China: Further Regulations Relaxing Commercial Franchising In China

Last Updated: 18 July 2007

Commercial Franchising is a successful business model around the world. It is also a fast growing business trend in China. It is estimated that there are more than 2,600 franchise operations in China (ranking number one in the world) involving more than 168,000 franchise outlets in more than 60 industries in 2006. The legal framework was however based on the Measures on Administration of Commercial Franchising issued in 2004 ("2004 Measures") which did not have adequate administrative penalty, civil compensation or criminal liability and are very restrictive to foreign franchisors.

On 6 February 2007, the State Council promulgated the Regulations on Administration of Commercial Franchise ("Regulations") which replaced the old 2004 Measures and set out a stronger legal framework for commercial franchising in China. The Regulations apply to franchisors that have been engaging in franchising activities within the boundaries of China before and after the Regulations and are effective from 1 May 2007. To implement the Regulations, the Ministry of Commerce, Ministry of Commerce issued the Measures on the Administration of Filing of Commercial Franchising and the Measures on the Administration of Information Disclosure of Commercial Franchising on 30 April 2007, also effective 1 May 2007.

Basics of a Commercial Franchise

Article 3 of the Regulations provides the four basic fundamental elements in a franchise. To begin with, a franchisor must have its own operational resources such as registered trademarks, logos, patents or specific techniques etc. Secondly, the relationship between the franchisor and the franchisee should be governed by a contract and the rights and obligations of the parties are specified in the franchise agreement. Thirdly, as operating in a highly organizational and systematic manner is the core value of a franchise, all franchisees will conduct their operations in a consistent manner ranging from their management, promotional activities and quality control to decoration and location of the logo. Lastly, the franchisee shall pay a fee to the franchisor as specified under the franchise agreement.

Qualifications of Franchisor - the "Two Outlets + One Year" Rule

The 2004 Measures require the franchisor to have at least 2 direct-operated outlets which have been in operation for more than one year before it can franchise in China. Article 7 of The Regulations now do not explicitly state that the outlets must be within China. This is a welcome change for international franchisors.

It is expressly stated in the Regulations that only corporate entities are entitled to be franchisors, whilst other entities or individuals are prohibited to conduct such business. The Regulations also require the franchisor to possess a mature operational mode and provide continuing operation guidelines, technical support and training to the franchisee.

Terms of Franchise Agreement

Article 11 of the Regulations set out the standard terms to be included in a franchise agreement :- category of payments, amount of fees to be paid and the format of payment, guidance and technical support provided, quality and standard required, promotional activities, consumer protection in relation to the franchise operation and the relevant obligations, termination and amendments of contract and dispute resolutions.

Under Article 12 of the Regulations, a franchisee is entitled to unilaterally terminate a franchise agreement after a certain period of time. The Regulations also set out that the term of the franchise shall not be less than 3 years.

A franchisee is also prohibited by the Regulations to transfer or assign its franchised rights without the consent of the franchisor. Franchisee is also forbidden to disclose the business secrets relating the franchise in its possession to any other third parties.

Disclosure of Information by Franchisor

The franchisor shall disclose the substantial information to the franchisee at least 30 days prior to the execution of the franchise agreement including information on the franchisor intellectual property rights, budget for the franchise outlet, quantity, distribution and evaluation of current franchisees in China, information on major legal action or arbitrations in the last 5 years and whether the franchisor was ever prosecuted for illegal business activities or fined more than Rmb300,000.

Filing of Franchise Agreement

Article 8 of the Regulations provides that within 15 days of the signing of the franchise agreement between the franchisor and its first franchisee, the franchisor shall file the franchise agreement with the Department of Commerce in the relevant province. For franchise operating in more than one province, the franchisor shall file the franchise agreement to the Ministry of Commerce of the State Council. The filing shall include documents and information including its business license, sample contract, operational guideline, marketing plan, a declaration of compliance of the qualifications under Article 7 of the Regulations. If the goods or services involved in the franchise require special approval by relevant authorities, the relevant approval documents shall also be filed by the franchisor. The Department/Ministry shall complete the filing within 10 days after the receipt of all relevant documents and publish a list of filed franchisors in the website of MOC.

The franchisor is required to file with the competent authorities within the first 3 months of each year the status of all of franchise agreements in the previous year and within 30 days, any change to filed information.

To better protect the potential franchisees, the authorities will publish a list of franchisors in the government’s websites after the relevant filing is completed for verification by the public.

Existing Franchisees

As the Regulations are applicable to those franchisors who were already operating commercial franchising in China before the effective date of the Regulations, such existing franchisors are required to file their application in accordance with the Regulations within one year of the effective date of the Regulations (i.e. on or before 1 May 2008).

Lawyers in our China Business Practice Group regularly advise clients on foreign direct investments, mergers and acquisitions and China investment issues.  For more information on the Regulations, please contact us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions