On 31 December 2004 the Ministry of Commerce of the People’s Republic of China promulgated the Measures for the Regulation of Commercial Franchises1 which became the sole legal framework for franchising in China, replacing the Circular of the Ministry of Domestic Trade Concerning the Promulgation of the Measures for the Administration of Franchise Operations (for Trial Implementation) of 14 November 1997. The Measures became effective on 1 February 2005.
The Measures provide a detailed regulation, comprising some 42 articles divided into nine Chapters.
Chapter I “General Provisions” (Articles 1 – 6) includes a definition of a commercial franchise as “an arrangement whereby a franchisor, through an agreement with a franchisee, grants the franchisee the right to use business operating resources including trademarks, trade names, business models. etc., which the franchisor has the right to grant others to use; and the franchisee shall operate under the uniform franchise system and pay franchise fees to the franchisor in accordance with the agreement” (Article 2). Article 4 specifies that a franchisor is entitled to use master franchise arrangements, even if no more specific details are given.
Chapter II “Parties to Franchise Operations” (Articles 7 to 12) includes provisions on the qualifications of a franchisor (Article 7), the qualifications of a franchisee (Article 8), the rights of a franchisor (Article 9) and the obligations of a franchisor (Article 10), as well as on the rights of a franchisee and a franchisee’s obligations (Article 12). To be noted is that both franchisor and franchisee must be an enterprise or economic entity organised under the law of the country.
The rights of a franchisor as specified in Article 9 include the right
to supervise the franchisee’s operations,
to terminate the franchise agreement for breach of contract, infringement of the legitimate rights and interests of the franchisor or the damaging of the system, and
to collect franchise fees, which are specified in Article 14.
The obligations of the franchisor on the other hand include the duty
to provide timely disclosure,
to provide the operations manual and the signage necessary for the system,
to provide training, and
to supply the franchisee with goods. The franchisee may use other suppliers although the franchisor can fix quality standards.
The rights of the franchisee include the right
to use the intellectual property of the franchisor,
to receive training, and
to receive the goods supplied by the franchisor in a timely manner.
The obligations of the franchisee include the obligation
to conduct the business according to the agreement,
to pay the required fees,
not to transfer the franchise without the franchisor’s prior authorisation,
to keep the franchisor’s trade secrets confidential, and
to provide the franchisor with the information required under the Measures.
Chapter III “Franchise Agreement” (Articles 13 to 16). Article 13 specifies the information that is “generally included” in a franchise agreement, i.e. inter alia the names and addresses of the parties, the contents, term, location and exclusivity of the franchise, specifications as to the fees to be paid, details on the training and guidance offered, the use of the trade names, trademarks and other intellectual property, amendment and termination of the agreement, liability for breach, quality control and liability for the products sold or services offered. Article 15 states that the term of a franchise agreement shall be no less than three years and renewal can be negotiated. Article 16 specifies the obligations of the franchisee if the franchise agreement is terminated without the consent of the franchisor, such as not using the trade name of the franchisor any more.
Chapter IV “Information Disclosure” (Articles 17 to 22). Article 18 provides that a copy of the franchise agreement and a written disclosure document must be given to the prospective franchisee at least 20 days before the execution of the agreement. Article 19 further specifies the information that must be provided, including information on the registration of the intellectual property, on litigation that the franchisor was involved in over the five years prior to the conclusion of the agreement, information on the goods and services that the franchisor can supply the franchisee with, information on the principal officers of the franchisor, including whether they were personally responsible for the bankruptcy of any companies or have any criminal convictions. Article 20 provides for an obligation of the franchisee to disclose information to the franchisor on its legal status, credit history, etc. Articles 21 and 22 provide for a duty of confidentiality both in-term and post-term, as well as for prospective franchisees who do not sign the agreement.
Chapter V “Advertising” (Articles 23 to 26)
Chapter VI “Oversight and Regulation” (Articles 27 to 31) Article 28 states that the franchise trade organisations shall adopt codes of ethics for the industry, Article 29 that every year the franchisor shall file a report with both the commerce regulatory authority of its locality and that of the franchisee’s locality, and Article 30 that if the franchise involves a patent, a patent licensing agreement must be concluded and registered. Furthermore, prior to engaging in franchising operations the franchisor must register the trademark licensing agreement.
Chapter VII “Special Rules for Foreign Invested Enterprise” (Articles 32 to 37) In order to offer franchises in China, Foreign Invested Companies must apply for approval to the original approval authority and the requirements for such applications are stated in Article 33. Article 34 provides that a FIE which has received such an approval must file a report every January with both the original registration authority and the commerce regulatory authority of the franchisee’s locality, disclosing information regarding the franchise agreements signed in the past year. Also FIEs already engaged in franchising have to follow this procedure.
Chapter VIII “Legal Liabilities” (Articles 38 to 40) Article 38 provides for fines in the case of a violation of Articles 7 and 8, Article 39 for non-disclosure, which also provides for the cancellation of the business licence in the case of serious violations, and Article 40 for the conducting of advertising and promotion in violation of the law.
Chapter IX “Supplemental Provisions” (Articles 41 to 42) Article 41 states that the Measures shall be interpreted by the Ministry of Commerce and Article 42 that the Measures shall enter into force on 1 February 2005, and replace the Interim Measures of the Regulation of Commercial Franchise Operations promulgated by the former Ministry of Domestic Trade.
Subsequent to the adoption of the Measures was the approval of Regulations on Administration of Commercial Franchise (Regulations) on 31 January 2007. The Regulations entered into force on 1 May 2007.2 Where the two conflict, the Regulations override the Measures. Implementation Guidelines are due to be prepared by the Ministry of Commerce.
Both the Measures and the Regulations contain provisions on disclosure. The whole of Chapter III of the Regulations (Articles 20 – 23) and Chapter IV of the Measures (Articles 17 – 22). They also indicate the information that the contract must contain.3 Franchisors intending to franchise in China must own at least two directly operated outlets and must also have been in operation for more than one year.4 This provision reflects what was contained also in the Measures, but there it was specified that the outlets must be in China.5 A number of documents, including the franchise agreement, the operations manual and a copy of the business licence, must be filed within fifteen days of the execution of the initial franchise contract with the competent commercial authorities.6 This represents a relaxation, as the provision indicates that the filing is merely for record and appears not to distinguish between wholly domestic franchises and franchises originating abroad, whereas the Measures indicate that foreign invested enterprises must have approval for their franchise activities.7