Release time:2024-04-23 10:45:36
Commercial Franchise Contract refers to the agreement concluded between the franchisor and the franchisee, under which the franchisor who owns operational resources such as registered trademarks, enterprise marks, patents, proprietary technology and other operational resources licenses the franchisee to use the aforesaid operational resources, the franchisee conducts business under a unified operation model as stipulated in the contract and pays franchise fees to the franchisor.
The franchising model places the franchisor in a relatively core and dominant position throughout all franchising activities. While enabling the franchisor to achieve rapid brand expansion, capture market share and diversify commercial risks, it also gives rise to a large number of legal issues.
Then, from which aspects shall a franchisor pay attention to avoiding legal risks when engaging in franchising activities?
I. The "two stores and one year" requirement shall be satisfied.
Article 7 of the *Regulations on the Administration of Commercial Franchises* stipulates that: A franchisor engaging in franchising activities shall have a mature business model, and possess the capability to continuously provide franchisees with such services as operation guidance, technical support and business training.
In other words, one of the prerequisites for conducting franchising activities in China is that the franchisor shall own at least two directly-operated stores, each of which shall have been in operation for more than one year.
This provision of the Regulation is a mandatory provision of a regulatory nature and one of the preconditions for commercial record-filing. It also enables franchisees to objectively understand the franchisor's business model, maturity of operational capacity, brand scale, assessment of development prospects and other relevant information to a certain extent.
Where a franchisor violates the relevant provisions, such violation does not necessarily invalidate the franchise contract. However, in light of the actual facts of the case, such violation may lead to the termination or rescission of the contract executed by both parties in judicial practice, and the franchisor is very likely to be ordered to refund all or part of the franchise fees.
II. The record-filing for commercial franchise shall be duly completed.
Pursuant to the provisions of Articles 8, 9 and 19 of the Regulations, a franchisor shall file for the record with the competent commerce authority within 15 days from the date of first concluding a Commercial Franchise Contract, and submit a report on the conclusion of Commercial Franchise Contracts in the previous year in the first quarter of each year.
It shall be clarified that:
The Regulations do not implement an "approval system" for franchisors conducting franchising activities. Record-filing is not an ex ante administrative licensing act. It is a specific administrative act of ex post confirmation in nature, with the attributes of information notification and public publicity. Its fundamental purpose is to standardize the development of the franchising industry and safeguard the fairness and stability of the franchising order.
The requirements for commercial franchise record-filing also fall under mandatory provisions of a regulatory nature. Where a franchisor fails to make truthful disclosure or complete the record-filing formalities, notwithstanding the validity of the contract, such failure may constitute grounds for contract termination or trigger breach of contract clauses, which will ultimately prevent the franchisor from realizing its contractual purpose and undermine its interests.
Furthermore, in accordance with the provisions of the *Measures for the Administration of Record-Filing of Commercial Franchises*, the competent commercial administrative authorities have the power to order the party concerned to complete the record-filing within a specified time limit and impose a fine of not less than RMB 10,000 but not more than RMB 50,000; where the party concerned still fails to complete the record-filing upon expiration of the time limit, a fine of not less than RMB 50,000 but not more than RMB 100,000 shall be imposed, and a public announcement thereon shall be made.
III. A "cooling-off period" shall be stipulated in the contract
The so-called "cooling-off period" refers to the provision under Article 12 of the Regulations, which stipulates that "A franchisor and a franchisee shall specify in the franchise contract that the franchisee may unilaterally terminate the contract within a certain period of time after the conclusion of the franchise contract."
That is to say, the franchisee shall have the phased right to unilaterally terminate the contract within a certain period after the contract takes effect.
The stipulation of the "cooling-off period" and corresponding handling rules are extremely important components of franchise contracts and the contractual relationships thereunder, yet they are often unknown to the parties concerned or neglected. Its original purpose is to prevent franchisees from suffering undue losses after rashly entering into the franchise business as a result of acting on impulse or having insufficient understanding of the franchise brand.
