The organisational consequences in the development of appropriate legal arrangements for conducting franchising

Franchising has emerged as a powerful method of conducting business. This paper examines a number of the elements of franchising and their foundation in transaction cost theory, the legal environment and measures which seek to control excesses in franchising. These are reviewed in part by reference against the writer's background as the Corporate Solicitor from 1989 to 1990 for Brisbane founded and based franchisor, Nu-Steel International Pty Ltd. Also during the latter part of 1990 the writer was Corporate Solicitor for the franchisor of the Bumpa T Bumpa franchise system. The economic rationale for franchisors and franchisees entering their business relationship and the legal consequences of franchising are discussed. The Franchising Code of Practice was introduced on a voluntary basis in February 1993 and recently there has been debate on possible changes to address deficiencies in the legal framework covering the conduct of franchising in Australia. These changes are examined and evaluated. The popular proposition is that for many suppliers and manufacturers franchising provides a cost and administratively effective method of achieving optimum results instead of by direct investment via vertical or horizcntal integration. For franchisees access is gained to an established business system. Hence the likelihood of failure and poor return on investment is claimed to be reduced. These propositions are tested against the researcher's observations. Legal complications make franch ising a hazardous undertaking for both franchisors and franchisees, particularly the likelihood of opportunistic behaviour which the legal system seeks to guard against by providing avenues of redress but can not eliminate. To many participants potential pitfalls are not fully appreciated and are only comprehended through costly experience. To seek to reduce the incidence of l.!:1desirable p:·2.ctices !~c Federal Government introduced a Code of Practice based on voluntary self regulation after considering the impact of regulatory regimes in Australia, England and the United States. Given the contribution of undesirable practices, lower than expected awareness of the Code amongst franchising participants and with approximately 50 per cent of franchisors registered with the Franchising Code Administration Council Limited which administers the Code, the Federal Government released in October 1995 a Better Business Conduct Discussion Paper. While the changes proposed in the Discussion Paper relating to the Trade Practices Act will provide a useful protection mechanism, this will be at the cost of franchising participants until the harsh and oppressive conduct prohibitions are litigated and hopefully improved standards of commercial practice established. This paper shows that there are common features in the economic and legal processes fou nd in franchising. It is suggested that traditional market transaction issues are not relevant to a consideration of effective controls on franchising which deals with a total resource package comprising human and physical capital. For governments and franchising participants, consideration needs to be given to address, at the outset of a franchising transaction, mechanisms to cover fundamental opportunistic behaviour