Franchise in China is a wide concept. Many distribution agreements are facing the risk to fall under the category of franchising agreements. For exemple, “commission/affiliation” and agency contracts
According to the Franchise Regulations, “commercial franchise” refers to such business operations by which an enterprise owning a registered trademark, corporate logo, patent, know-how or any business resource (the “Franchisor”) licenses such business resources to other business operators (the “Franchisee”) by way of a contract. The Franchisee undertakes business operations under the uniform business model as stipulated by the contract. He also pays for franchising fees to the Franchiser.
Franchise in China : Disclosing obligation
According to the Franchise Regulations and relevant regulations, a Franchisor shall, at least 30 days before concluding a franchising agreement, provide the Franchisee with relevant information, including but not limited to the specific financial information, franchising activities, intellectual property rights, and investment budget for franchise business, financial reports and audit reports for the last 2 years, involvement in litigation for the last 5 years.
Furthermore, the Franchisor shall file the signed franchising agreements and relevant documentations with competent authority. And this within 15 days after execution of the franchising agreement.
How to set a Deposit/Guarantee?
If the Franchisor charges a pre-contractual deposit. The purpose of this payment and conditions of refund (if the deposit is refundable) shall be provided in writing.
In practice, a Franchisee is rarely comfortable providing personal guarantee. Instead, a domestic Franchisor charges a security deposit. It can be returned to the Franchisee on the expiration of the franchise agreement. Provided that the Franchisee complied with the obligations under the agreement.
To know more, download our legal handbook related to contractual options in China…
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