Tuesday, March 22, 2011

Guidelines on Several Issues Regarding the Applicable Law for Hearing Disputes Arising from Franchising Contracts

Almost 4 years after the Regulations for Administration of Commercial Franchising (2007) (“Regulations”) were promulgated, the Guidelines on Several Issues Regarding the Applicable Law for Hearing Disputes arising from Commercial Franchising Contracts (the “Guidelines”) were issued by the Beijing High Court on 24 February 2011. The Guidelines further define the scope of “business resourses”, the character and validity of franchising contracts, the termination of franchising contracts as well as the liabilities of the parties in case of breach. It aims to standardize the hearing of franchising related disputes so as to better regulate franchising in China.

Key points in the Guidelines are:

1. Scope of “business resources”

Article 2 of the Guidelines further defines the scope of “business resources” as: registered trade marks, enterprise logos, patent, trade name, trade secret, distinctive overall operation image and unregistered trade marks which are prior used which have reputation. The above mentioned business resources can be owned by or solely licensed to the franchisor.

2. The recognition of “franchising contracts”

Franchising contracts are those between franchisor and franchise which stipulate the rights and obligation of the parties. Article 3 & 4 of the Guidelines provide how to decide whether a contract is a franchising contract. The recognition of a franchising contract will be based on the content of the contract not the mere title of the contract, the relationship between the parties (e.g. whether the contract is signed between associated companies) and the declarations of the parties (whether the parties deny that it is a franchising contract).

3. The validity of “franchising contracts”

According to the Regulations, a franchising contract should be signed by the parties in writing and be registered with the competent authorities within 15 days of the execution of the contract (Article 8 & 11); the franchisor has to have operated at least 2 direct stores for over 1 year (Article 7); where an approval or special qualification should be obtained prior the franchising occurs, the parties shall comply with this (Article 8).

However, according to Article 6, 7, 8 and 10 of the Guideline, the validity of franchising contracts will not be affected even if: 1) the contract is not executed in writing; 2) the contract is not registered with competent authorities; 3) the franchisor does not have 2 direct stores or has operated less than 1 year; 4) the parties to the franchising did not obtain relevant approval or qualification where necessary at the commencement of the franchising but possess such approval and qualification before the dispute arises.

4. The right of the franchisee to terminate the franchising contract

Article 12 of the Regulation provides that parties to a franchising contract shall include a clause in the franchising contract to allow the franchisee to unilaterally cancel the contract. The Guidelines further stipulate that the franchisee is allowed to cancel the franchising contract within a reasonable period of time even there is no clause in the contract allowing it to do so.

The Guidelines also specifies the liability for the franchisor when the franchisor fails to comply with its obligation to disclose information to the franchisee.

Guest post by IP Komodo Dragon

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