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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:

  • Limit your control to the overall generalized outcome of the franchisees operations but not to the specific day-to-day operations;
  • Limit your control to the overall results of your franchisee’s operations and not to the control over each particular step that a franchisee takes in maintaining their day-to-day operations;
  • Limit control to overall performance standards but not the means by which those performance standards are achieved;
  • Disclaim the principal- agent relationship in your operations manual and include an overall disclaimer clearly stating that you control overall performance standards but that the overall method by which franchisees maintain their day-to-day operations remains within their control, including a franchisees decision to hire or fire employees; and
  • Ensure that your franchise agreement disclaims a principal-agent relationship.

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.

  • As part of your system incorporate notices and notifications where customers are notified that the franchised location is an independently owned and operated franchise location. These notifications should be incorporated into the operations of your franchisees, including their corporate names, advertising and marketing materials.

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.

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