China: The New Chinese Franchise Regulation: Worth the Wait?

Last Updated: 6 December 2004
Article by Lee J. Plave and Tao Xu
This article is part of a series: Click New China Franchise Regulation To Be Effective February 1 for the previous article.

Originally published December 3, 2004


We have been waiting for three years for the Chinese Government to issue new regulations on franchising. We knew they were inevitable, in light of the manifest inadequacy of the only current regulatory treatment, a set of rules promulgated in 1997. Perhaps more important, we knew that China’s commitments, made in order to move toward membership in the World Trade Organization, would require a new and more carefully developed regime. The several sets of proposals which were leaked over the years were all flawed, in one fashion or another.

Despite the anticipation, the release of draft rules by the Ministry of Commerce (the "MOFCOM") last week (with the first translations appearing in the West earlier this week) came as something of a surprise. They were drafted as an "emergency response" in order to meet the WTO’s requirement that restrictions on franchising by foreign investors be lifted by December 11. The drafters seem to have lacked confidence that the full-fledged Commercial Franchise Regulation would be adopted in time, and the resultant Provisional Measures on the Regulation of Foreign Invested Enterprises Engaging in Commercial Franchising Business (Draft) (the "Measures") have the earmarks of a somewhat hasty operation. Because the translation which was circulated in America this week was inadequate, here’s what we’ve learned from our own translation and, more importantly, from our discussions this week with those in China who are knowledgeable about the drafting process.


The Measures are heavily based on the 1997 Interim Measures on Administration of Commercial Franchise Operations (the "Interim Measures"). The Interim Measures were promulgated by the Ministry of Domestic Trade, which only had jurisdiction over domestic trade. Although there are some serious questions as to whether the Interim Measures apply to foreign franchisors, it has remained until now the only legal framework in China for franchising.

Now, with the imminent adoption of the Measures, it appears that there will be, at least for the immediate future, a parallel regulatory scheme, with the Measures applying to foreign franchisors and the Interim Measures still being applied to domestic franchisors. This dichotomy raises concerns, as there are important differences between the Interim and the Measures. As just one example, the Interim Measures require disclosure to be provided at least 10 days before the execution of a Franchise Agreement, while the Measures require disclosure at least 20 days in advance. While that difference is not particularly troubling, the fact that these and other differences exist at all may well be inconsistent with China’s commitment to the World Trade Organization to treat foreign and domestic businesses on an equal footing.

The regulatory structure in China is made somewhat more complicated by the fact that the Interim Measures and the Measures have, until now, been widely expected to be replaced by formal legislation – tentatively entitled the "Commercial Franchise Regulation" (the "Regulation" in this report) – which remains pending before the State Council of the People’s Republic of China. As of now, it is uncertain whether and when the Regulation will be adopted, whether it will apply to foreign franchisors, and whether the Regulation will be substantively consistent with the terms in the draft Measures, the Interim Measures, or both. If the Regulation is adopted and applicable to foreign franchisors, then presumably it will override the current Interim Measures and the Measures, since they are both only "departmental" rules.

For the present, we must deal with these Measures. Here’s what you need to know:


By its terms, the Measures apply to franchisors offering franchises in the so-called "service industries" (which the Measures suggest include businesses operating in the fields of retailing, food services, lodging, and rental services, as well as "cultural and sports"). It is unclear whether this term is meant to suggest a different treatment for foreign franchisors in other "non-service" industries, such as the distribution of goods.

Foreign-Invested Entities
The Measures only apply to foreign-invested entities ("FIE") franchising in China. No mention is made of foreign franchisors offering franchises directly to Chinese parties without setting up a Chinese FIE to be the franchisor. Franchisors should note, however, that it is quite possible that direct "off-shore" franchising by a foreign franchisor will be deemed illegal under the Measures for the Administration of Foreign Investment in the Commercial Sector, which was promulgated by MOFCOM earlier this year. That regulation explicitly states that to offer franchises in China, a foreign investor must set up an FIE in China.

The Measures do not address the critical issue of master licensing, or subfranchising, which leaves unanswered many questions. Among these, for example, are whether it is the master franchisee or the foreign franchisor that is obliged to make disclosure to the subfranchisees, and what obligation a franchisor may have to a subfranchisor which is itself an FIE.


