CHINA Trends and Developments Contributed by: Qiang Ma and Yan Feng Liu, Jingtian & Gongcheng
Ultra vires operations A franchisor may not be legally liable for a franchisee’s unauthorised business activities, but it faces signifi - cant commercial risk. To protect brand reputation, the franchisor may be compelled to compensate consum - ers for losses, creating a substantial contingent liabil - ity. Conclusion The judicial treatment of commercial franchise dis - putes in China reflects a consistent and pragmatic “substance over form” approach. Courts are reluctant to invalidate agreements based on non-compliance with statutory provisions that are deemed administra - tive or procedural in nature, particularly after the fran - chisee has accepted the benefits of the relationship through performance. However, this preservation of contractual validity does not insulate franchisors from liability. The analysis reveals a clear demarcation: while procedural lapses (eg, failure to file or lack of a written contract) may be cured or result only in administrative sanctions, failures that go to the substance of the bargain are treated seriously. Material misrepresentation in infor - mation disclosure, the failure to provide a licensable trade mark, or an inability to deliver on operational promises – often evidenced by non-compliance with the “two stores, one year” rule – can and do provide sufficient grounds for contract termination and the restitution of fees.
For all participants in the Chinese franchise market, the message is clear: while courts will strive to uphold the commercial reality of an agreement, they will not hesitate to grant relief where a franchisor’s failure to adhere to its core statutory and contractual obliga - tions fundamentally frustrates the purpose of the fran - chise.
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