Welcome to Oriental Marketing Services

Area of Expertise

Regulation

New Regulation on Franchising
Issued By the Ministry of Commerce
Of the People’s Republic of China
(Issued on December 30, 2004)

Chapter I – General Provisions

Article 1. With a view to regulation commercial franchising activities, protecting related parties’ interests and further promoting franchising development in China, the Ministry f Commerce provides this regulation.

Article 2. The commercial franchising described in this Regulation has a meaning of that the franchisor grant those business resources of its own including trademark, trade name and business model, etc to the franchisee(s) for use through written agreement; and the franchisee(s) conducts business activities under the system of the franchisor and pay franchise fee to the franchisor.

Article 3. Those franchising activities that conducted in the territory of the People’s Republic of China shall apply to this Regulation.

Article 4. The franchisor may grant a franchise to the franchisee(s) to set up franchised outlet(s) but without sub-franchise right; or the franchisor may grant master franchise(s) to the franchisee(s) within certain territory and the master franchisee(s) has the right not only to establish its own franchised outlet(s) but also to sub-franchise other applicant(s) within the territory.

Article 5. Participant(s) in franchising shall abide by laws and regulations of the People’s Republic of China and comply with the basic principles of willingness, equity, honesty and credit, and shall not violate lawful interests of consumers. The franchisor shall not conduct pyramid selling in the name of franchising. The franchisor shall not result in any market monopoly or violation of fair competition by means of franchising.

Article 6. The ministry of Commerce is authorized to supervise franchising activities of the whole nation, while Authorities of Commerce in all levels take the responsibilities for supervisions of franchising activities within their relevant regions.

Chapter II – Participants in Franchising

Article 7. The franchisor shall be qualified with the following criteria:
Enterprises or other business organizations that lawfully established;
Possessing competent business resources including trademark, trade name and business model, etc. that can be granted legally;
Having capacity to provide long-term operation guidance and training service to the franchisee(s);
Possessing or the franchisor’s subsidiary/holding company possessing at least two directly-owned outlets in the territory of the PRC with more than one year operation time each;
Equipped with stable qualified supply chain system and providing related services, for type of the franchise which needs goods supply;
Having good credit, with no record of fraud through franchising.

Article 8. The franchisee shall be qualified with following criteria:
Enterprises or other business organizations that lawfully established;
Possessing competent capital, business place and personnel to operate the franchise.

Article 9. The franchisor has the right to:
Supervise the franchisee(s)’s operation in accordance with the franchise agreement to ensure the unity of the franchise system and the conformity of quality of products and services;
Terminate the franchise agreement against the franchisee whose activities violate the franchisor’s interests and undermine the franchise system;
Receive franchise fees and deposit according to the franchise agreement;
Other rights stipulated in the franchise agreement.

Article 10. The franchisor shall perform following obligations:
Disclosure of information that required by this Regulation;
To grant franchise to the franchisee(s) and provide related business symbol(s) and operation manual with the franchisee(s);
To provide guidance, training and other related service in sale, operation and technique that necessary in running the franchise;
To supply the franchisee(s) with goods according to the franchise agreement. This is prohibited for any requirement by the franchisor to the franchisee(s) on purchase of a particular supply, unless the circumstance of monopoly commodity or to guarantee quality of the franchise with such supply, the franchisor shall have the right to require the quality standard of goods or offer list of candidate suppliers for the franchisee(s)’s selection
Be liable for guaranty of the quality of goods & services provided by its designated supplier(s);
Marketing and promotion of the franchise as stipulated in the franchise agreement;
Other obligation(s) stipulated in the franchise agreement.

Article 11. The franchisee has the right to:
Use the trademark, trade name, business model and other related business resources granted by the franchisor;
Obtain training and operational guidance provided by the franchisor;
Obtain marketing & promotional support provided by the franchisor;
Other right(s) stipulated in the franchise agreement;

Article 12. The franchisee shall perform following obligations:
To conduct business activities in accordance with the franchise agreement;
To pay franchise fees and deposit;
To maintain the unity of the franchise system and should not transfer the franchise to other party without consent of the franchisor;
To submit true operational, financial and other required information stipulated in the franchise agreement to the franchisor timely;
To receive guidance and supervision of the franchisor;
To keep confidential of the business secret of the franchisor.
Other obligation(s) stipulated in the franchise agreement.

