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.
There is no legislation specifically applicable to franchising in the PRC. However, the following legislation will be relevant to a franchise arrangement:-
(a) The Interim Provisions on the Guidance of the Direction of Foreign Investment ("Foreign Investment Guidelines"), which were issued recently in June 1995 and established new approval procedures for foreign investment activities. Of note is that retail and wholesale activities fall into a category of restricted activities requiring approval from the central and local authorities; otherwise, the venture concerned is liable to be revoked. Arguably, a franchise should not be regarded as giving rise to participation in "investment" or retail activities by the foreign franchisor; the franchise arrangement will be a licence/sale rather than an investment arrangement between the parties and it is generally the PRC franchisee who is retailing. However, the franchisor should note the possible impact of the Foreign Investment Guidelines on franchise arrangements which involve the establishment of a joint venture franchisee. It is also unclear whether the supply of tied products by the franchisor to the franchisee will be regarded as wholesale activities. As the Foreign Investment Guidelines are largely untested, it remains to be seen how these will be interpreted in respect of franchises;
(b) The PRC Regulations on the Administration of Technology Import Contracts ("Technology Import Regulations"), which will be applicable where the franchise agreement provides for the provision of industrial property, knowhow and technical services to the franchisee. The Technology Import Regulations set out a list of provisions required and prohibited in a technology import contract. The main points to note from the Technology Import Regulations are that:-
i) the franchisor must provide a guarantee that it is the "lawful owner" of the technology (nb. the difficulties this may present to sub-franchises), that the technology is "complete, correct and effective" and that the technology is capable of accomplishing the technical targets specified in the contract;
ii) the technology import contract must permit the franchisee to retain the licenced technology after the contract terminates and the contract is subject to a maximum term of ten years. This requirement has caused significant problems to potential franchisors;
iii) there are certain terms which are prohibited. The general thrust of the prohibitions is that the restricted clauses in the franchising agreement must not be beyond the scope of what is reasonable to protect the technology. The sort of contractual restrictions that are prohibited include, for instance, the "tieing" provisions requiring the franchisee to buy unrelated equipment or materials and provisions which unreasonably restrict the franchisee's access to domestic or overseas markets;
(c) The Patent Law and Trade Mark Law, which provides for a registration system for marks, patents, utility models and designs;
(d) The Copyright Law, which grants protection to technical drawings, databases and computer software;
(e) The Anti-Unfair Competition Law, which provides a limited degree of protection for unregistered marks, names, style and trade secrets. The law is also relevant in that the franchisor should be wary of attaching unreasonable conditions to the sale of goods and services to the franchisee; for instance, a franchisee buying a key product cannot be compelled to buy another product "against its will";
(f) The Foreign Trade Law, which governs the capacity of a PRC franchisee to contract with foreign investors and the PRC franchisee's import rights;
(g) The Foreign Economic Contract Law, which governs the validity of contracts between a PRC franchisee and a foreign franchisor and requires certain provisions to be included in the contract. The Foreign Economic Contract Law also stipulates that the contract will not be valid until the requisite approvals are obtained;
(h) The Joint Venture Law, which will be applicable where the establishment of a joint venture franchisee is being considered;
(i) The Product Quality Law, which renders a producer or seller liable for sub-standard and fake goods. The franchisor should note that his product specification should conform to PRC industry standards for that product and the product must match with standards listed on the packaging. The law also has certain provisions with regard to the labelling of the product, which should state the product's name, manufacturer and instructions in Chinese. The franchisor should place the onus of complying with the law upon the franchisee if the franchisee will be the producer of the product, and the PRC franchisee may give a warranty and indemnity to the franchisor with regard to claims arising in this respect;
(j) The Consumer Law, which regulates the provision of accurate information with regard to the product. Again, the onus should be placed upon the franchisee to comply with the law.
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.