CHINA Law and Practice Contributed by: Qiang Ma and Yan Feng Liu, Jingtian & Gongcheng
5. Duration, Renewal and Termination 5.1 Duration of a Franchise Agreement The franchise term stipulated in the franchise contract shall not be less than three years, unless it is other- wise agreed upon by the franchisee. The previous requirement is not applicable when the franchiser and the franchisee renew the franchise con - tract. 5.2 Franchise Renewal The regulations do not grant a franchisee an auto - matic statutory right to renew the franchise agreement upon its expiration. The franchise agreement should explicitly state the terms and conditions for renewal. The law is silent on the matter of goodwill compensa - tion payable upon non-renewal. 5.3 Termination of the Franchise Agreement Franchisor’s Termination Rights A franchisor may terminate the agreement for cause, such as a material breach of contract by the fran - chisee. The specific grounds for termination should Article 12 of the Regulation mandates that the fran - chise agreement must include a clause allowing the franchisee to unilaterally terminate the contract within a certain period after signing it (a so-called “cooling- off period”). If the franchise agreement explicitly defines the dura - tion of the cooling-off period, courts will generally uphold this agreed-upon period. But even if the con - tract is silent on this period, franchisees are generally granted a “reasonable period” to exercise this right by courts. The key factor is that the franchisee has not begun to “utilise the franchisor’s business resources”. If the franchisee invoked the “cooling-off” termination and has not used the franchisor’s resources (no train - ing received, no store opened, no operational materi - als used, etc), courts typically recognise the right to terminate and may order a full or partial refund (after deducting costs incurred by the franchisor, such as ini - tial training or materials provided). But if the franchisee be clearly defined in the agreement. Franchisee’s Termination Rights
has already operated a store or used the franchisor’s resources (eg, trade marks, training or operational systems), courts generally do not support termina - tion under the cooling-off period. Article 23 of the Regulations requires franchisors to provide true, accurate, and complete information dur - ing the disclosure process before signing the contract. If a franchiser hides any relevant information or pro - vides false information, the franchisee may rescind the franchise contract. 6. Restrictions on Competition in Franchise Agreements 6.1 Treatment of Competition Restrictions in Franchise Agreements Exclusive Territories Competition authorities assess whether the exclusiv - ity restrictions in a franchise agreement are necessary to protect the franchise system’s integrity. If the terri - tory is excessively broad or prevents other franchisees from entering without justification, it may be viewed as anti-competitive. The key is to balance legitimate business interests against the risk of market foreclo - sure. Non-Compete Obligations If the scope, duration, or geographic reach of such obligations in a franchise agreement are overly broad, they may be deemed to restrict competition exces - sively. Courts and regulators often require that such clauses be proportionate to the legitimate business interests they protect. For instance, non-competes should not apply to ordinary employees without access to confidential information. Purchase Ties Tying may be justified for quality control or brand con - sistency but can be abusive if the franchisor holds a dominant market position and the tie restricts compe - tition without objective justification. Authorities exam - ine whether less restrictive alternatives are available to achieve the same quality standards.
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