Optimization of Franchise Contracts through Strategic Contracting

Søren Lindebjerg Olsen

Student thesis: Master thesis

Abstract

This master thesis focuses on the incorporation of strategic contracting into franchise contracts. Within Danish law, there is no Lex Specialis that regulates the parties’ obligations and rights within the partnership between franchisor and franchisee. Consequently, there is no immediate limitations to how the parties can formulate and construct a partnership that focuses on the ability to communicate and cooperate, and ultimately, create a long-term competitive advantage. In economic terms, the main problem lays with the partners of the franchise, and whether they can create relational rent through strategic contracting. The thesis will examine whether the Danish Obligation Law protects and provides the necessary loyalty commitments in a franchise relationship. Further, whether the Danish Obligation Law limits the parties’ opportunities to perform strategic contracting and create relational rent. Through the Business Law Method, which combines economic theory and law bilaterally, this thesis provides suggestions on how to optimize both the contracting aspect of the franchise relation, but also the creation of economic incentives for the franchisee to contribute by sharing strategic information with the franchise system. The thesis suggests that by incorporating the parties’ loyalty obligations explicitly in the contract, it will eliminate any doubt of the parties’ loyal commitments in the relationship. Through the loyalty clauses, the parties will establish a certain level of commitment from the beginning of the partnership. Furthermore, the parties should include a mutual communication obligation clause in the contract. This is the first step of creating a healthy relationship which will ultimately lead to relational rent. By having a separate section written in non-legal terms, which solely focuses on the parties’ opportunities to create relational rent, it will engage the franchisee in the contract draft, thus the parties can use the contract as a management tool for future collaboration. As a supplement to the incorporation of the above-mentioned clauses, the thesis suggests economic incentives for the franchisee to share strategic information with the franchise system. The franchisee’s nature of being an independent retailer does not provide immediate incentives for him or her to share strategic information with the rest of the franchise system unless he or she is being economically compensated. Consequently, this thesis suggests specific compensation that directly involves profit for the contributions that are made to optimize the franchise system. This will satisfy the franchisee short-term, as well as the franchise system long-term.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages74
SupervisorsKim Østergaard & Bent Petersen