It is about analysis of whether 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 system

1. 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 system
R. Sashikala

2. Page  2
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
2

3. Content
1. 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
1. Agency cost
2. How operation of fiduciary duty eliminate the agency cost under franchise
system
3

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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]
1. 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]
1. 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.]

11. 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.

12. 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.

15.  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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References
Books
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)

18. 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