Chapter III – Conditions of Franchise Agreement

Article 13. A franchise agreement normally has the following contents:
Names and addresses of the participants;
Contents of the franchise, period time, territory and exclusivity or not;
Type, amounts of the franchise fees and method of payment, payment and reimbursement of the deposit;
Confidentiality;
Quality control of the franchised products & service and its responsibility;
Training and guidance;
Using of the trade name;
Using of the trademark and other intellectual property rights;
Disposal of consumers’ complaint;
Marketing and promotion;
Modification and termination;
Breach of agreement;
Dispute resolution;
Other clauses agreed.

Article 14. Payment of the franchisee to the franchisor to obtain and maintain the franchise include:
Franchise fee: a lump sum payment to obtain the franchise before starting the franchise;
Royalty: payments in regular times based on a percentage or an agreed level during the process of franchising;
Other agreed fees: payments for goods supply or services of the franchisor, in accordance with the franchise agreement.

Deposit means a sum of money paid by the franchisee to the franchisor for guaranty of the franchisee’s performing the franchise agreement. When the franchise agreement expires, such deposit shall be reimbursed to the franchisee.

Fees and deposit of franchise shall be negotiated by the franchisor and the franchisee according to the principle of reasonableness and equity.

Article 15. Term of a franchise agreement shall not be less than 3 years under usual circumstances. When the franchise agreement expires, conditions of renewal of the franchise agreement can be negotiated by the franchisor and the franchisee according to the principle of reasonableness and equity.

Article 16. After a franchise agreement terminates, without the consent of the franchisor, the ex-franchisee shall not continue to use the trademark, trade name or other symbol of the franchisor; shall not register the franchisor’s registered trademark in similar goods or services Class(es); shall not file a trade name with identical or similar content as the franchisor’s registered trademark; shall not use a business symbol identical or similar to the franchisor’s registered trademark, trade name or outlet decoration in same or similar business area.

Chapter IV – Disclosure of Information

Article 17. Before entering into the franchise agreement and ongoing the franchising process, the franchisor and the franchisee shall disclose relevant information to each other timely.

Article 18. The franchisor shall provide the prospective franchisee with true, accurate disclosure documents of the franchise and sample of the franchise agreement, 20 days before the formal signature of the franchise agreement.

Article 19. The franchisor’s disclosure documents shall include following contents:
The franchisor’s name, address, registered capital, business scope, time of franchising, the audited financial statement and taxation statement;
Quantity of the franchisee(s), locations, operation conditions and investment budget on franchised outlets network etc. and the ratio of the terminated franchisee(s) and the total franchisees;
Conditions of trademark registration & licence, and litigation if any; conditions of trade name, business model and other related business resources;
Types, amounts and method of payments of franchisee(s), method of payment and reimbursement of deposit;
Any litigation involved in latest 5 years;
Goods supply or services provide with the franchisee(s), and additional requirements and restrictions;
Certification on capability of providing training and guidance with the franchisee(s) and actual conditions on training and guidance;
Basic information of the legal representative or principal of the franchisor and whether he/she has ever been prosecuted or be deemed liable for bankruptcy of any other enterprise;
Other information required by the prospective franchisee(s).

The franchisor shall compensate the franchisee(s) for the latter’s loss incurred by the inadequacy of the disclosure or fraudulent information provided by the franchisor.

Article 20. The prospective franchisee shall provide true information of his/her business capacity with the franchisor as per the franchisor’s requirement, including legal entity certification, financial credit statement, property certification etc. During the process of franchising, the franchisee shall provide true operational information and other information required in the franchise agreement to the franchisor.

Article 21. During the process of franchising and after the franchise agreement terminates, without the consent of the franchisor, the franchisee and its employee(s) shall not disclosure, use or allow to use any related business secret of the franchisor.

Article 22. In the circumstance that no franchise agreement is entered into, the applicant of franchisee and any person who may obtain related business secret of the franchisor from the franchisor’s disclosure documents, shall take the obligation of confidentiality and shall not disclosure or release or transfer the business secret of the franchisor to others, if without the consent of the franchisor.

Chapter V – Marketing & Promotion

Article 23. While the franchisor is marketing and selling its franchise, contents in the marketing materials shall be accurate, true, and legal. It is prohibited to contain any fraudulent information or to omit important issues or have any misleading presentation in such marketing materials.

Article 24. Any presentation in the franchisor or franchisee’s marketing materials in terms of the franchise business income or other related information shall be true and accurate enclosed with its corresponding region and period.

