Balance of power, certainty and discretion in the franchise relationship: An analysis of contractual terms

Executive Summary:
Balance of power is a factor in considerations of fairness in the formation of contracts and in Australia is an express factor in determining unconscionability in contract formation and performance. Certainty is essential to business confidence that underpins planning and investment. Certainty is also a factor in evaluating what parties have agreed to in making the contract. Discretion, if it is too wide, may no longer represent the true intentions of the parties, but may instead be an indication of other forces, including asymmetries in the power relationship. These issues are of particularly significance in franchising; redressing imbalance of power and ensuring certainty among the parties are among the stated goals of the regulation of the franchise sector in Australia. Previous analysis has demonstrated that the market interaction between franchisor and franchisee sets up a relationship that is characterized by imbalance of power and uncertainty for a franchisee. Further, it has been demonstrated that, in theory, the standard form and relational qualities of the franchise contract synergistically reinforce these conditions. This paper tests that theory by evaluating balance of power and uncertainty in the terms of franchise contracts. A sample of ten contractual terms from nineteen franchise contracts is analysed as follows: first, the purpose of each contract term is outlined and the interests of both a franchisor and a franchisee are explained with respect to each term; second, the results of the sample are discussed. The results show that contract terms indicate that greater power resides with a franchisor, while higher levels of uncertainty are experienced by franchisees. This section also discusses the allocation of discretion in franchise contracts. Discretion accorded to parties in contracting relationships can be both a measure of balance of power and certainty as well as a factor that reinforces these conditions. The results presented here also indicate that franchise contracts confer high levels of discretion upon a franchisor. Complacency about the ability of the sector to regulate itself through market and contractual mechanisms therefore should be guarded against.
Note: A companion paper discusses direct intervention, with a particular focus on the potential for disclosure to function effectively as a principal means of regulating the sector. (Please refer to ‘Effective Disclosure in the Regulation of Franchising’.)