Avoiding Franchise Pitfalls in China: ‘Zero Franchise Fees’ and Liability Across Separate Contracts

When considering a franchise in China, you may receive not one franchise agreement, but a package of ‘brand cooperation’, ‘equipment purchase’ and ‘operational services’ agreements. Splitting a transaction across contracts is not necessarily unlawful, but it can make it harder to establish the nature of the arrangement, recover payments and identify who is liable. This guide focuses on one question: before paying, how can you tell whether these agreements collectively form a franchise arrangement, and who is responsible for the package as a whole?

1. Look at the substance of the transaction, not the contract’s title

China has specific rules governing commercial franchising. Article 3 of the Regulations on the Administration of Commercial Franchising identifies elements including the licensing of business resources, a uniform operating model and franchise fees. Whether an arrangement constitutes a franchise does not depend solely on whether the agreement uses the word ‘franchise’.

Break the proposal down into three questions:

• What does the brand owner provide? Permission to use business resources such as trade marks, corporate logos or proprietary technology, or simply equipment or products for sale?
• How must the outlet operate? Must it follow prescribed shop design, operating procedures, product ranges or management rules?
• What will you actually pay? Beyond anything labelled a franchise fee, are there charges connected with the use of business resources or operational support?

For example, a proposal may advertise ‘zero franchise fees’ while requiring you to buy a start-up package, follow a centrally prescribed management system and pay monthly operating fees. That calls for a review of the full transaction, rather than an immediate conclusion that it is not a franchise. Conversely, an ordinary equipment sale that includes training does not automatically constitute franchising.

The label attached to a fee is not decisive: what matters is the purpose of the transaction and the parties’ actual rights and obligations. Whether purchase prices or service charges include payment for franchise rights must be assessed against all the agreements, pre-contract communications and actual performance. There is no blanket answer.

2. Map the contracting parties, payment recipients and delivery obligations in one table

A common problem with split transactions is that one company makes the sales promises, another signs the licensing agreement, an equipment supplier receives most of the money, and a third party provides ongoing support. If a dispute arises, each may argue that the issue falls outside its own contract.

Before signing, draw up a responsibility table:

Item to check	Details to establish
Contracting parties	Each company’s full legal name and Unified Social Credit Code, its official registration identifier in China
Payment arrangements	The recipient, purpose and corresponding agreement for each payment
Delivery obligations	Who supplies the equipment, who provides the business resources and who delivers operational services
Exit and settlement	Who refunds which payments, how returns are handled and when settlement is due

Do not assume that companies will automatically share liability because they use the same office address, sales staff or brand name. Even affiliated companies are generally separate legal entities.

If you are asked to pay a company or individual who is not a party to the contract, first obtain written payment instructions from your contractual counterparty. Clarify whether that payment will discharge your payment obligation under the contract and who will be responsible for any refund. Payment references should identify the specific contract and fee item, rather than simply saying ‘cooperation payment’.

3. Link the whole transaction through jointly signed terms

If equipment, licensing rights and services must be purchased together, ask the relevant parties to jointly sign an overarching or supplementary agreement. It should list all attachments and make clear that the agreements form an interdependent package for opening the outlet. Do not rely on a salesperson’s verbal assurance that ‘we are all the same company’.

Prioritise the following points:

1. The relationship between the agreements. Which agreements must take effect together? Which terms prevail if there is a conflict?
2. What happens if key conditions are not met. If the agreed business resources cannot be provided, can the equipment purchase and services agreements also be terminated, or must they be dealt with separately?
3. Settlement rules for each component. Can delivered equipment be returned? How will services already provided be valued? Who refunds amounts relating to unperformed obligations?
4. Liability across different entities. If one company is to bear joint and several liability for refunds owed by other contracting parties, specify the scope and triggering conditions, and ensure that the company assuming that liability signs the agreement.

In particular, avoid assuming that terminating the main agreement automatically terminates all the others. Ending a licensing agreement does not necessarily unwind an equipment sale that has already been performed. Whether the agreements can be dealt with together depends on the transaction structure, the contractual terms and applicable law.

Also check the dispute resolution clauses across the agreements. Avoid a situation in which some disputes under the same arrangement must go to arbitration while others must go to court, increasing the cost of resolving them. Where multiple entities or substantial payments are involved, have a lawyer review the package as a whole rather than each agreement in isolation.

4. Renaming a contract does not remove statutory obligations

If the substance of the transaction constitutes commercial franchising, a statement that ‘this agreement is not a franchise agreement’ cannot, by itself, exclude the application of the Regulations on the Administration of Commercial Franchising.

Article 21 requires the franchisor to provide the prescribed information and the contract text in writing at least 30 days before the franchise agreement is concluded. The Measures for the Administration of Information Disclosure in Commercial Franchising set out more detailed disclosure requirements. Splitting the arrangement into services, purchase and other agreements should not be used to evade these obligations.

Article 19 also requires a franchisor that asks a prospective franchisee to pay fees before the franchise agreement is concluded to explain, in writing, what those fees are for and the conditions for their refund. If you are told to ‘pay for the package before you can see the licensing agreement’, ask for the full contract documents and a written explanation of the charges first, rather than paying and assessing the arrangement afterwards.

However, discovering that an arrangement has been split across contracts does not automatically entitle you to a full refund. The legal classification of the contracts, whether a breach has occurred and the settlement due following termination must be assessed under China’s Civil Code, the relevant franchising rules and the specific facts. Nor does an administrative complaint automatically replace a civil claim for repayment.

Practical takeaway: connect all the agreements, all the fees and all the responsible parties before deciding whether to pay. The real question is not whether there is a ‘franchise fee’, but what you are buying, who must provide it and how each payment will be dealt with if the arrangement fails.