Shelley Nadler writes:
A concern that businesses may have when deciding to franchise their business, is the potential risk of liability over the actions of the franchisee. This is a type of secondary liability where, although the franchisor has not done anything wrong themselves, they will be liable for the wrongdoings of the franchisee as the primary wrongdoer, otherwise known as vicarious liability.
The elements that must be satisfied in order to fulfil a vicarious liability claim are as follows:
1) The relationship between the franchisor and franchisee is one that gives rise to vicarious liability; and
2) The wrongful conduct is so closely connected with the acts that the franchisee was authorised to do, it may fairly and properly be regarded as done by the franchisor themselves.
The main issue with a franchise relationship is whether this is one that gives rise to this type of liability; however, generally, the courts have been reluctant to imply franchisors have this sort of liability to their franchisees. The courts have previously compared a franchise relationship to that of lessor and lessee or a vendor and purchaser, both of which are relationships far removed from those which generate vicarious liability.
There could be a risk that franchisors are liable for the acts of their franchisees if the franchisees are seen as employees. Franchising is based on a relationship of two separate business entities that are legally and commercially independent and this is reflected in the terms of the franchise agreement. In a genuine franchisor-franchisee relationship, franchisees should not be treated by the courts as employees. Franchisors should ensure however that they do not exercise such an excessive degree of control over their franchisees that they are seen as “quasi employees”.
Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.