Hadfield on Opportunism

July 17, 2008

Gillian K. Hadfield wrote Problematic Relations: Franchising and the Law of Incomplete Contracts in 1990. It remains the gold standard of defining why franchising remains such a difficult area for the law to deal with.

See here’s the rub: Franchisors legitimately require discretion because no contract could ever be written that would exactly specify, to the penny over many years, through market changes what each party will do. That’s fair.

What is not fair is when a franchisor exercises his discretionary powers in a way to strip a franchisee’s [and their family’s, usually] labour, life savings, credit worthiness and future earnings. This is possible largely because the investment is trapped [sunk cost] and dependent on the franchisor’s whim.

The Problem for the Law: Did a franchisor have a legitimate business reason for doing what it did OR is it just acting as a predator? This is what judges have a hard time dealing with.

You can can download a copy here.

Hadfield’s 2000 expert testimony to the Ontario government is also presented here. She presents an excellent judicial test for opportunism and I got to help with the overhead projector.

  • Opportunism fueled by sunk costs: the most important and distinguishing characteristic of franchising. If you aren’t talking about opportunism, you are wasting your time.

A very useful thumbnail sketch of Problematic Relations is provided by Michael Webster here. The franchisors problem is quality control but that is fairly easily solved.

The franchisee’s concern is defending against opportunism.

The incentive that causes a business with sunk costs to stay in operation despite losses makes franchisees vulnerable to franchisor behavior known as “opportunism.”

Because the franchisee will continue to operate even if it is not recovering its sunk investment, the franchisor can make decisions that induce such losses without the franchisee going out of business.

When these decisions benefit the franchisor at the expense of the franchisee, the franchisor opportunistically extracts a portion of the franchisee’s sunk costs.

It is this point: franchisees will continue operating a losing business [long past the time an independent business would have abandoned it] because of their sunk costs.

 


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