This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.
The following documentation generally will be required in the establishment of a franchise operation in the PRC.
1. Letter of intent. Although not required by law, a simple pre-contract letter of intent will be useful since this may contain a binding confidentiality clause in respect of knowhow passed to the franchisee candidate in the course of the negotiation of the definitive agreements. See comments in paragraph 2(j) below.
2. Franchise agreement. This should include the following main terms (if applicable):-
(a) scope of the franchise, i.e. the territory and the products and marks covered by the franchise;
(b) whether on an exclusive or non-exclusive basis;
(c) duration of the franchise (nb. note the ten year maximum limit stipulated under the Technology Import Regulations);
(d) tieing clauses requiring the franchisee to buy materials or products from the franchisor;
(e) pricing, fees and royalities and their basis of calculation;
(f) reporting requirements of the franchisee;
(g) financial or management systems to be established by the franchisee;
(h) training to be provided by the franchisor;
(i) permission to the franchisor to inspect the franchisees' premises or products;
(j) confidentiality clause with regard to knowhow being passed to the franchisee. This is important because although the Anti-Unfair Competition Law provides some protection for "trade secrets", the owner must have taken steps to safeguard these before he can avail himself of such protection, which usually would mean including in the relevant agreement a specific confidentiality clause;
(k) an indemnification by the franchisee in favour of the franchisor in respect of losses or claims suffered by the franchisor as a result of the franchisee's operation of the franchise and related third party claims;
(l) governing law. Although there is no requirement that a franchise agreement must be governed by PRC law, nevertheless, if the agreement comes before the review of the approval authorities, they may require that the governing law be PRC law.
3. Licensing contract. Provisions with regard to the licensing of marks, knowhow and the provision of technical services may be included in the main franchise agreement or in a separate intellectual property licence contract. From a commercial perspective, it may be advisable to separate the arrangements into two documents so that the fee arrangements may be more easily differentiated (e.g.a franchise service/product supply fee under the franchise agreement and a royalty fee in respect of the licence agreement). From a legal perspective, technology import contracts will be subject to the regulation of the PRC Regulations on the Administration of Technology Contracts Regulations and the approval of the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC"). It may be advisable therefore to separate the technology import aspects into a separate document which will be subject to review and approval by MOFTEC. The other terms governing the franchise arrangement in the franchise agreement may thus be removed from the review and approval process. However, where the technology import consists of no more than a trade mark licence, given MOFTEC's dispensation that this will not require approval, it may be unnecessary to deal with this in a separate document.
However the technology and intellectual property provisions are documented, this should address certain basic issues with regard to the definition of the intellectual property being licensed, restrictions on the use of the intellectual property (for instance, this should be conditional upon certain quality control standards stipulated by the franchisor being satisfied and the franchisor should be permitted to supervise or review the franchisee's adherence to these standards), confidentiality clauses and provisions dealing with infringement claims.
4. Joint venture contract. This will be required where a joint venture is part of the franchise arrangement.
Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.