CHINA: New Measures on Franchising.

Silvia BORTOLOTTI | CHINA | 2005-09-13


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According to the new Regulation, the term ‘commercial franchise’ refers to the operation in which a franchisor, through an agreement, grants the franchisee the right to use business operating resources including trademarks, trade names, operational model, etc., which the franchisor has the right to grant to others to use; the franchisee, on the other hand, operates under the uniform franchise system according to the agreement and pays franchise fees to the franchisor.

The Measures specify the qualifications of the franchisor and the franchisees as well as their respective rights and obligations.

Particularly the franchisor must (i) be an enterprise or other economic entity duly established under the laws and regulations, (ii) possess business operating resources such as trademarks, trade names, operational model, etc., and have the right to grant others to use, (iii) have the capacity to provide franchisees with long-term operational guidance and training services, (iv) have at least two operating units inside the territory of China owned by itself, its branch or its subsidiary for more than one year, (v) if the franchise requires supply of goods by the franchisor, have a supply system that is stable and guarantees quality, as well as the ability to provide related services, and (vi) have a good reputation and no record of fraud by utilizing the method of franchise.

The franchisee, on the other hand, must be an enterprise or other economic entity and possess the necessary resources for the franchised business.

The franchisor, at least 20 days before the conclusion of the franchise agreement, is obliged to provide the prospective franchisee with a copy of the franchise agreement (which shall include a number of items, specifically provided) and a written document containing the genuine and accurate basic information relating to the franchise operation. The basic information disclosed by the franchisor shall include the franchisor’s name and business address, the number and location of the existing outlets, the estimated investment for an outlet, information on the franchisor’s trademark, copyrights and patents, franchise fees and royalties due under the franchise agreement, the franchisor’s litigation history, information about training, sources of products and supplies, and some background information on the franchisor’s principal officers.

Every year, the franchisor shall file a report with both the commerce regulatory agencies of its place of business as well as that of the franchisee’s place of business, disclosing the information regarding the franchise agreements signed in the preceding year.

Foreign-invested enterprises (FIE) wishing to engage in commercial activities by means of franchising shall apply to the original registration agency for recordal and comply with specific rules (Chapter VII of the Measures).

The text of the law (in English) can be found in the legislation section of the website.

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