Cooling-off Periods in Chinese Franchise Contracts: Agreeing Termination Rights and Refunds

Before joining a franchise network, think beyond how to open your outlet: if you discover after signing that the business is not right for you, can you withdraw? For prospective franchisees in mainland China, clearly defining the contractual ‘cooling-off period’ is an important way to manage the risks of initial investment. It is not a safety net for trading losses, nor does it guarantee that every payment will be refunded.

1. First, understand that there is no nationwide fixed cooling-off period

Article 12 of the Regulations on the Administration of Commercial Franchising requires franchisors and franchisees to agree in their franchise contract that the franchisee may unilaterally terminate it within a specified period after it is concluded. In practice, this is commonly called the franchise contract’s ‘cooling-off period’.

The Regulations do not prescribe a nationwide cooling-off period of seven, fifteen or thirty days. They require written disclosure and a copy of the contract to be provided at least thirty days before signing, but that is a pre-contractual obligation, not an unconditional refund window after signing.

It is also important to distinguish between two grounds for exit: exercising a unilateral termination right within the agreed period, and seeking termination under the contract or the Civil Code of the People’s Republic of China because, for example, the franchisor has breached the agreement. The conditions, evidence required and treatment of payments may differ. These routes should not be confused.

The absence of a cooling-off clause does not automatically leave a franchisee without protection. Equally, it does not mean they can change their mind indefinitely. In a dispute, a court may consider factors such as when termination was sought, how far the contract has been performed and whether the franchisor’s business resources have been used. If you find that the clause is missing, seek to agree an addition promptly rather than waiting until preparations are complete.

2. Make the exit mechanism workable when you sign

When comparing franchise brands, compare their exit terms too. A franchisor willing to explain its exit rules clearly provides a better basis for a stable relationship within the franchise network. Do not rely solely on a sales representative’s verbal assurance that ‘you can get a refund if you are not happy’.

Discuss and clarify each of the following:

• Duration and starting point: Specify exactly when the period begins after the contract is concluded, whether it is measured in calendar days or working days, and how the final day is determined. If there are several documents, such as a preliminary agreement and a final contract, clarify how they relate to one another.
• Conditions for exercising the right: State whether you may withdraw during the period without having to give a business reason. Avoid turning a right that the law requires the parties to include into one that ‘requires head office approval’.
• Recipient of notice: Record the contracting company’s address for notices, email address and designated contact. Do not rely solely on a franchise recruitment agent’s personal contact details.
• Settlement procedure: Specify which payments are refundable, what may be deducted, the documents needed for settlement and the refund deadline. Avoid wording that merely says matters will be handled ‘in accordance with head office rules’.
• Related agreements: List whether equipment, training, software and supply agreements will end alongside the franchise contract, and who is responsible for settling each one.

If the franchisor combines an extremely short period with terms such as ‘training starts on signing, and withdrawal is no longer permitted once training begins’, ask a lawyer familiar with franchising to review the arrangement before you pay. Whether such terms affect the termination right requires a case-specific assessment; the label given to a clause is not enough.

3. Assess refunds payment by payment, not just by the franchise fee

A right to terminate the contract does not mean you can recover every expense from the franchisor. The Civil Code of the People’s Republic of China sets out general rules on performance, restoration of the parties’ original positions, remedial measures and compensation following termination. The actual settlement still depends on the nature of the contract and what has already been performed.

Before paying, it is helpful to divide your budget into three groups.

The first covers the franchise fee, security deposit and prepaid management fees paid to the franchisor. Agree separately how each will be returned if you withdraw. If a security deposit guarantees future performance, specify the conditions for calculating any deductions and returning the balance after termination. Its name alone does not determine whether it is refundable.

The second covers training, design, equipment and the initial stock order. Ask for clarity on what has already been delivered, whether items are bespoke, whether goods can be returned and how deductions will be calculated. The franchisor should not replace a specific explanation with a blanket statement that ‘costs have already been incurred’. Equally, the franchisee should not assume that services already received are free.

The third covers payments to outside parties, such as rent, fit-out costs and financing costs. Terminating the franchise contract will not usually terminate a separate lease or loan agreement automatically, nor will it automatically release you from your payment obligations to those parties.

Until the exit period expires, therefore, try to limit expenditure that cannot be recovered. If you need to secure premises or order equipment, consider negotiating staged payments and separate cancellation terms. Where a refund remains uncertain, do not rely on receiving it to meet loan repayments.

4. Once you decide to withdraw, give notice and complete the handover in order

As soon as you decide to exercise your unilateral termination right, check the deadline. Do not let repeated discussions with sales representatives cause you to miss it. Send a clear notice to the contracting entity in accordance with the contract and applicable legal requirements, identifying the contract, the grounds for termination and your refund request. Confirm that the notice has been delivered. When a termination notice reaches the recipient is often important; simply clicking ‘send’ will not always resolve a dispute.

Next, stop making further investments and take stock of the training you have received, materials obtained, goods delivered and system access used. Whether you have made substantive use of the franchisor’s business resources may affect the assessment of a dispute. Do not assume that ‘the outlet has not opened, so I must still be able to withdraw’.

During the handover, address the removal of branding, deactivation of accounts, return of materials and confidentiality obligations, and check the settlement statement. If you are asked to sign a document stating that ‘all payments have been settled and neither party has any further claims’, first confirm the amount actually received and identify any unresolved issues. Avoid giving up other claims prematurely.

If there is a dispute over the termination right, deductions or delivery of notice, assess the litigation or arbitration options under the contract’s valid dispute resolution clause. Reporting a problem to the relevant authorities does not itself terminate the contract or secure a refund.

Practical essentials: agree the exit deadline before signing, break down the costs before paying, and give timely notice and complete the handover when withdrawing. A cooling-off period is only truly useful if you know how to exercise your rights before your investment grows.