Structurally, the disclosure obligations imposed by the Measures are not excessively onerous, with a few notable exceptions. The Measures will require a franchisor to provide a prospective franchisee with a written disclosure document and a copy of the franchise agreement at least 20 days before signing a franchise agreement. The disclosure document must include basic information such as the franchisor’s name and business address, the number and location of the existing outlets, the estimated investment for an outlet, information on the franchisor’s trademark, copyrights and patents, franchise fees and royalties due under the franchise agreement, the franchisor’s litigation history, information about training, sources of products and supplies, and some background information on the franchisor’s principal officers.

Breadth and Vagueness
While the structure of the proposed disclosure obligations is relatively clear, there is more uncertainty as to the nature and extent of some of the required disclosures. Most of these concerns have to do with the breadth of the requirements, which are vaguely worded (in both the translation and in the original Mandarin text) and which therefore leave uncertain a franchisor’s disclosure obligations. Additionally, there are some provisions that appear to impose unduly onerous burdens on franchisors that cannot be justified by any corresponding benefits to prospective franchisees.

Among these, most troubling of the disclosure obligations is the proposal that franchisors must disclose "operational results" of existing franchisees. In the U.S. and other jurisdictions, authorities have reconsidered this proposal and stepped back from mandated earnings claims requirements. While the intent underlying this requirement is not clear, the Measures appear to require franchisors to provide information that few, if any, franchisors actually possess - "operational results" – in any sufficiently meaningful fashion so that the franchisors, in turn, can make that information useful to a prospective franchisee. And, of course, if a franchisor has no or few franchisees in China, or has incomplete or unclear results, any such information on "operational results" could actually be grossly misleading to a prospective franchisee.

An example of how a vague clause leaves a franchisor’s disclosure obligations unclear is the litigation disclosure. The Measures would require a franchisor to disclose "any disputes and unresolved litigations [in] which the franchisor is involved." While seemingly straightforward, the requirement is ambiguous and potentially quite burdensome. The use of the conjunction "and" suggests that the language is intended to refer to "disputes" that have not yet resulted in actual litigation. That, of course, could include any number of disagreements that arise between contracting parties in the normal course of business and that are resolved, also in the normal course of business. Compounding the problem is the absence of any time limitations with respect to the required disclosure as well as to the requirement to disclose "background information" with respect to the franchisor’s principal officers.

Existing Franchisees
The Measures also require franchisors to make disclosures to existing franchisees, among other things about "any development and improvement of the business model, operational technique and management system." While it may well be appropriate as a matter of good business practice for a franchisor to keep its franchisee informed, it is unusual in the context of what is largely a pre-sale disclosure set of requirements.

Franchisor-Franchisee "Relationship" Issues

The Measures also impose requirements as to the franchisor-franchisee relationship. Some are helpful, e.g., that a franchisee not transfer its business without the franchisor’s approval. Some only modestly infringe on a franchisor’s freedom, e.g., the Measures require that the term of a franchise agreement generally cannot be less than 3 years. In general, the Measures accord the parties the freedom to contract and act in accordance with the terms of their agreement, e.g., the franchisor may terminate according to the franchise agreement, without any statutory standards. Moreover, parties are free to agree by contract as to their dispute resolution provisions. These provisions show welcome evidence of the Chinese government’s support for the sanctity of contract.

However, some serious concerns arise when the Measures seek to impose requirements that are unrelated to the terms of the franchise agreement itself. For example, a franchisor would be liable for the products supplied by its designated suppliers. The Measures require that the franchise agreement include provisions addressing the issue of consumer complaints. These reflect the Chinese government’s laudatory intention to protect consumers, but it is unrealistic for a franchisor to be responsible for the products provided by outside suppliers, especially where the franchisee may have selected the local supplier from among those approved, and where the franchisor is unlikely to be a party to the supply contract. (Franchisors that would otherwise prefer simply to sell products directly to their franchisees might be stymied by a provision generally preventing the franchisor from being the sole source of a product unless the item is proprietary in nature, although U.S. franchisors are familiar with such antitrust concerns.)

Compared to the Past: Better or Worse?

