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Franchising in China and its Legal Implications. BY LUYU 2010.10 Email:chloe_lulu@hotmail,com. Contents. 1. 1. 1. 1. What is franchising?. 2. 2. 2. 2. 2. Franchising in China. Franchising in China. 3. 3. Relevant regulations. 3. 3. 4. Legal disputes and resolutions. 4.

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Franchising in China and its Legal Implications

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Franchising in china and its legal implications

Franchising in China and its Legal Implications










What is franchising?






Franchising in China

Franchising in China



Relevant regulations




Legal disputes and resolutions




Franchising in china and its legal implications

What is franchising?




  • Franchising is the practice of using another firm's successful business model.

  • For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain.

  • For the franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

Question 1


  • It will also be seen from the names of the franchise that which country is a leader in franchising innovations, a position it has held since when when it took the major form of fast-food restaurants, food inns and, slightly later, the motels during the first depression.

(the US )

(the 1930s)

Question 2


  • Franchising has grown rapidly in Europe in recent years. The Loi Doubin of 1989 of which country?was the first European Franchise Disclosure law in Europe


Franchising in china and its legal implications

Franchising in China


If i do not join a brand i could not get profit

If I do not join a brand, I could not get profit



  • China has the most franchises in the world but the scale of their operations is relatively small.

  • Each system in China has an average of 43 outlets, compared to more than 540 in the United States.

  • Together, there are 2600 brands in some 200,000 retail markets. KFC was the most significant foreign entry in 1987 and is widespread. But total franchising is only 3% of retail trade which is hungry for foreign franchise growth.

Franchising in china and its legal implications


Hotels & Motels

Business Services


Children's Products & Services

Personal-Care Businesses



Financial Services



Service Businesses

Health Care

Tech Businesses



Franchise in china up to 2010 8 30

Franchise in China---Up to 2010.8.30

Development of the franchise market in china

Development of the franchise market in China

  • In the early 90’s

    Franchising was only introduced to China

  • In 1997

    China’s Ministry of Internal Trade promulgated the Administration of Commercial Franchise Procedures representing the first set of regulations directed at specifically addressing issues pertaining to the franchise sector.

  • In 2004

    as part of China’s accession into the World Trade Organization (WTO) and commitment to the principles therein, the Ministry of Commerce issued the Measures for the Administration of Franchise Operations (“Franchise Measures”) effective February 1st, 2005.

  • In 2007

    Three new regulations promulgated by MOFCOM

Franchising in china and its legal implications

Relevant regulations


Franchising in china and its legal implications

Current Legal Framework and Franchising Structures in China

Information disclosure measures(2007)

Franchising Structures

Archival filing measures(2007)



1 definition upon chinese law

1.Definition---upon Chinese law

Franchisor must have registered trademark, patent, logo, know-how,

resource of enterprises.

Franchisee shall pay the expenses to the franchisor.


Franchisee shall be under the unified management business mode

There is a contractual relationship between the franchisor and franchisee.

2 qualifications and the two plus one rule

2. Qualifications and the Two-Plus-One Rule

Question 3


  • Among the franchisor obligations are:

  • 1、The franchisor (or its subsidiary) must have operated at least operated how many?(two )company-owned franchises in China (revised to anywhere) for more than 12 months

    so-called "the two-store, one-year” rule

3 filing requirements

3. Filing Requirements

  • Within 15 days from executing the first franchise agreement, the franchisor must file with MOFCOM

  • i) if the franchising activities take place within a single province, autonomous region or municipality under the central government (Beijing, Shanghai, and other major cities), then with the MOFCOM of that province, autonomous region or municipality under the central government;

  • or ii) if franchising activities take place in more than one province, autonomous region or municipality, then at the national level MOFCOM.

Franchising in china and its legal implications

  • Thereafter, the relevant MOFCOM will have 10 days to properly file all completed filings, and publish them on its website.

Chinese commerce ministry's website ↓

4 disclosure of information

4. Disclosure of Information

  • The following materials must be provided to the prospective franchisee a minimum of 30 days prior to the signing of the Franchise Agreement:

  • 1. Basic information on the franchisor and franchise activities 

  • 2. Basic information on the business resources of the franchisor

  • 3. Basic information on franchise expenses:

  • 4. Information on the prices and conditions of the products, services and equipment provided to the franchisee.

  • 5. Information on the continuous provision of services to the franchisee.

  • 6. Methods and content of guidance and supervision over the franchise activities of the franchisee:

  • 7. Information on the investment budget of the franchise:The expenditure for the investment budget may include the following: initial fee; training fee; real estate and decoration fee, procurement fee for equipment, office supplies….

  • 8. Information on franchisees within China:

  • 9. Abstracts of the franchisor's financial and accounting reports and of the audit reports in the last two years audited by the accounting or auditing firms.

  • 10. Information on any major litigation or arbitration involving any franchises of the franchisor in the last five years.

  • 11. Information on any record of major illegal operations of the franchisor and its legal representative.

  • 12. Franchise Contract

  • ……

Question 4


2、the franchisor must disclosure any information requested byWHO?

( the franchisee )

Question 5


  • The Disclosure has to take place how many days in advance.


Franchise agreement

Franchise Agreement

The Franchise Regulations require certain clauses be provided in the relevant franchise agreement:

  • 1. basic information on the franchisor and franchisee;

  • 2. content and term of the franchise;

  • 3. types, amounts and payments of franchise fees;

  • 4. specific content and manner of provision of operational guidance, business training, technical and other services to franchisee;

  • 5. quality standards, quality control measures for the provision of products and services by franchise operations;

  • 6. promotions and advertisements of products and services of franchise operations;

  • 7. arrangements for consumer rights, and assignment of liability in franchise operations;

  • 8. amendment, rescission and termination of the franchise agreement;

  • 9. liability for breach;

  • 10. dispute resolution;

  • 11. other matters as agreed upon between the franchisor and franchisee.

Question 6


  • The Franchise Regulations require the franchise agreement must have how many yearsterm

(a minimum three-year)

Other elements of this agrement are

Other elements of this agrement are:

  • confidentiality obligations:the franchisee’s confidentiality obligations continue indefinitely after termination or expiration of the franchise agreement

  • deposit term:if the franchisee has paid a deposit to the franchisor, it must be refunded on termination of the franchise agreement

  • franchisor’s marks:upon termination, the franchisee is prohibited from continuing to use the franchisor’s marks

Franchising in china and its legal implications

Legal disputes and resolutions


Dispute 1

You should pay the management fee!

What? I don’t understand why you ask me to pay this and this and this…..who told me should pay it?

Dispute 1

Dispute 2

We sent the manager to your store! And you should pay it!

Pay it? What did your manager do for us?

Dispute 2

Dispute 3

Now you should pay for franchising

In fact, I get nothing from franchising, and I am bankrupt because of you! Now you should give me compensation!

Dispute 3

Franchising in china and its legal implications


  • A good contract is best protection

  • Know your rights and protect your rights not only from contract but also from law

  • Record and Prepare the evidences, proofs ,and you can send official letter to the opposite and preserve the proofs

  • Take legal actions as soon as possibly

How to solve the disputes

How to solve the disputes?








  • China represents a tremendous opportunity for international franchise operations.

  • Although there are numerous challenges and complexities in establishment and operations, the recent legal changes have largely liberalized the franchising market for foreign investors. In combination with the current rates of economic growth, the timing is ideal for foreign franchisors to explore opportunities in the Chinese market.

Contact chloe lulu@hotmail com

Thank You !


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