As shown in judicial practice, the specific duration of the "cooling-off period" is not explicitly stipulated in relevant provisions, which fully respects the party autonomy of both parties.
Where the parties fail to expressly stipulate the specific term of the "cooling-off period" in the contract, the people's courts will uphold a cooling-off period ranging from six months to one year in most judgments.
This practice, while protecting the basic rights and interests of franchisees, has also led to the indefinite expansion of their "unilateral right of termination".
It is recommended that the two parties explicitly stipulate the "cooling-off period" in the contract as far as possible where a consensus can be reached. Generally, the reasonable period shall be around one month.
However, a franchisee that has actually used the franchisor's business resources shall not rescind the contract pursuant to the "cooling-off period" clause.
IV. False Publicity Entails Severe Consequences
In practice, for the purpose of achieving rapid franchise investment attraction, franchisors often entrust third-party investment promotion companies or teams to carry out specific work such as brand publicity and franchise recruitment, so as to improve the efficiency of soliciting investors and franchisees.
However, such contents as promotion methods, marketing measures, franchise recruitment scripts and presentations of franchise policies adopted by third parties in the process of franchise recruitment generally contain over-polished or exaggerated elements, which exert a misleading effect on franchisees to a certain extent, and may even constitute acts of false publicity in some cases.
Furthermore, the franchisor fails to grasp such a phenomenon in a timely manner, making it even more difficult to conduct necessary examination and rectification.
Once such promotional content and information that is obviously inconsistent with reality come to the knowledge of potential franchisees, and the latter conclude a contract with the franchisor on the basis of such erroneous cognition, the act of the franchisor shall constitute a violation of the *Regulations on the Administration of Commercial Franchises* and a number of mandatory legal provisions.
Franchisors may be exposed to administrative, civil and criminal risks. It shall be noted that a franchisor may not assume only one of the three types of legal liabilities. While bearing civil legal liability, it may also be held liable for administrative legal liability, or even criminal legal liability.
In the civil field, where an act constitutes "civil fraud", the relevant contracts concluded shall be rescinded, and the party concerned shall be required to pay liquidated damages; in the administrative and criminal fields, the said party shall also be subject to penalties of varying degrees.
Therefore, it is recommended that franchisors conduct regular self-inspection, self-correction and self-review of the information they publish, and make corresponding adjustments in a timely manner.
A franchise agreement is a contract concluded by and between an enterprise (the franchisor) with business resources such as registered trademarks, patents and proprietary technologies, and other business operators (the franchisee), pursuant to which the franchisor licenses its business resources to the franchisee for use in the form of a contract, and the franchisee shall carry out business operations under the specific operation mode specified by the franchisor in accordance with the stipulations of the contract and pay franchise fees to the franchisor.
In franchising operations, business operators can hold a core and leading position throughout the entire process, achieve brand expansion, secure market share and diversify commercial risks, but such operations also often give rise to various legal issues.
Franchise operators shall pay attention to the following legal issues in the process of conducting brand franchise business operations.
Shall conform to the 2.1-year standard
Article 7 of the *Regulations on the Administration of Commercial Franchises* stipulates: "Whoever engages in franchise operations shall have a mature business model, as well as the capability to provide franchisees with services including operation guidance, technical support and business training. A franchisor shall own no less than two directly-operated stores and have been in operation for more than one year."
To be specific, one of the requisite conditions for a business operator to conduct franchising business is that the operator shall operate at least two directly-operated outlets, each of which shall have an operation history of no less than one year.
This provision of the
Where a business operator violates these provisions, such violation shall not necessarily lead to the invalidity of the franchise business contract. However, in light of the actual facts of the case in judicial practice, the contract concluded by the two parties under such circumstances is highly likely to be terminated or rescinded. In addition, the business operator shall refund all or part of the franchise fee as required or in accordance with a judgment.
2. Franchise operation information shall be registered in a timely manner.
Pursuant to the provisions of Articles 8, 9 and 19 of the Regulation, a franchise business operator shall complete the registration with the competent administrative department of commerce within 15 days from the date of first execution of the Commercial Franchise Contract, and shall submit a report on the contract execution status of the previous year prior to April each year.
It shall be clarified in this regard that the Ordinance does not implement the examination and approval system for commercial franchise operation activities carried out by business operators. Registration is not a pre-administrative licensing act, but a specific administrative act intended for informative and publicity-oriented ex post confirmation, which aims to standardize the market development of commercial franchise operations and maintain a fair and stable order.
As the requirements for commercial franchise filing are mandatory provisions of a regulatory nature, where an operator fails to make truthful disclosure or complete the filing formalities, the validity of the contract may be upheld, but there is a high probability that such failure will lead to rescission of the contract or application of the clauses on liability for breach of contract. Ultimately, the franchisor will suffer economic losses and fail to realize the purpose of concluding the contract.
In addition, pursuant to the provisions of the *Administrative Measures for the Filing of Commercial Franchises*, the competent commerce authority shall order the relevant business operator to complete the filing formalities within a prescribed time limit and impose a fine of no less than RMB 10,000 but no more than RMB 50,000 on it. Where the business operator still fails to complete the filing within the prescribed time limit, a fine of no less than RMB 50,000 but no more than RMB 100,000 shall be imposed thereon.
3. A "cooling-off period" clause shall be stipulated in the contract.
The term "cooling-off period" refers to the provision under Article 12 of the Regulations, which stipulates that "A franchisor and a franchisee shall expressly agree in the franchise contract that the franchisee may unilaterally rescind the contract within a certain period of time after the conclusion of the franchise contract."
In other words, the franchisee shall have the right to unilaterally terminate the contract within a specified period after the contract takes effect.
The provision of the cooling-off period and corresponding handling methods are extremely important components in the process of handling franchise agreements and contractual relations, yet they often fail to receive sufficient attention. The purpose of setting up the cooling-off period is to prevent franchisees from suffering economic losses due to reckless conclusion of franchise agreements out of temporary impulse without a clear understanding of the brand.
As relevant provisions do not set forth explicit requirements on the specific time limit of the "cooling-off period", such time limit may be jointly determined by both parties to the contract through negotiation in practice, with due respect for the will of each party.
If the contract does not explicitly stipulate the specific term of the cooling-off period, the people's court will generally render a judgment specifying the term as 6 months to 1 year in the course of litigation.
While this approach protects the basic rights and interests of franchisees, it also unduly expands the franchisees' unilateral right to terminate the contract.
Accordingly, the parties shall stipulate a cooling-off period as far as practicable prior to the execution of the contract and incorporate such clause into the contract. It is reasonable to set the general term of the aforesaid cooling-off period at one month.
However, where a franchisee has actually commenced using the franchisor's operating resources, the said franchisee shall not rescind the contract pursuant to the "cooling-off period" clause.
4. False publicity will result in serious consequences.
Based on practical experience, business operators usually entrust work related to commercial franchising promotion and investment attraction to third parties (i.e. companies engaging in commercial franchising promotion and investment attraction) for the purpose of effectively carrying out commercial franchising and investment attraction.
As the marketing and promotion methods and information provided by third parties in the process of franchisee solicitation may involve over-explanation or exaggeration, such content may deliver a certain degree of misleading effect to franchisees, and even acts of false publicity may occur.
In addition, business operators and relevant management personnel fail to detect such situations in a timely manner, and thus are unable to carry out the necessary review and rectification.
Franchisees eventually conclude contracts with franchisors on the basis of publicity content and information inconsistent with the actual situation, and the franchisors violate the Regulations and a number of mandatory legal provisions due to their own faults and acts.
Business operators are exposed to administrative, civil and criminal risks. Rather than being held liable for only one type of the aforesaid liabilities, in most circumstances, they shall bear administrative and criminal liabilities concurrently while assuming civil liabilities.
Where a business operator shall bear civil liability, the contract shall be rescinded on the ground of "civil fraud", and liquidated damages shall be paid for the breach of contract.
In short, franchisees shall, with the assistance of professionals, conduct regular self-inspection and review, and make compliance adjustments in a timely manner.
