Franchise Confidentiality Agreements in China: Clarify Information Use, Adviser Access and Liability Before Signing

When assessing a franchise brand in China, you may be asked to sign a confidentiality agreement before receiving the full contract. Protecting recipes, operating manuals and business know-how is reasonable. But if the agreement treats every communication as confidential and prevents you from consulting a solicitor or accountant, meaningful due diligence becomes difficult. A healthy franchise community depends on mutual trust: the brand’s business assets deserve protection, but prospective franchisees also need room to investigate investment risks.

1. Confidentiality cannot replace statutory disclosure

China has specific rules governing commercial franchising. Article 21 of the Regulations on the Administration of Commercial Franchising requires franchisors to provide the prescribed disclosure information and a copy of the franchise agreement in writing at least 30 days before the franchise agreement is concluded. A brand may make reasonable arrangements for access to documents, but it cannot use ‘trade secrets’ as a blanket reason for withholding information it is legally required to disclose.

Article 7 of the Administrative Measures for Information Disclosure in Commercial Franchising also allows the parties to sign a confidentiality agreement before disclosure. It provides that franchisees must not disclose or improperly use trade secrets learned during the contracting process. This obligation may apply even if no franchise agreement is ultimately signed. It is therefore wrong to assume that, because you did not proceed with the franchise, you are free to forward the information to anyone.

Two points must be kept separate: a brand’s statutory disclosure does not authorise public circulation, and an applicant’s confidentiality obligations do not mean giving up the ability to verify information. When you receive a confidentiality agreement, first establish which documents will be supplied after signing, when they will arrive and who will explain them. Do not mistake signing the agreement for completion of the disclosure process, and do not acknowledge receipt of documents that have not yet been supplied.

2. Define ‘confidential information’ in identifiable terms

A clause stating that ‘all information arising from contact between the parties must remain confidential forever’ may look straightforward. In practice, it can sweep in public information, general business experience and even the applicant’s own financial calculations. Before signing, ask the brand to specify the categories of information covered, how it will be supplied and how it will be marked as confidential.

Check the following points individually:

• Specific material: Which recipes, manuals, purchasing terms, system documentation or non-public operating data are protected? How will information disclosed orally be confirmed in writing?
• Reasonable exclusions: Does the agreement exclude information that is already lawfully public, was lawfully known to the recipient before receipt, was lawfully obtained from a third party entitled to disclose it, or was independently developed?
• Permitted purposes: Does it expressly allow information to be used to assess the franchise opportunity, review the contract and arrange finance?
• Duration: Are appropriate protection periods or termination conditions set separately for general confidential material and core technology that continues to remain secret?

These are contractual arrangements to negotiate; do not assume the law will automatically fill in the gaps for you. Contractual confidentiality obligations may also cover more than legally recognised trade secrets. The fact that a document may not qualify as a trade secret does not necessarily mean that using or forwarding it carries no contractual risk.

In particular, check whether the agreement includes requirements such as ‘you must not operate a similar outlet’ or ‘you must not invest in other brands’. These go beyond confidentiality and may affect your future business choices. They need separate scrutiny, regardless of whether the document is headed ‘Confidentiality Agreement’.

3. Preserve access to professional advice and lawful use of evidence

Practical due diligence often involves a solicitor reviewing the terms and an accountant checking the fees. You may also need to explain the project to a lender. If only the applicant is allowed to read the documents, every subsequent consultation could become a source of dispute.

Consider proposing a clause allowing the applicant, for the purpose of assessing the opportunity, to disclose information as necessary to professional advisers bound by confidentiality duties and to agreed financing institutions. Only the material needed for the relevant task should be shared, with no onward disclosure or use for other purposes. Confirm separately whether family members, business partners and investors are included: people close to you do not automatically have permission to view the material.

The agreement should also preserve the ability to make necessary lawful disclosures to courts, arbitration bodies or regulators. Where legally permitted and practicable, protective measures might include giving notice or redacting irrelevant content. Do not accept wording that automatically treats complaints, the submission of evidence in legal proceedings or lawful co-operation with an investigation as breaches of confidentiality.

In practice, keep a record of each delivery of information: the document name, version, sender, date received, purpose and authorised recipients. Do not upload entire manuals to public group chats, document-sharing platforms or unauthorised online tools. Professional consultation can be expressly authorised; public circulation cannot be passed off as due diligence.

4. Agree how information will be deleted on withdrawal and how liability will be calculated

Even if you withdraw without signing a franchise agreement, you need a workable process for handling the information received. The confidentiality agreement should specify when documents must be returned or deleted, what this covers and how completion will be confirmed. Consider printed manuals, downloaded files, advisers’ copies and cloud backups separately. Avoid promising to ‘immediately and completely erase every trace’ if that is not realistically achievable.

It is also worth negotiating permission to retain necessary evidential copies to meet legal obligations, demonstrate the disclosure process or deal with disputes, subject to continuing confidentiality safeguards. This is not permission to retain everything indefinitely or continue using it commercially. It is a way to avoid being left unable to prove what you received or what the other party promised.

Read the compensation provisions carefully too. Could one accidental email trigger repeated charges based on the number of files attached? Does the agreement demand a contractual penalty, all losses and an open-ended range of additional costs? Will the applicant be responsible for everything an adviser does? The agreement should clearly define what constitutes a breach, the remedial steps available, the scope of recoverable losses and the evidence required to substantiate costs.

The Civil Code of the People’s Republic of China allows a party to ask a people’s court or arbitration body to reduce an agreed contractual penalty that is excessively high compared with the loss suffered. However, this protection does not apply automatically and is no reason to sign without proper consideration.

The practical takeaway is to confirm four things before signing: the scope of information is clear, due diligence use is authorised, professional advice is accessible and the exit arrangements are workable. Reasonable confidentiality should help both sides exchange reliable information—not pressure a prospective franchisee into paying before they can verify the opportunity.