Consumer Compensation for Franchises in China: Clarify Store and Franchisor Responsibilities Before Signing

If you are considering joining a franchise network in China, there is more to assess than the cost of opening a store. You should also ask: when a customer requests a refund or compensation, who deals with it first, and who ultimately pays? Shared branding, centralised purchasing and nationwide promotions do not automatically make head office responsible. Clarifying obligations towards consumers and the arrangements for recovering costs between the parties before signing can prevent your store from paying compensation with no clear route to reimbursement.

1. Distinguish obligations towards customers from internal contractual arrangements

Article 11 of mainland China’s Regulations on the Administration of Commercial Franchising requires franchise agreements to address matters including consumer rights protection and responsibility for compensation. These are not optional details to be tucked away in an appendix: they need to be addressed directly in the franchise agreement.

Liability towards consumers must also be assessed under legislation including the PRC Law on the Protection of Consumer Rights and Interests, the PRC Product Quality Law and the PRC Civil Code. Businesses selling food or certain other products are also subject to sector-specific laws. Who is liable depends on facts such as the actual transaction arrangements and the cause of the defect or harm, not simply the brand name above the door.

The allocation of responsibility within a franchise agreement cannot deprive consumers of their statutory rights. For example, where the law requires the seller to accept a return or provide a replacement because of a product quality problem, the store cannot refuse to deal with it merely because “head office supplied the goods”. Whether the store can subsequently recover its costs from the manufacturer, supplier or brand owner requires a separate assessment of the legal basis, contract and evidence.

The agreement should therefore answer two distinct sets of questions: who receives complaints, takes action and liaises with customers; and who ultimately bears the cost of refunds, compensation, testing and other reasonable expenses. Do not interpret “head office handles everything centrally” as “head office pays for everything”.

2. Test the franchisor’s approach against three scenarios

During negotiations, ask the franchisor to provide a written response plan for the following scenarios, rather than simply saying “follow the operations manual”.

• Quality problems with centrally supplied goods. Identify the actual seller, manufacturer and supplier. Require clear arrangements for batch tracing, stopping sales, returns and testing, and co-operation on any legally required recall. If the supplier is an affiliated company, confirm which entity has contractual responsibility towards the franchisee. Do not assume the brand owner will pay on its behalf.
• Harm caused by store operations. For problems such as improper storage or errors in service delivery, agree how the store should report the incident, preserve records and handle complaints. If incorrect guidance from head office also contributed to the problem, there should be a mechanism for a joint investigation and allocation of responsibility.
• Head-office promotional promises that cannot be honoured. Head office might, for example, advertise refunds or use across multiple stores when the systems or settlement rules do not support them. Clarify who approves the promotion, who makes the promise to consumers and who settles the cost of refunds arising when stores implement it.

These scenarios test supply-chain, operational and marketing responsibilities respectively. If the franchisor insists that stores bear every cost regardless of the cause, prospective franchisees should reassess whether the commercial terms adequately reflect that risk.

3. Turn complaint handling and cost recovery into a workable process

A liability clause should do more than state that “the party at fault is responsible”. When a complaint arises, losses may continue to mount before the cause has been established. At a minimum, consider agreeing the following points:

Complaint handling and escalation. Name contacts on both sides, specify how emergencies must be reported and set response deadlines. Where personal safety or a suspected batch defect is involved, make clear that necessary safety measures must be taken promptly and statutory reporting and other duties fulfilled, rather than waiting indefinitely for head-office approval.

Evidence and investigation. List the records to be retained, including proof of purchase, batch details, purchasing records, storage records, relevant operational records and complaint correspondence. For disputed physical items, agree how the parties will co-operate on retaining samples, securing items or arranging testing, so that one party does not destroy evidence and make the cause impossible to establish.

Upfront payments and settlement. Specify what the store may resolve without prior approval, how approval is obtained for matters outside that scope, how retrospective confirmation works in an emergency, and the deadlines for verification and payment once supporting documents have been submitted. Keep interim payment arrangements separate from the final determination of liability, so that paying first is not treated as an admission of full responsibility.

Scope of recoverable costs. Alongside refunds and compensation, discuss testing, transport, legally required recalls and reasonable costs of dealing with affected goods. For more contentious items, such as business interruption losses or additional goodwill payments, specify the conditions, evidence requirements and calculation methods rather than using a blanket reference to “all losses”.

Both parties should also make clear that internal approval procedures cannot justify delaying consumers’ statutory remedies. Equally, unverified or unauthorised promises should not automatically create a payment obligation for the other party.

4. Check that the contract, manuals and insurance align before paying

The Regulations on the Administration of Commercial Franchising require franchisors to disclose specified information in writing and provide the contract text at least 30 days before the agreement is concluded. Use this period to check the consumer compensation provisions alongside the supply agreement, operations manual and promotional rules, paying particular attention to contradictions.

For example, if the main agreement states that head office is responsible for defects in supplied goods but the manual makes the franchisee pay all customer complaint costs, resolve that inconsistency before signing and specify which document takes precedence. Core responsibilities should not appear only in system notices that can be updated at any time.

If the franchisor says that insurance has already been arranged for the network, ask to see the insurance documents and policy wording. Check whether franchise stores are covered, which risks are insured, the excesses, exclusions and claims notification requirements. Insurance is a tool for sharing risk, not an automatic exemption from liability, and it does not guarantee a payout for every complaint. Your budget should still allow for refunds, testing and other reasonable expenses that may need to be paid upfront.

Practical takeaway: before signing, ask the franchisor to walk you through a complete “complaint—loss mitigation—investigation—compensation—cost recovery” process. Every stage should have a named responsible party, evidence requirements and settlement rules. Resolve anything unclear before you pay.