Franchisors Beware - You May Be Liable for the Acts of your Franchisees

What Can You Do to Protect Yourself?

Mistake Often Made By Franchisors

As a franchisee operates as an independent business owner, many franchisors often think that they will not be held responsible for the actions of its franchisees. This is a common mistake and in some cases overseas courts have found that as the franchisor exercises “control” over a franchisee they can be held responsible for its acts.

Where Franchisors Have Been Held Responsible

Examples of when a franchisor has been held responsible for acts of its franchisee include the following:

• A franchisee caused an accident while delivering a pizza and a person rushed to assist. While giving first aid to the victim the person was hit by another driver. The franchisor had previously informed the franchisee (through the operating manual) that delivery of a pizza to a customer was to take under 30 minutes. The court found that the franchisor controlled how the franchisee delivered the pizza and, as such, was liable for the franchisee’s actions in causing the accident which eventually resulted in the plaintiff being hit.
• A person entered into a franchised restaurant and killed an employee while attempting to move all the staff into the refrigerator. A representative of the victim brought an action against the franchisor for emotional distress. The representative’s solicitor argued that (prior to the event) the franchisor had recognised the potential threat and had prepared a bible for store security operations. The representative also argued that the franchisor had undertaken to follow up the recommended security procedures to ensure that they were being complied with. The court held that the franchisor was vicariously liable for the victim’s injuries by failing to complete the security check to ensure that proper procedures had been implemented.

It is only a matter of time before the same type of litigation pops up in New Zealand.

What Can a Franchisor Do To Protect Itself?

Purchase appropriate and effective insurance;

• Make sure that every franchisee has the required cover and that the franchisee provides you with evidence of this (which notes you as an additional insured);
• Put a clause in the franchise agreement whereby you can arrange insurance for the franchisee and recover the costs of doing so (if the franchisee fails to arrange insurance themselves);
• Put a wide indemnity clause in the franchise agreement whereby the franchisee and guarantors promise to pay you for any loss you suffer as a result of the franchisee’s (or its employees) acts or omissions;
• Establish and enforce clear quality standards. Detailed processes should only be required where completely necessary (i.e. in terms of quality of the product). At all other times, you should make it clear to your franchisees that a procedure is merely a suggestion and NOT a mandatory requirement; and
• Ensure that in every document there is a statement that the franchisee is an independent operator and not your agent. This should also be recorded on a sign at the franchisees premises.