CHINA Trends and Developments Contributed by: Qiang Ma and Yan Feng Liu, Jingtian & Gongcheng
unregistered trade mark or non-patented technol - ogy as registered or patented. • Concealment of adverse business conditions – This includes the deliberate concealment of signifi - cant litigation, arbitration or administrative penal - ties against the franchisor; hiding an existing or impending bankruptcy status; or severely misrep - resenting the scale of the enterprise or the origin of the brand (eg, presenting a domestic brand as a well-known international one). • Misrepresentation of franchisee’s operating condi- tions – This includes failing to disclose the exist - ence of other franchisees within the contractually agreed-upon territory or making gross exaggera - tions regarding the quality of products or services. The “two stores, one year” rule Article 7 of the Regulations imposes a market-entry threshold on franchisors, stipulating that they “shall have operated at least two direct stores for more than one year”. A franchisor’s failure to meet this statutory precondi - tion does not, as a matter of law, render a franchise agreement void. Courts reason that a violation is a matter for administrative sanction and does not pro - vide a statutory basis for nullifying the contract itself, particularly where the franchisee has not proven a dis - tinct material breach. Although a contract’s formal validity may be pre - served, a franchisor’s violation of the “two stores, one year” rule is a highly salient fact in assessing its ability to perform core contractual obligations. Courts view non-compliance not as a mere technicality, but as compelling evidence that the franchisor lacks a mature operational system. In a case involving an international yogurt brand, a franchisee sought to ter - minate an agreement on grounds including that the franchisor did not meet the “two stores, one year” requirement and could not prove it had the legal right to license the brand in China. The court found that the combination of the statutory non-compliance and the failure to substantiate its intellectual property rights constituted a fundamental failure to provide the core resources of the franchise. It held that the franchisor’s incapacity to meet these basic legal and operational
thresholds justified the contract’s termination and a substantial refund of fees paid. The archival filing requirement Article 8 of the Regulations imposes a procedural duty on franchisors to complete an archival filing with the competent commerce authority. The judiciary uniform - ly treats this as an administrative formality that does not affect the validity of the franchise agreement itself. Courts have consistently held that the filing require - ment is a quintessential “management-related man - datory provision”. Its purpose is to regulate the fran - chisor’s interaction with administrative bodies, not to establish a precondition for the validity of its civil contracts. The legal consequence of non-compliance is therefore administrative sanction, not contractual nullity. This judicial treatment is consistent with the analyses of the “written form” and “two stores, one year” provisions, reinforcing the judicial approach that a franchisee seeking rescission must demonstrate a material breach that frustrates the contract’s purpose. Lack of a registered trade mark The definition of a commercial franchise under Arti - cle 3 of the Regulations lists “registered trade marks” as a primary business resource. The failure to own a registered trade mark for the principal brand is a significant defect in the operating resources provided by the franchisor. However, it does not automatically frustrate the contract’s purpose, particularly where the franchisee’s conduct can be construed as an assump - tion of the associated risk. A claim for termination based on this defect is subject to a fact-intensive analysis of performance, causa - tion and the franchisee’s own conduct. In one matter involving a beverage franchise, the agreement explic - itly required the franchisor to provide the “exclusive use” of its trade mark. The franchisor was later unable to provide proof of a registered trade mark in main - land China, only an application receipt that was sub - sequently rejected. The court held that without a regis - tered trade mark, the franchisor was legally incapable of providing the “exclusive use” it had contractually promised. This failure to deliver a core component of the bargain was found to be a material breach that frustrated the purpose of the contract, giving the fran -
46 CHAMBERS.COM
Powered by FlippingBook