Vicarious Liability of Franchisors and Franchisees

Vicarious Liability of Franchisors and Franchisees

 

The franchisor-franchisee relationship is a unique and dynamic partnership that offers several advantages for both parties. For the franchisor, it offers an opportunity to expand the business and brand reach, transfers majority of the operational and legal risks, and much of the “daily headache” to the franchisee. For the franchisee, it offers the opportunity to venture into entrepreneurship without starting “from scratch”, letting a known or popular brand carry the venture into eventual profitability – ideally, sooner rather than later. Part of this two-way relationship is the “vicarious liability” concept, which every aspiring business person should be familiar with.

 

Understanding the Franchisor-Franchisee Relationship

Within this unique relationship, there are some very important questions: how much of the franchise is the franchisor – and conversely, the franchisee – responsible for? In the event of any untoward incident, to what degrees can the franchisor and franchisee be held accountable for?

These questions illustrate the concept of vicarious liability, the principle of law that holds one party (the franchisor) liable for the acts or omissions of another (the franchisee) that may result in any ill toward a third party, even if the first party may not have been directly involved in the precipitating event.

The core principle of a franchise is that the franchisor and the franchisee are independent contractors – that in no way, shape or form is the franchisee an agent of the franchisor. Claims of vicarious liability may have merit because the franchisor still exercises a certain degree of control over the franchisee to maintain certain systems and quality control standards that are associated with the franchise brand or “reputation”. Therefore, there must be demonstrable directives or documents that outline just how much control the franchisor has over the franchisee.

 

Documents That Help Define Vicarious Liability

One such document that can be sought is the franchise disclosure document (FDD), which includes a detailed list of about 23 major items that outline the franchise agreement, ranging from a description of the franchise entity or brand, franchise fees, franchisee’s obligations, use of brand trademarks, etc.

Aside from the FDD, factors that can give claims of vicarious liability merit are operations manuals, terms of the franchise contract, and other circumstances that can demonstrate that despite the declaration that the franchisor and the franchisee are independent contractors, there is an existing agency relationship between them.

For instance, if a car wash franchisor requires its franchisees to submit daily and weekly reports regarding sales or operations and makes recommendations to improve the processes of either to meet certain standards (“the brand trademark”), then such a detailed degree of control may be seen as an actual agency relationship.

If, on the other hand, the franchisor seeks only to influence the end results (e.g., a car wash franchisor advises one of its franchisees to “do your best to increase the volume of cars washed” without recommending specific steps or strategies), then such a relationship may be seen as void of actual agency.

 

“Apparent Agency” as a Cause for a Vicarious Liability Claim

Another principle that can give merit to a claim of vicarious liability is the concept of “apparent agency”. This is a scenario wherein, whether through negligence or misdirection, an innocent or unsuspecting third party is led to believe that the franchisee is the franchisor’s agent, and the third party relies on this misconception to reach a decision that results in any form of detriment to the latter. To counteract this potential misunderstanding, a franchisee must make it clear to all its clients – through notices, such as disclosures in signages, service menus, and transactions receipts – that it is an independent contractor and not a direct operating arm of the franchisor.

 

Conclusion

DetailXPerts has over a decade of experience in the car wash and detailing industry, and our franchise opportunities are carefully laid out so that potential franchisees are fully aware of the venture they are getting into. With our 6-step franchise application process, no potential franchisee is left in the dark about their perks and responsibilities, as well as the tremendous opportunities for financial independence and a sense of community.

 

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