The Measures make some very sensible changes compared to the Interim Measures. For example, the Measures add provisions protecting a franchisor’s intellectual property rights. The Measures also mandate that a franchise agreement should include provisions on confidentiality, and provide that a prospective franchisee is prohibited from disclosing any confidential information gained from the written disclosure document, even if a franchise agreement is not executed or before a franchise agreement is executed. The Measures also abandon the distinction in the Interim Measure between "direct franchise" and "regional franchise" (a combination of area development and subfranchising). The earlier provisions, insisting that a franchisor is only allowed to franchise if it "has good operational results for more than one year" were also dropped, and while the Measures provide more details than the Interim Measures, they are not as detailed and definitive as one would like on how to discharge the disclosure obligations.

Compared to the previously circulated drafts of the Regulation, the Measures also make some welcome changes. For example, the Measures do not require a franchisor to have a certain number of company-owned outlets and be profitable before offering franchises, nor do they require that the franchise agreement be in Chinese. In short, we have made substantial progress.

Approval Process

The Measures mandate application to various government agencies – some local and in some cases directly to the MOFCOM – for approval before an FIE franchisor can offer franchises in China. The application must be made to whichever government agency has the authority to approve the establishment of the FIE in the first instance. To gain approval, an FIE must submit supporting documents, including an application, relevant board resolutions, business licenses, modified bylaws, materials on the FIE’s trademark, copyright and patent, a copy of the sample franchise agreement, and a copy of the written disclosure document.

The few countries that have established such application and approval systems have typically limited the process to a determination of whether the requisite documents were filed in the required fashion. The Measures, however, go further and seek to prescribe the qualifications of the parties, and thus allow the government agency to make a judgment as to whether they should enter into a contractual relationship with one another. For example, the franchisor must demonstrate that it is "equipped with the ability" to undertake certain actions in furtherance of the franchise relationship. Conversely, the franchisee must demonstrate that it possesses adequate capital and "other qualities corresponding to the needs of the franchise business." These qualification standards are unusual and, we believe, inappropriately trump judgments best made by the private parties.

The Measures also require the franchisor to file "information on the franchise agreements executed in the previous year" every January to the approving agency. The Measures leave unclear what kind of "information" will be required.

A Major Question

The Measures have no provisions addressing the consequences of violations, just as the Interim Measures did not. That probably reflects the Chinese government’s determination that special penalties or causes of actions are not necessary, and that existing remedies and penalties in the general legal framework are sufficient. However, it remains unclear what impact there will be due to placing ordinary obligations – such as requiring a franchisor to comply with the terms of the franchise agreement – in the Measures. For example, it is uncertain whether this implies that in addition to any private right of action, a franchisor accused of violating the franchise agreement might also be subject to state action as well. And it is not yet clear whether the Chinese courts – which are not bound by a "department" rule, such as the Measures, that is issued by a ministry – will follow or ignore these guidelines.


No one should expect significant changes to be made in the Draft. The secrecy of the process, the necessity of rapid action, and the extremely short period of time provided for comment, all make it clear that what you see is almost certainly what you are going to get.

So what do we see? A largely tolerable, if obviously flawed, set of requirements. Some unwise and ill-considered provisions, alongside an otherwise quite manageable litany of obligations. Much work remains to be done by franchisors and their counsel, but there is a sense of relief that we are at last dealing with an official, and at least nominally "final," document.

But if we step back from the text and the imperfect translation, we can glimpse a larger reality: this legislation may be that rare example of a law which franchisors do not oppose, but actively seek.
Franchisors have historically taken the position that the only legal conditions needed for franchising to thrive are a recognition of the sanctity of contract and protection of intellectual property. China may prove to be the exception to that rule.

The Chinese market is so huge that no franchisor can afford to ignore it. The uncertainties of the Chinese legal system, and the questions hovering over the legal status of the new marketing technique called franchising, have led multinational franchisors to reconsider the historic opposition to franchising.

For almost two decades we have heard the arguments made in socialist and post-socialist societies, "It doesn’t make any difference that we have not had any real abuses necessary to ‘justify’ a law. What matters is that franchising will never be a fully accepted way of doing business until we have a law addressing it." For almost two decades we have scoffed at that simplistic approach. We are not scoffing any longer.

This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

This article is part of a series: Click New China Franchise Regulation To Be Effective February 1 for the previous article.
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.