Franchising is one of the fastest-growing business models in China, attracting both local and international investors. But as the market expands, so do disagreements between franchisors and franchisees. 

These conflicts, known as franchise disputes in China, can involve money, contracts, or even brand control.

Understanding how these disputes happen and how to manage them can save your business time, money, and stress. If you are involved in or planning to start a franchise, this guide will help you stay informed and protected. 

Read on to learn what causes franchise disputes in China, how to resolve them, and how to avoid them in the first place.

Understanding Franchise Disputes in China

Franchise disputes in China happen when franchisors and franchisees disagree about their rights or responsibilities. These disputes can affect both local and foreign businesses operating under franchise agreements.

Common Types of Franchise Disputes

• Breach of contract: When one party fails to meet the terms of the franchise agreement.
• False promises: When franchisors exaggerate profits or support to attract franchisees.
• Termination disagreements: When one side ends the agreement early or unfairly.
• Intellectual property misuse: When a franchisee uses the brand name or logo without permission.
• Financial issues: Disagreements about royalties, fees, or marketing contributions.

Each of these issues can quickly escalate if not handled properly. That is why understanding the legal background is essential.

Key Laws Governing Franchise Disputes in China

China has specific laws and regulations to manage franchising relationships and prevent unfair practices. These laws aim to protect both franchisors and franchisees while ensuring transparency in business operations.

China’s Commercial Franchise Administration Regulations

This is the main law governing franchise operations in China. It requires franchisors to:

• File a record with the Ministry of Commerce (MOFCOM) or its local branches after signing their first franchise contract.
• Provide a Disclosure Document to franchisees at least 30 days before signing the agreement.
• Have at least two company-owned outlets operating for over one year before starting to franchise.
• Offer training and ongoing support to franchisees.

Failure to follow these rules can lead to serious legal consequences and disputes.

📚 Also read: China Franchising Law: Key Regulations for Business Success

Other Relevant Laws

• Civil Code of the PRC (2021): Governs all franchise agreements and contract obligations.
• Trademark Law: Protects brand identity and intellectual property rights.
• Advertisement Law: Ensures that franchise promotions are truthful and not misleading.
  

📚 Also read: Advertisement Law Compliance in China: What Businesses Need to Know

Foreign Franchisors in China

Foreign franchisors must establish a foreign-invested enterprise (FIE) or appoint a local master franchisee to operate legally in China. They must also comply with MOFCOM’s record-filing requirements and disclosure obligations.

Why Franchise Disputes in China Happen

Most franchise disputes in China arise from poor communication, unclear contracts, or unrealistic expectations. Understanding the root causes helps prevent them from happening.

1. Misrepresentation and False Promises

Sometimes franchisors overstate potential earnings or the level of support offered. When franchisees realize the truth, trust breaks down, leading to disputes.

2. Unclear or Unfair Contract Terms

If franchise agreements lack clarity about fees, territory rights, or renewal terms, misunderstandings can occur. Legal review before signing is essential.

3. Poor Operational Support

Franchisees rely on franchisors for training, marketing, and business guidance. When this support is missing, franchisees may feel misled or abandoned.

4. Termination and Renewal Disagreements

Ending a franchise early or refusing renewal can lead to serious legal challenges, especially if the reasons are not well-documented.

How to Resolve Franchise Disputes in China

When a dispute arises, it is best to act quickly and professionally. China offers several legal and non-legal ways to handle franchise conflicts.

1. Negotiation and Mediation

This is the simplest and most cost-effective method. Both sides can sit down with a neutral mediator to find a fair solution. Mediation helps preserve relationships and avoids lengthy legal battles.

2. Arbitration

Many franchise agreements in China include an arbitration clause. Arbitration is faster than court litigation and is often preferred for cross-border franchise disputes. The decision made by an arbitrator is legally binding. 

Common arbitration bodies include the China International Economic and Trade Arbitration Commission (CIETAC) and the Shanghai International Arbitration Center (SHIAC).

