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. Additionally, it 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”. Moreover, it lets 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 Intricate Franchisor-Franchisee Relationship
Within this unique relationship, there are some very important questions. How much of the franchise is the franchisor responsible for? Conversely, how much is the franchisee responsible for? In the event of any untoward incident, to what degrees are the franchisor and franchisee accountable for?
These questions illustrate the concept of vicarious liability. It is 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. Vicarious liability remains valid 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. In other words, in no way, shape or form is the franchisee an agent of the franchisor. However, claims of vicarious liability may still have merit. This is because the franchisor still exercises a certain degree of control over the franchisee. For example, to maintain certain systems and quality control standards that associate 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 is the franchise disclosure document (FDD). It includes a detailed list of about 23 major items that outline the franchise agreement. These items range from a description of the franchise entity or brand to 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. Anything that can demonstrate that there is an existing agency relationship between the two parties can be used. A declaration that the franchisor and the franchisee are independent contractors is not enough.
Let us suppose that a car wash franchisor requires its franchisees to submit daily and weekly sales or operations reports. Then, it makes recommendations to improve the processes of either to meet certain standards, “the brand trademark”. Such a detailed degree of control may be seen as an actual agency relationship.
In another case, the franchisor seeks only to influence the end results. For example, the car wash franchisor advises one of its franchisees to “do your best to increase the volume of cars washed”. It does not recommend specific steps or strategies. Then, such a relationship may demonstrate voidance 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. Consequently, 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 that it is an independent contractor and not a direct operating arm of the franchisor. The franchisee can do it through notices, such as disclosures in signages, service menus, and transactions receipts.
DetailXPerts has over a decade of experience in the car wash and detailing industry. Our franchise opportunities carefully lay out the venture that potential franchisees are getting into. With our 6-step franchise application process, everyone gets to know their perks and responsibilities, as well as the tremendous opportunities for financial independence and a sense of community.
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