CHINA: The New Regulations on Franchise.

Carlotta Mazzetti | CHINA | 2007-04-18

Carlotta Mazzetti

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The text will not repeal the currently in force 2004 Measures on Administration of Commercial Franchising, but rather the two shall co-exist.
Nevertheless, as the new Regulations have been promulgated by the State Council while the 2004 Measure have been issued by the Ministry of Commerce, the new Regulations shall prevail in case of conflict, while the 2004 Measures shall apply only where the Regulations are silent.

The new Regulations shall provide a common discipline to both Chinese and Foreign invested companies, whereas the 2004 Measures had distinct provisions for these two kinds of subjects.
A general view of the most significant modifications in the legal frame follows hereby.

Firstly, the law requires that the franchisor, in order to be allowed to start its activity, shall own at least two directly operated outlets, and shall be in operation for more than one year.
Under the 2004 Regulations, the franchisor had to own within China at least two directly operated outlets (or directly operated outlets established by its subsidiaries or its share-control company), that had been operating for at least one year.
So, usual practice by entrepreneurs under 2004 Measures was to setting up a FICE in China, running two stores or showrooms, which, after one year, could be entitled to sign franchising agreements.
Now, the new Regulations appear not to require the two outlets to be in China.
If this interpretation shall be the one adopted by the administration, it will be sufficient for the franchisor to own two directly operated outlets being in operation for more than one year anywhere in the world to be entitled to enter into the franchising business.
Still, only when the law will have entered into force it will be possible to have full confirmation of this.

Secondly, to start franchise activity in China, prior approval by the competent authorities is no more required.
Now, the franchisor is only required to register with the relevant authority within 15 days from the signature of the first franchising contract, submitting a number of documents.
Franchisors engaged into franchising activities before the enforcement of the Regulations shall file with the relevant authorities for record within one year from the entry into force of the Regulations (i.e., within 1 may 2008), and shall not be subject to the requirement of owning two stores for more than one year.

The most relevant innovations brought by the law set obligations upon the franchisor.
Firstly, only enterprises established under the Chinese law may engage, as franchisors, in the franchising activities. Individuals are therefore excluded.
Moreover, franchisors are expressly requested to own a well developed business format and to have the capabilities to continuously provide operational guidance, technical support and business training to the franchisee.
Secondly, the law provides for a specific content in the contract. Not only the provisions are more specific than the 2004 Measures, but also the requirements listed in the new Regulations are mandatory (as was not the case under the 2004 Measures).
It is particularly important the provision that the franchisee can unilaterally rescind the contract during a cool-off period, whose length shall be determined by the Parties (no general time limits are provided by the law, though).
This cool-off period applies only to the first contract signed between the parties, and not upon renewal.
As it was ruled under the 2004 Measures, the term of the contract shall be no less than 3 years; still, a shorter term is possible provided the franchisee agrees.

The franchisor can request the franchisee to pay a deposit of guarantee, but in this case the franchisee shall be given written explanation as for the purposes, the condition and the modalities of refund.

As far as the disclosure information is concerned, the law states clearly that ‘the franchisor shall establish and implement a complete information disclosure system’, to be pursuant to stipulations that the competent commercial authority of the State council shall enact.

The term for the Franchisor to provide the franchisee with detailed information and the text of the franchise contract has been increased from 20 days to 30 days before the contract has been signed.



Jue Tang, IDI Country Expert for China



The text of the mentioned Regulations can be found in the Legislation Section of the IDI website.



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