3. Litigation

If negotiation or arbitration fails, the dispute can go to court. Chinese courts handle franchise disputes under the Civil Code and relevant commercial laws. However, litigation can be time-consuming and expensive, so it should be the last resort.

4. Cross-Border Disputes

Foreign franchisors operating in China must pay attention to jurisdiction clauses in their contracts. It is important to know whether disputes will be handled under Chinese law or international arbitration.

What Happens After a Franchise Agreement Is Terminated

When a franchise agreement ends, both sides must follow the terms stated in the contract.

• For the franchisor: They must stop the franchisee from using their brand name, trademarks, or business model.
• For the franchisee: They must return confidential materials, equipment, or property owned by the franchisor.
• Financial settlement: Any outstanding payments or deposits must be cleared.

Properly handling termination helps avoid further legal problems and protects both sides’ reputations.

Can You Sue Your Franchisor in China

Yes, you can sue your franchisor in China if they break the law or the terms of your agreement. Common reasons include false promises, lack of disclosure, or unfair termination.

To win a case, you need solid evidence such as written contracts, emails, and financial records. Chinese courts usually prefer mediation first, but if that fails, they will evaluate the case based on the Civil Code and the Commercial Franchise Administration Regulations.

How to Avoid Franchise Disputes Before They Start

Preventing disputes is always better than solving them later. Here are some practical steps to reduce the risk of franchise conflicts in China:

• Do your research: Study the franchisor’s business model, financial background, and reputation.
• Review documents carefully: Read the disclosure document and franchise agreement thoroughly before signing.
• Seek legal advice: Consult a lawyer familiar with Chinese franchise law to ensure your rights are protected.
• Maintain open communication: Regular updates and honest discussions help prevent misunderstandings.
• Document everything: Keep written records of meetings, decisions, and financial transactions.

Taking these steps early helps build a strong and transparent business relationship.

Franchise Liquidation in China

If a franchise or franchisor goes into liquidation, the process must follow Chinese corporate and bankruptcy laws.

• The franchisor must notify all franchisees about the liquidation.
• Franchisees may need to stop using the brand name or trademarks immediately.
• Outstanding debts or fees should be settled before closing operations.

Getting legal and financial advice early can help protect your investments and minimize losses.

Franchisor’s Perspective: Managing Risks and Maintaining Trust

Franchisors can also take steps to prevent disputes and protect their brand reputation.

• Transparency: Provide accurate financial and operational information before signing agreements.
• Training and support: Offer consistent support to help franchisees succeed.
• Monitoring: Regularly check franchisee performance to ensure brand standards are met.
• Fair treatment: Handle complaints and disagreements professionally to maintain trust.

A strong franchisor-franchisee relationship is built on honesty, communication, and shared goals.

Conclusion

Franchise disputes in China can be complex, but understanding the law and taking preventive steps can make a big difference. Whether you are a franchisor or franchisee, staying informed about your rights and responsibilities helps you avoid costly mistakes.

For more helpful guides about Chinese franchise law and other business issues, explore China Legal Experts blogs and resources. 

If you need professional help, advice, or legal support with a franchise dispute, contact Choi & Partners for expert assistance.

FAQs About Franchise Disputes in China

How to resolve franchise disputes?

The best way to resolve franchise disputes in China is through negotiation or mediation. These methods are faster and less costly than going to court. If that fails, arbitration or litigation may be necessary depending on the contract terms.

Can you sue your franchisor?

Yes, if your franchisor breaks the law or your contract, you can take legal action. You will need evidence to prove your case, such as written agreements and communication records. It is best to consult a legal expert before filing a lawsuit.

What happens if you break a franchise agreement?

If you break a franchise agreement in China, you may face financial penalties or legal claims. The franchisor may also terminate your rights to use their brand. It is important to review your contract and seek legal advice before making any major decisions.

What is the simplest method to resolve disputes?

Mediation is the simplest and most cost-effective way to resolve franchise disputes in China. It allows both parties to reach a peaceful agreement without going to court. This method also helps maintain business relationships.

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