Problematic Relations: Franchising and the Law of Incomplete Contracts

  • Hadfield G
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This paper explores an alternative approach to the analysis of franchise contracts which takes seriously their unavoidable incompleteness. The point of departure is the fundamental insight of relational contracting theory, namely that when a contract is embedded within an identifiable relationship, such as the franchise relationship, contractual obligations are often modified, supplemented or completely supplanted by the norms of the ongoing relation. Thus far, the explication of this insight has been along largely theoretical lines. My objective in this article is to further develop the theoretical analysis of the importance of relational elements in order to fashion operational guidelines for courts faced with the difficult concrete task of resolving franchising disputes on the basis of incomplete contracts. I focus first on the economic dynamics created by uncertainty, sunk costs and the allocation of control within the franchise relationship. I argue that these dynamics structure the central commitment problems facing franchisee and franchisor as they endeavor to secure their exchange. Consequently, judicial efforts to identify the obligations created by the franchise contract should be directed at determining if and how these commitment problems have been addressed by the parties. It is at this juncture that the norms of the franchise relationship become important: Where there is no explicit contractual term supplying commitment, where the written contract appears incomplete, courts must look to the norms of the relation itself to see if they functioned to supply needed commitments. Relational norms should not be imposed on a particular relationship simply because such norms overcome commitment problems. But the courts should determine the likelihood that the contracting parties themselves implicitly or explicitly relied on the relational norms to supply the commitments they could not reduce to written form. Thus relation becomes important because it contributes directly to the obligations exchanged by franchisee and franchisor at the formation of their contract; respecting the parties' control over their relationship means that obligations must be understood to have arisen not only from the written document but also from the relation itself.

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  • Gillian K. Hadfield

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