Who is liable in a franchise

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Business Disputes. Corps, LLCs, Partnerships, etc. Buying and Selling a Business. In general, this is true and a good business strategy for minimising personal risk, however it is not an absolute protection. This area of personal liability is often overlooked.

Directors have clear statutory duties which they must fulfil and these are set out in the Companies Act CA These include:. In this current difficult economic climate one of the clear risk areas to look out for is wrongful trading. Here a director may be personally liable to the company or, in an insolvency situation, the liquidator and can be ordered to contribute personally to the assets of the company. Wrongful trading is separate from fraudulent trading, which is where, in an insolvency situation, a director can be personally liable where he or she was a knowing party to the carrying on of a business within intent to defraud creditors, or for any fraudulent purpose.

The UK Competition and Markets Authority has powers to disqualify directors where there have been breaches of competition law and has used these powers in recent cases.

For example, in two directors of estate agent companies involved in a price fixing cartel were disqualified from acting as a director of any company for periods between three and three and a half years. This can have disastrous consequences, especially where the individual is a director of a number of companies within a franchised network.

In addition a director may be personally liable for criminal penalties under the Insolvency Act which allows directors to be prosecuted in certain circumstances, for example if directors engage in fraud in anticipation of winding-up, or make false representations to creditors. The recommended courses of action revolve around risks associated with the existence of an actual agency relationship, the existence of an apparent agency relationship and notices included in your operations manuals and franchised locations.

Although your franchise agreement states that the relationship with your franchisees is that of independent contractors an actual agency relationship may be claimed to nevertheless arise.

Whether or not an actual agency relationship arises has a lot to do with the degree of control that you exert and maintain over the day-to-day operations of your franchisees. Consider these factors:. The existence of an apparent agency relationship exists or may be claimed where an actual agency relationship does not exist but where a claimant claims that he or she reasonably relied on representations that an agency relationship existed.

Most commonly, the claim is that due to the uniform trade dress and operations that a claimant believed that the franchisor and the franchisee was one and the same. The best method for preventing against or mitigating against apparent agency claims if for the franchisor to require that each franchised outlet include a sign notifying customers that the franchised location is an independently operated franchise.