Article 25. The franchisor and franchisee shall not imitate other’s trademark, commercials, advertising slogan or any business symbol in any way that may result in mislead, fraudulence, and confusion.

Article 26. In promotion of a franchise, the franchisor shall not exaggerate the interests of the franchise or intentionally conceal any issue that may possibly happen and further substantially affect other’s interests.

Chapter VI – Supervision

Article 27. Authorities of Commerce in all levels shall strengthen the supervision and coordination of franchising activities in their regions and give guidance to related industry associations (chambers). Authorities of Commerce in all levels shall establish relevant credit records of franchisors and franchisees in their regions and publish black list regularly of franchising participants whose activities violate this Regulation.

Article 28. Franchising associations (chambers) shall work out relevant rules of practice for self-discipline and provide related services to the franchising participants and further promote the development of franchising.

Article 29. The franchisor shall file all the franchise agreements signed in the previous year on record with the Authorities of Commerce in both the regions where the franchisor and the franchisees locate in each January. The Authority of Commerce shall submit its recorded information to its upper level Authority of Commerce.

Article 30. If franchising activities concerning patent licensing, the participants shall sign related patent licensing contracts(s) in accordance with the PRC Patent Law and its Supplementary Provisions, and further file the contract(s) on record with the relevant Patent Authorities in accordance with the Regulation on Patent Licence Record Management.

Article 31. Prior to conducting franchising activities, the franchisor shall file its trademark license contracts(s) on record in accordance with the PRC Trademark Law and its Supplementary Provisions.

Chapter VII – Special Provisions for Foreign-fund Enterprise

Article 32. The foreign-fund enterprise shall not engage in the prohibited industries stipulated in the Catalogue for the Guidance of Foreign Investment by means of franchising.

Article 33. To conduct franchising activities, the foreign-fund enterprise shall apply to the former Investment Approval Authority for supplementing the contents as “engaging commercial activities through franchising” to the original business scope and further submit following documents:
Application and Resolution of Board of Directors;
Photocopy of the Business License and Approval Certificate of Investment;
Amendment of contract and articles of association (articles of association only for wholly-owned foreign enterprise);
Related certified documents required by Article 7 of this Regulation;
Disclosure documents required by Article 19 of this Regulation;
Sample of the franchise agreement;
Franchising Operational Manual.

The investment Approval Authority shall issue written decision on approval or disapproval of the application within 30 days since receipt of all the required materials.
Once the application approved, the applicant shall perform necessary modification procedure with the Administration of Commerce and Industry within one month since receipt of the renewed Approval Certificate of Investment.

Article 34. The foreign-fund enterprise approved to conduct franchising activities shall file all the franchise agreements signed in the previous year on record with the former Investment Approval Authority and Authorities of Commerce in the regions where the franchisees locate on each January.

Article 35. Establishment of a foreign-fund enterprise especially for franchising activities shall comply with this Regulation and other laws, regulation and rules governing foreign investment.

Article 36. The foreign-fund enterprise, which has conducted franchising activities prior to the issue of this Regulation, shall file its franchising information on record with the former Investment Approval Authority and comply with this Regulation’s requirement if such franchising activities continue.

Article 37. The enterprise funded by Hong Kong, Macao, and Taiwan entity would like to conduct franchising in mainland apply to this Chapter.

Chapter VIII Legal Responsibility

Article 38. For violation of Article 7 and 8, Authority of Commerce is entitled to order a correction and further impose a penalty under RMB 30,000; for case of serious violation, Authority of Commerce is entitled to put forward suggestion to related Administration of Industry and Commerce on revocation of business licence.

Article 39. For non-performance of disclosure of franchise information, Authority of Commerce is entitled to order a correction and further impose a penalty under RMB 30,000; for case of serious violation, Authority of Commerce is entitled to put forward suggestion to related Administration of Industry and Commerce on revocation of business license.

Article 40. The franchisor’s violation of requirement in terms of advertisement and promotion of this Regulation should be applied in accordance with the PRC Advertisement Law and other related laws, regulation and rules.

Chapter IX – Supplementary Provisions

Article 41. The Ministry of Commerce is responsible for the interpretation of this Regulation.

Article 42. This Regulation shall come into force on the date of February 1, 2005. The Commercial Franchising Regulation (Trial) issued by the former Ministry of Domestic Commerce shall be simultaneously abrogated.