comparative Law, (W. E. Butler Tr., Wildy, Simmonds and Hill Publishing Ltd, 2003) 22 and Mathias Siems, Comparative Law, (Cambridge University Press, 2014)15. 80

Mathias Siems, Comparative Law, (Cambridge University Press, 2014) 16.

81

REGULATION (EC) No 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 June 2008

on the law applicable to contractual obligations (Rome I), According to Article 1(1), this Regulation applies EU member states in situations involving a conflict of law with regard to contractual obligations in civil and commercial matters. See http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32008R0593&from=EN DRAFT CHAPTER1_11MAY2018 

 

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26    contracting parties cannot subject their contract to non-state law such as UNIDROIT Principles of International Commercial Contracts, PECL,82 and the DCFR because the Regulation only permits a choice of the law of a state.83 However, in other conflict-of-law systems such as American and Israeli conflict-oflaw, commentators have argued that non-state law can be chosen as the law governing contracts, insofar as it provides a clear set of rules.84 Furthermore, the DCFR is systematically drafted in the format of a code of law structured in books with precise rules. Chapter 4 of Part E: Commercial agency, franchise and distributorship of Book IV consists of ‘black letter’ rules concerning the whole process of the franchise contract. These model rules provide normative standard as same as provisions of civil codes of a number of countries did. Second, in the contemporary practice of legal research, it is not uncommon for choosing soft law or non-state law as objects of comparative studies. Over the past two decades, there has been a certain amount of legal literature – be it books or articles - which chose non-state law for the comparative legal studies. For example, in Odavia Bueno Díaz’s doctoral thesis,85 the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), which is an academic text prepared by the Amsterdam team,86 was chosen as the system to be examined, in comparison with French and Spanish legal systems.

                                                             82

Principles of European Contract Law. See https://www.trans-lex.org/400200/_/pecl/

83

Franco Ferrari(ed), Rome I Regulation: Pocket Commentary, (sellier European law publishers GmbH, 2015) 84. ;

Michael McParland, The Rome I Regulation on the law applicable to contractual obligations, (Oxford University Press, 2015) 143. ; Geert van Calster, European Private International Law, (2nd edn, Blommsbury Publishing, 2016) 213-214 and Michael Bogdan, Concise Introduction to EU Private International Law (3rd edn, Europa Law Publishing, 2016) 120. 84

Talia Einhorn, Private International Law in Israel, (Kluwer Law International, 2009) 80. and Symeon Symeonides,

‘Contracts Subject to Non-State Norms’ (2006) 54 (Supp) American Journal of Comparative Law 209, 221-222. 85

Odavia Bueno Díaz. Franchising in European Contract Law: A comparison between the main obligations of the

contracting parties in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and Spanish law, (sellier. european law publisher, 2008) 86

Martijn W. Hesselink and others, Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), (Sellier.

European Law Publishing, 2006) DRAFT CHAPTER1_11MAY2018 

 

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27    1.6.2.2. The United States of America and Australia First of all, it is undoubted that legal resources of The USA and Australia are in English. Besides, the resources are easily accessible, especially via online databases such as WestlawNext and Hein Online. Secondly, in the area of franchising, the USA and Australia have franchising legal regimes that offer the most advanced franchise law, compared to other countries in the world.87 The US franchise law has influenced many legal systems worldwide; hence, it is said to be a prototype for a number of jurisdictions that enacted and try to enact their franchise legislation.88 For instance, the US legal concept of franchising has been adopted in some European countries such as France.89 In legal practice, modern contracts such as franchising agreements are also influenced by American drafting style.90 Furthermore, with the new franchising legislation entered into force in 2015, Australian franchise law, alongside other general regulations, provides the modern, comprehensive legal frameworks for regulating franchising industries. The new franchise law introduces significant changes and new ideas that are worth my attention, For instance, it introduces an obligation for parties to act in good faith when dealing with the other party.91 Thirdly, the USA and Australia are in different regions of the world; thus, the franchise laws and a concept of franchising may not be too similar to render the comparative study uninteresting. However, as

                                                             87

Albrecht Schulz, ‘Protection of Agents, Distributors, and Franchisees, in Dennis Campbell and Louis Lafili (eds),

Distributorships, Agency and Franchising in an International Arena: Europe, the United States, Japan and Latin America, (Kluwer Law and Taxation Publishers, 1990) 59. 88

Manzoor Ishani, ‘Problems of Regional Master Franchising’ in Dennis Campbell (ed), International Franchising,

(Kluwer Law International, 2008) 1. 89

Wolfgang Wiegand, ‘The Reception of American Law in Europe’ (1991) 39 American Journal of Comparative Law

229, 236-237. 90

Ralf Michaels, ‘American law (United States)’ in Jan M. Smits (ed), Elgar Encyclopedia of Comparative Law, (2nd

edn, Edward Elgar, 2012) 84. 91

See https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct

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28    the English common law system has influenced the US and Australian legal systems,92 they are not radically different systems that would lead a comparison of apples and oranges.93 1.6.3. Conclusions A comparative legal study is the chosen methodology of the thesis. I will employ functions and methods of comparative law to achieve the objectives of the research. That is, the research uses a comparison method to determine similarities and differences of the selected legal systems with regard to the subject matters – the research questions developed in Section 1.4. In the end, the research aims to put forward a proposal for the franchise-specific legal framework, which can be adopted in a number of jurisdictions around the world, in particular, Thailand. Concerning legal systems to be compared, I choose to compare the DCFR with two existing legal systems, namely, the US and Australian legal systems. For the purpose of the research, I consider the DCFR, which is merely an academic instrument, as a system of a franchising legal regime, which resembles the other two systems. The reasons for the choice of these selected legal systems are based on the availability and accessibility of legal resources, offering advanced franchise-specific legal frameworks, and representing three major regions of the world.

1.7. Structure of the research N/A

                                                             92

Konrad Zweigert and Hein Kötz, Introduction to Comparative Law, (Tony Weir Tr., 3rd edn, Oxford University Press,

1998) 218-255. 93

Mathias Siems, Comparative Law, (Cambridge University Press, 2014) 16.

DRAFT CHAPTER1_11MAY2018 

 

CHALERMWUT SRIPORM