Some companies utilize different tactics or tricks to claim that they are not a franchise, not only because of the expense and time required for the preparation of a franchise disclosure document, but also trying to avoid a unilateral right enjoyed by franchisees to terminate the franchise agreement during the cooling-off period according to Article 12[1] of the Commercial Franchise Administration Regulation (the “Regulation”). In a recent appeal case[2], the judge looked through the arrangement of splitting one agreement into two agreements, as devised by the franchisor to avoid a franchise relationship with the franchisee, and confirmed that the essence of the relationship between the two parties was a franchise.
On June 28, 2020, both parties signed two separate agreements, namely, a “Service Agreement” and an “Agreement on the Use of Logo.” On July 15, 2020, the franchisee claimed to terminate the agreements mentioned, but the franchisor refused. The franchisor argued that the franchisor only provided advice on the training and the license to use its logo to the franchisee. The franchisor would not interfere with the franchisee’s operation and management of the business in many ways. Therefore, the relationship between them was not a franchise. And in the absence of a contract provision, the franchisee did not have a statutory right to terminate the agreements unilaterally. The court held a different opinion based on the following reasons: first of all, even though both parties entered into two agreements, both of them had one common goal, that is, the franchisee operating the catering business utilizing the franchisor’s operational resources and trademark under the franchisor’s guidance. Secondly, the content of both agreements reflected the features of franchising, namely, a uniform mode of operation. Even though the franchisor in this case would not exercise controls over the franchisee’s operation of the business in various ways, it did not change the consideration the franchisee aimed to obtain from those agreements, namely, the franchisor’s operational resources and the guidance on franchisor’s uniform mode of operation of the business.
Even though none of the agreements provided for a cooling-off period, Article 12 of the Regulation provides for a unilateral termination right within a reasonable time after the franchise agreement is signed. In consideration of the length of time between the date the agreements were signed and the termination date (less than 20 days), and the fact that the franchisor did not provide the training to the franchisee, the franchisee’s store was never opened, and the franchisee never used the franchisor’s business resources, the court supported the franchisee’s claim to terminate the agreements between the parties.
The key takeaway from this case is that when determining the nature of the agreements, the courts will look through those superficial arrangments, such as the title of the agreements, and the trick of splitting the agreement into several agreements.
[1] Article 12 The franchisor and the franchisee shall provide in the franchise agreement that for a certain period of time after signing the franchise agreement the franchisee may unilaterally terminate the franchise agreement.
[2] Beijing Dingtaihe Catering Management Co., Limited vs Zheng Zhang, Beijing Intellectual Property Court (in Chinese, 北京鼎泰禾餐饮管理有限公司与张争特许经营合同纠纷.
Paul Jones, IDI Country Expert for franchising in China
Xin Xu
Zie Huang
