Franchising an Existing Business: Sharing Responsibility for Customer Complaints and Incidents
Who receives, assesses and resolves complaints and incidents at franchised outlets? Learn how to align contracts, response procedures and cost allocation while recognising that franchisors and franchisees are independent businesses.
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In company-owned outlets, the founder may be able to resolve difficult complaints by stepping in personally. As the franchise network grows, that approach becomes unsustainable. To protect trust across the network, you need clear decision-making authority for both franchisor and franchisees, without passing customers from one to the other. Before recruiting franchisees, translate the entire process—from receiving a complaint or incident report to resolving it—into contractual terms and practical operating procedures.
1. Distinguish between ‘the same brand’ and ‘the same business’
To customers, outlets with the same signage may appear to be the same business. Legally, however, the franchisor and its franchisees are independent businesses. Without explaining this distinction, promising that the franchisor will cover all compensation—or refusing to help because the matter concerns a franchisee—can cause confusion.
Start by identifying which business the customer is dealing with. Review in-store notices, receipts, booking screens and enquiry channels to establish who sells the goods and provides the services. If a franchisor-operated booking website accepts bookings for franchisee services, it should clearly distinguish the business taking the booking from the business providing the service.
The agreement should state that the parties are independent businesses, but this alone does not necessarily shield the franchisor from liability to third parties. Liability may depend on the circumstances, including the franchisor’s own instructions and involvement, and how the operating business is identified to customers. Consult a lawyer about the potential application of Japanese law, including contractual liability, tort and joint tort liability under the Civil Code, and liability for allowing another business to use one’s name under the Commercial Code or Companies Act.
Liability to customers and the final allocation of costs between franchisor and franchisee are separate issues. Start from the principle that an internal agreement cannot, by itself, restrict customers’ rights.
2. Classify complaints by severity and create a single reporting channel
Design response criteria around not only the number of complaints, but also the seriousness of the harm and the potential for it to spread. Use the following categories as a starting point and test them against cases from your existing outlets.
| Category | Typical examples | Initial response |
|---|---|---|
| Matters the outlet can resolve | Dissatisfaction with customer service, incorrect orders | The outlet manager checks the facts and acts within their delegated authority |
| Matters requiring consultation with the franchisor | Repeated complaints of the same kind, quality defects with no clear cause | Share records and check for a common cause |
| Matters requiring immediate coordination | Injuries, suspected harm to health, potential effects across several outlets | Prioritise safety and contact the franchisor’s emergency team |
Where the law requires notification or reporting to a public authority, contacting the franchisor is not a substitute. Procedures must also ensure that emergency action, such as seeking urgent medical assistance, does not wait for the franchisor’s approval.
Reporting forms should focus on the date and time, outlet, product or service, details of the complaint, verified facts, action already taken and outstanding issues. Separating ‘the customer’s account’ from ‘facts verified by the outlet’ helps prevent assumptions from circulating as established facts. Also put procedures in place to prevent relevant products or transaction records from being discarded or overwritten before the cause has been investigated.
Do more than establish a contact point: specify out-of-hours contacts, cover for absent staff and how receipt of a report will be acknowledged. Managing serious cases solely through an individual’s mobile phone risks bringing the response to a halt when that person is on leave or leaves the business.
3. Set decision-making authority and cost allocation separately
Simply requiring outlets to ‘consult the franchisor’ can cause delays even for a straightforward refund. Define which replacements, repeat services and refunds outlets can authorise, and which compensation decisions or public statements require consultation with the franchisor. Consider not only the amount involved, but also whether anyone has suffered physical harm, whether the response involves admitting liability and whether other outlets may be affected.
When the franchisor helps handle a customer complaint, clarify whose behalf it is acting on and what it can promise. Avoid arrangements in which the franchisor’s staff commit a franchisee to paying compensation without its consent. At the same time, assign someone to keep the customer informed while the parties coordinate their response.
Consider cost allocation by distinguishing between causes such as:
- Errors in the franchisee’s work or storage practices
- Problems with specifications or standard procedures prescribed by the franchisor
- Defective products supplied by a supplier
- Several contributing causes that require investigation
These categories are a framework for drafting the agreement, not automatic legal conclusions. For each cost category—such as refunds, investigations, recalls and professional advice—set out who pays initially and how the final allocation will be settled. Rather than making the franchisee pay everything before the cause is known, establish a process for reviewing evidence and discussing responsibility.
If insurance may be used, check the policyholder, insured parties, scope of cover, exclusions, excesses and incident notification requirements. Response procedures should also prohibit assurances to customers that payment is guaranteed simply because insurance is in place.
4. Align the agreement, pre-contract explanations and response procedures
Japan has no single comprehensive statute governing all franchises. That does not mean there are no specific regulations. Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a ‘specified chain business’ under the Act to provide prospective franchisees with prescribed information in writing and explain it before the agreement is signed. Do not assess applicability solely by labels such as ‘retail’ or ‘food service’; check the statutory requirements, including those relating to the supply of goods.
It would be inaccurate to treat complaint-handling clauses themselves as a standalone statutory disclosure requirement common to all franchisors. Nevertheless, reporting duties, compensation costs and obligations to cooperate with the franchisor’s response are important terms that affect a prospective franchisee’s decision. Check how they relate to applicable disclosure requirements and ensure that explanations given during recruitment match the agreement.
Japan’s Antimonopoly Act also applies to transactions between independent businesses. The Japan Fair Trade Commission’s franchise-system guidelines identify conduct that may raise concerns during recruitment and in dealings after an agreement has been signed. Using the franchisor’s position to impose unfair burdens may constitute an abuse of a superior bargaining position or raise other competition-law issues. The arrangements should therefore avoid imposing unlimited costs solely on the grounds of protecting the brand.
Sharing customer information also engages Japan’s Act on the Protection of Personal Information. As the franchisor and franchisees are separate businesses, information cannot necessarily be shared freely simply because they operate under the same brand. Check the purposes of use, the legal basis and arrangements for sharing, access permissions and retention periods. Avoid collecting personal information that is unnecessary for handling the matter.
5. Test the arrangements through simulations before recruiting franchisees
Test the completed documents through simulated responses at existing outlets. Scenarios might include a report of harm to health arriving outside the franchisor’s office hours, complaints about the same product coming from different outlets, or an outlet and the franchisor disagreeing over whether to issue a refund.
Do not assess only how quickly forms are completed. Check whether outlet staff can recognise danger, whether contact routes actually work, whether explanations to customers are consistent and whether someone taking over a case can understand it from the records alone. Where the process stalls, do not simply blame staff inexperience: address unclear authority or procedures.
Once a case is resolved, record its cause, the outcome for the customer, the settlement of costs and measures to prevent recurrence. When sharing lessons with other outlets, include no more personal information than necessary and focus on what needs to change. A culture that merely blames people for reporting failures makes early detection harder across the network.
Practical takeaway: Before recruiting franchisees, prepare a severity-based contact matrix, a decision-making authority matrix and a cause-based cost allocation matrix, then run simulated responses. The key to a workable system is to separate immediate action to protect customer safety from the process of determining liability and allocating costs.
