Franchisor Liability for Franchisee Conduct

Abstract

Franchisors and franchisees are legally and financially independent parties responsible for their own torts, contracts and other legal obligations. From the perspective of the general public however the independent contractor nature of the relationship is obscured by system standardisation and uniformity which conveys the appearance of a single entity. Although in law there is a fundamental difference between a system outlet operated by a franchisee and a system outlet operated by the franchisor through a manager, the outlets are otherwise identical and the legal subtleties are imperceptible to customers and the public generally. The legal ramifications are nevertheless significant. In general terms a franchisor is liable under the principle of vicarious liability for the torts committed by employee managers but not for the torts committed by franchisees who are independent contractors. Franchisors may also be liable under agency principles - for contracts made by those agents who have the actual or apparent authority to make contracts on behalf of the franchisor principal - which may be the case for employed outlet managers but rarely for franchisees. This article reviews the law relating to franchisor liability for franchisee conduct in Australia and concludes that legal principle and commercial practice have been largely effective in insulating franchisors from liability under vicarious liability and agency principles. Such actions are nevertheless not the exclusive sources of potential franchisor liability and franchisors and their legal advisors need to be aware of the potential consequences beyond unwelcome system publicity which might arise from franchisee conduct.