CHINA Trends and Developments Contributed by: Qiang Ma and Yan Feng Liu, Jingtian & Gongcheng
truncated cooling-off period (eg, five days), viewing such provisions as improper attempts to nullify statu - tory protections. After striking such clauses, courts apply the “substantial utilisation” test. If the franchisee has not yet commenced operations or used the fran - chisor’s resources, the right to terminate is typically upheld. Conversely, consistent judicial findings indicate that once a franchisee begins to actively operate the busi - ness, the right of unilateral termination is extinguished. In one matter, a franchisee attempted to invoke the cooling-off period after operating the business for four months. The court denied the termination, estab - lishing that the actual operation of the franchise and commercial use of the franchisor’s brand and systems represent a definitive act of substantial utilisation, exhausting the legislative purpose of the cooling-off period. By accepting goods, using the franchisor’s branding, and engaging in commerce, the franchisee moves beyond the reconsideration phase and affirms the contract through performance, thereby forfeiting Article 11 of the Regulations stipulates that franchise agreements “shall be concluded in written form”. A recurrent issue in franchise litigation is whether the failure to adhere to this requirement of form renders an agreement void. The prevailing judicial interpretation indicates that it does not. This determination is guided by the established judi - cial distinction between “validity-related” and “man - agement-related” mandatory provisions. A contract is deemed void for illegality only when it violates a validity-related provision, which typically concerns the public interest or fundamental market order. Pro - visions aimed at regulating administrative procedures, such as Article 11’s requirement for a written instru - ment, are generally classified as management-related. Non-compliance, therefore, does not automatically nullify the underlying civil agreement. the right to unilateral termination. The written form requirement This interpretation is further buttressed by Article 490 of the Civil Code, which provides that performance can cure a formal defect. Where a contract is required by law to be in writing but is not, it is nonetheless
considered formed if one party has performed its main obligations and the other party has accepted said per - formance. Consistent court rulings affirm that where a franchisor has provided its operational resources and the franchisee has accepted and utilised them, a valid and enforceable oral contract is established. However, a franchisor’s failure to adhere to these rules can indeed trigger both administrative penalties and separate civil liabilities. Information disclosure and commercial fraud Distinct from procedural formalities, the franchisor’s duty of pre-contractual information disclosure is a core, substantive obligation. A violation provides the franchisee with an independent basis for seeking ter - mination. However, courts do not treat all instances of non-disclosure equally. The judicial analysis cen - tres on distinguishing between mere non-compliance and malicious fraud, with the latter being required to invalidate or rescind a contract, particularly one that has been partially performed. For a franchisor’s non-disclosure to be deemed fraud - ulent, it must be established that the concealed or falsified information was material and that it induced the franchisee to enter into the contract under a false understanding. In one case, a franchisor made exten - sive claims regarding its US origins, its relationship with a major global education group, and its owner - ship of registered trade marks. After the franchisee paid significant fees and invested in a location, it was discovered that the US entity was a shell company, the educational partnership was non-existent, and the core trade marks were not registered. The court held that such severe and material misrepresentations of core operating resources constituted fraud, funda - mentally frustrating the contract’s purpose and enti - tling the franchisee to terminate the agreement and recover its fees and associated losses. Judicial findings indicate that conduct may be deemed fraudulent if it falls into the following categories, caus - ing the franchisee to sign the agreement against their true intent. • Misrepresentation of operating resources – This includes concealing a lack of disposition rights over key intellectual property, or presenting an
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