Chapter 3: The Contract as Private Regulation
THE IMPORTANCE OF THE CONTRACTUAL RELATIONSHIP Regulation by contract is a method of self-regulation as part of the control over the relationship by the parties themselves; such control is achieved through the form and terms of the agreements that govern the relationship. In the case of franchising, the relationship often involves multiple, interrelated contracts governing a wide range of dynamic issues, including trademark licences, real estate leases, financing arrangements, supply agreements, cooperative advertising agreements and so on. The most important of these is the franchise agreement. Chapters 3 and 4 deal with the nature of this contractual agreement which governs the franchisor– franchisee relationship. Every franchisee needs to, ‘recognize his contract for what it is. It is not an opportunity to develop a business and invest in developing a brand in partnership with a franchisor, but rather a short-term licence from which the franchisee must derive short-term benefits . . . it makes sense to think of a franchise contract as a rental contract over an intangible asset, namely the brand, with the terms of the franchise contract clearly defining the relationship’.1 A franchisee is not establishing its own fully-transferable, independent business, but rather is contracting for the right to use a particular trademark in a particular location for a particular time period. However, in the sales process, the relationship is often not presented this way. If it were, franchisees would no longer consider themselves as owners of their own businesses. This could threaten franchisee effort and commitment and increase agency costs. Different...
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