Basics of Franchisor Vicarious Liability | Internicola Law Firm

The Basics of Franchisor Vicarious Liability

The relationship between franchisor and franchisee is a contractual relationship that is derived from the franchise agreement. Most if not all franchise agreements state that the relationship between the franchisor and franchisee is that of independent contractors and not an agency relationship. The independent contractor relationship between franchisor and franchisee serves as one of the many benefits of franchising in that, in many if not most instances, Franchisors achieve the franchised expansion of their business without incurring additional liability for their franchisees actions. Nevertheless, when a claim arises against a franchisee (for example for an injury that occurs at a franchised location or an action of a particular franchisee) certain claimants and their lawyers may attempt to sue the franchisor by claiming that the franchisor is vicariously liable for the actions of the franchisee.

Claims of vicarious liability rely on the existence of an agency relationship and although franchise agreements may disclaim the existence of an agency relationship (i.e., the franchise agreement states that franchisor and franchisee are independent contractors) claimants and plaintiffs lawyers may look to the degree of control that a franchisor may exert in an effort to establish an actual or de-facto agency relationship. Knowing this, franchisors need to be aware that when it comes to exerting control over a franchisee that the degree to which you exert control can become a double-edged sword. Below we will discuss the basics of vicarious liability and some precautionary measures that franchisors should consider in an effort to pre-empt claims of vicarious liability.

The Basics of Vicarious Liability

At its most basic level, vicarious liability is a legal claim and theory where liability imposed on one party for the fault of another. In the franchising world the issue of vicarious liability would exist where, for example, a claimant is injured at the location of a franchised outlet and due to the negligence of a franchisee and the claimant sues the franchisor claiming that the franchisor is vicariously liable for the actions of the franchisee. In doing so, the claimant and his or her lawyer will attempt to argue that the relationship between the franchisor and franchisee went beyond that of “independent contractors” and that either an “actual agency” relationship or an “apparent agency” relationship existed between franchisor and franchisee whereby the injury occurred as a result of the franchisee carrying out the instructions of the franchisor. Consider that even if an actual agency relationship does not exist, claimants and their lawyers will claim an “apparent agency” relationship existed where they claim that the claimant reasonably relied on representations and the belief that the franchised location was operated at the direct instruction of the franchisor.

When evaluating cases involving claims of vicarious liability against the franchisor, the good news is that there are preventative measures that franchisors may take to protect themselves and, in many instances pre-empt vicarious liability claims. These preventative measures have much to do with the structure of the franchise agreement, notices located within a franchisees operating units and limitations to the nature and degree of control that a franchisor exerts over a franchisee’s day-to-day operations.

Preventative Measures that Franchisors Should Implement

Like everything else in business and in life, you can’t eliminate legal risk and you certainly cannot eliminate claims of vicarious liability. However, you can and should implement steps and measures to mitigate your vicarious liability exposure. The recommended courses of action revolve around risks associated with the existence of an actual agency relationship, the existence of an apparent agency relationship and notices included in your operations manuals and franchised locations.

Actual Agency (Limit Your Control Over Day-to-Day Operations)

Although your franchise agreement states that the relationship with your franchisees is that of independent contractors an actual agency relationship may be claimed to nevertheless arise. Whether or not an actual agency relationship arises has a lot to do with the degree of control that you exert and maintain over the day-to-day operations of your franchisees. If a court finds that you exert control over the franchisee’s day-to-day operations then a court may find an actual agency relationship. If, however, your control is not over day-to-day operations and is limited, more generally, to the end result of the franchisee’s overall operations then it is very likely that an actual agency relationship will not exist. Consider these factors:

Apparent Agency (Use Notices)

The existence of an apparent agency relationship exists or may be claimed where an actual agency relationship does not exist but where a claimant claims that he or she reasonably relied on representations that an agency relationship existed. Most commonly, the claim is that due to the uniform trade dress and operations that a claimant believed that the franchisor and the franchisee was one and the same. The best method for preventing against or mitigating against apparent agency claims if for the franchisor to require that each franchised outlet include a sign notifying customers that the franchised location is an independently operated franchise.

One final recommendation is to mitigate the entire vicarious liability issue by ensuring that your franchisees maintain adequate and necessary insurance regarding their franchised operations.

More Information

Let's Talk

With services to make your growth strategy simple, cost effective, and with a team excited to help you, let’s talk about how we can help grow your brand. Click on the button below or call us at (800) 976-4904.

Top Resources for Franchising Your Business

  • videoImg

    Should You Franchise Your Business?

    Franchising may be the next big step for your business and brand. So, how do you know whether or not you should franchise your business and if franchising is right for you? The answer depends on your business, your business goals, your personal goals, your budget and where you want... read more

  • videoImg

    How to Franchise Your Business

    In this guide you’ll learn the basics of franchising, how to franchise your business, and how to win at franchising. We’ll also take a deeper dive into legal requirements for franchising and why they matter, steps to take before and after you launch your franchise, and even some tips on... read more

  • videoImg

    Franchising vs. Licensing Book

    When considering expanding a business both franchising and licensing are possible options. In this guide, you'll learn the differences of franchising and licensing and understand how each will affect you. read more

all guides

  • None right now

all videos

  • videoImg

    Franchising Your Business: Advantages & Disadvantages

    Are you a successful business owner? Are you looking for ways to expand your business? If so, this article will provide the answers you need to decide whether franchising your business is the right step for you. In short, franchising allows you, the franchisor, to create a relationship among several... read more

  • videoImg

    Documents To Start A Franchise

    Under federal law, prior offering or selling a franchise in any state, franchisors are required to disclose a franchise disclosure document (FDD) to their prospective franchisees. In addition to federal law certain states, including the franchise registration states, require that franchisors register their FDD with the state. The legal documentation... read more

  • videoImg

    Is Your Business Franchisable?

    If your business is successful and you are looking to expand, for good reason, you may be asking questions like “is my business franchisable?”, and “can my business be franchised?” To answer these questions and determine whether or not your business is ready for franchising, you should evaluate the following... read more

all articles

  • videoImg

    Leveraging PR & Digital Media to Jumpstart Franchise Sales

    Key strategies to accelerate franchise growth for startup and emerging franchisors In this webinar, franchise attorney Charles Internicola and Nick Powills, founder of No Limit Agency and 1851 Franchise, discuss key strategies to accelerate franchise growth through PR and digital media. Some topics include: Steps franchisors should take when it... read more

  • videoImg

    Winning Insurance Strategies for Emerging Franchisors with Michael Porpora

    One of the biggest issues for emerging franchisors is not having a plan for insurance and system-wide protection. What do emerging brands need to know when they're starting off, who should they rely on, and how can they plan ahead? Get an insurance game plan to protect your franchise system... read more

  • videoImg

    How to Build a Great Franchise Logo & Brand with Dan Antonelli

    Key strategies for developing the right logo & trade dress to drive franchise growth with branding and design expert Dan Antonelli. Dan is the author of ‘Building a Big Small Business Brand’ and is the creative director of the branding firm KickCharge Creative. Learn how to drive franchise growth and... read more

all webinars

Let’s Talk

With services to make your growth strategy simple, cost effective, and with a team excited to help you, let’s talk about how we can help grow your business.

Fill out the following form and we’ll contact you as soon as possible. To reach our team directly, give us a call at (800) 976-4904.

An attorney client relationship is not established by submitting this initial contact information.