CHINA Trends and Developments Contributed by: Qiang Ma and Yan Feng Liu, Jingtian & Gongcheng
Introduction The franchising model has become a significant vehicle for business expansion within China today, following its introduction in 1987 with the arrival of international brands. The market is characterised by its substantial scale and dynamic growth, a trend that has accelerated since the implementation of key regu - lations in 2007. Leading franchise enterprises collec - tively generate annual sales exceeding CNY500 billion and operate a network of over a quarter of a million stores, reflecting double-digit year-on-year growth in both metrics. This expansion, driven by a mix of prominent domestic and international brands across diverse sectors from catering to automotive services, underscores the model’s economic importance and the corresponding necessity of a clear legal frame - work. The legal environment governing these arrangements is multifaceted, consisting of specialised regulations built upon the foundational principles of general con - tract law. At its base, the Civil Code of China (the “Civil Code”) provides the overarching framework, dictating the essential elements of a valid contract, including the principles of fairness and good faith, and the con - sequences of breach. Layered upon this foundation is a specific regulatory framework designed to address the unique dynamics of the franchisor-franchisee relationship. The primary legal authority is the Commercial Franchise Admin - istration Regulation (the “Regulation”), effective as of 1 May 2007. This is supplemented by ancillary administrative measures, including the Administrative Measures for the Archival Filing of Commercial Fran - chises (the “Filing Measures”) and the Measures for the Administration of Information Disclosure of Com - mercial Franchises (the “Disclosure Measures”). Col - lectively, these regulations establish a comprehensive regime that imposes specific, mandatory obligations upon franchisors, the violation of which forms the basis for a significant portion of commercial franchise litigation in China. Overview of the PRC Franchise Litigation Disputes concerning statutory duties of franchisors The jurisprudential landscape of franchise litigation in China is largely shaped by disputes concerning the
statutory duties imposed upon franchisors. Several key areas have emerged as recurrent subjects of judi - cial scrutiny. Franchisee’s unilateral right of rescission Article 12 of the Regulation grants the franchisee a statutory “cooling-off period”, allowing for the uni - lateral termination of the franchise agreement post- execution. The statutory ambiguity surrounding the duration of this period has created confusion, which is analysed in detail below. The “2+1” requirement The regulations stipulate that a franchisor must have operated at least two directly owned business units in China for a period of no less than one year before engaging in franchising activities. This “two-stores, one-year” rule is a threshold qualification intended to ensure that the franchisor possesses a mature and proven business model. Disputes often involve franchisors who fail to meet this criterion, leading to claims for rescission of the franchise agreement. Pre-contractual information disclosure A paramount obligation of the franchisor is the duty of disclosure. The regulations mandate the provision of a detailed information dossier to a prospective fran - chisee at least 30 days prior to the execution of a franchise agreement. Litigation frequently arises from allegations of incomplete, inaccurate or misleading disclosures. Judicial treatment in such cases often centres on the materiality of the omitted or misrep - resented information and its substantive impact on the franchisee’s decision to enter into the agreement. Archival filing obligations Franchisors are required to complete an archival fil - ing of their franchise operations with the Ministry of Commerce or its local counterparts within 15 days of executing their first franchise agreement. While failure to comply with this administrative requirement may result in administrative penalties, prevailing judicial interpretation holds that such non-compliance does not, in and of itself, render the underlying franchise agreement void. Courts typically view this as a mat - ter of administrative, rather than contractual, validity.
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