Square Pegs in Round Holes: Franchisees of Insolvent Franchisors
Business Law International, Vol. 9, No. 2, pp. 114-144, May 2008
32 Pages Posted: 15 Jan 2009 Last revised: 1 Feb 2009
The franchise expansion model has cemented its place as an important growth mechanism for many businesses throughout the world. It has enabled thousands of former employees to take their first step into self employment. Whilst franchising is undeniably a reliable way for inexperienced people to become self employed, the categorisation of a franchisee primarily as a contracting party is problematic if the franchisor becomes insolvent. This article identifies many of the roles the franchisee occupies in the franchisor's business - provider of labour, capital, taker of risk; and in the broader economy as a consumer, business consumer, entrepreneur and independent business entity. It identifies on some of the problems that arise for franchisees when the franchisor's business fails, and some of the apparent disconnects between contract law and insolvency law. While the main focus of the article is Australia, examples are drawn from the USA, Germany and Japan. The author concludes that the current categorisation of franchise agreements as contracts that place franchisees in the general pool of creditors, or debtors does not adequately recognise their role in the franchisor's business.
Keywords: role of franchisee, insolvent franchisor, bankrupt franchisor, franchisee compared to supplier, franchisee as consumer, franchisee compared to employee, risk, franchisee source of capital, franchisee in USA, franchisee in Germany, franchisee in Japan
JEL Classification: D18, G33, K20, M55
Suggested Citation: Suggested Citation