## Facts

- Gertrude Nichols entered into five contracts for dance lessons at the “Arthur Murray School of Dancing” in San Diego and prepaid the lesson fees.
- The San Diego studio was owned and operated by Burkin, Inc., which held a franchise from Arthur Murray, Inc.
- The franchise licensed Burkin to use the Arthur Murray name and method and reserved to Arthur Murray, Inc. extensive rights of control over the studio’s operations, including employees, tuition rates, financial arrangements, location, advertising, policies, and records.
- The franchise agreement required Burkin to post a certificate stating Burkin was solely responsible for obligations of the studio, and it stated Burkin could not hold itself out as Arthur Murray, Inc.’s agent; contracts were to be in Burkin’s name.
- Nichols did not receive the lessons she had paid for and sued Arthur Murray, Inc. to recover the prepaid amounts on an undisclosed-principal theory.
- The trial court found Burkin acted as Arthur Murray, Inc.’s agent and entered judgment for Nichols.

## Issues

1. Whether the franchise relationship, considering the agreement and surrounding circumstances, created an agency such that Arthur Murray, Inc. was an undisclosed principal liable on Burkin’s lesson contracts.
2. Whether contractual language and posted notices disclaiming agency and assigning sole responsibility to the franchisee were dispositive against a third party seeking to hold the franchisor liable.

## Decision

- The Court of Appeal affirmed the judgment for Nichols.
- The court held substantial evidence supported the finding that Burkin functioned as Arthur Murray, Inc.’s agent in selling lesson contracts.
- Arthur Murray, Inc. was therefore an undisclosed principal liable for Burkin’s contractual obligations, including refund of prepaid sums for lessons not provided.
- The court rejected the argument that Burkin was merely a licensee insulated from creating principal liability for the franchisor.

## Legal Principles

- An undisclosed principal is liable for contractual obligations incurred by its agent acting within the scope of the agency, even if the third party did not know of the principal when contracting.
- Whether a relationship is principal–agent, as it affects a stranger to the agreement, depends on the parties’ intention as shown by the written agreement and accompanying circumstances.
- The right of control over the manner and means of business operations is a key indicator of agency; franchisor controls that extend beyond protecting a trade name can support an agency finding.
- Contractual disclaimers of agency and statements assigning responsibility to a franchisee are not conclusive as to third-party rights where the practical arrangement reflects a principal–agent relationship.

## Conclusion

Because Arthur Murray, Inc. reserved broad control over the franchisee’s operations beyond brand protection, the court treated the franchisee as the franchisor’s agent for purposes of third-party contracts and held the franchisor liable as an undisclosed principal for Nichols’s prepaid, unperformed lesson contracts.


Nichols v. Arthur Murray, Inc., 248 Cal. App. 2d 610, 56 Cal. Rptr. 728 (Ct. App. 1967)