Changing the Contracting Entity in a Chinese Franchise: Protecting Your Rights to Services and Refunds

Your franchise outlet still displays the same sign, but head office announces that another company will now provide services, issue invoices or collect payments. This may simply be an operational arrangement, or it may involve transferring contractual rights and obligations. For investors considering a franchise in China, the key question is not whether the brand still exists, but whether the company that originally promised training, supplies, settlement of accounts and refunds remains responsible.

1. Establish what has changed: the company name, payment collection or the contracting party

When you receive a notice from head office, do not rely solely on the brand name or explanations from staff. First compare the full registered company names, Unified Social Credit Codes (Chinese business identification numbers), company seals and bank accounts in the original contract and the new notice.

Common situations need to be treated differently:

• The same company changes its name: Check the registered change. A change of company name does not normally extinguish its obligations under the original contract.
• An affiliated company collects payments or provides services: Confirm the scope of its authorisation and whether the original contracting company remains responsible for performance. Collecting payments on another company’s behalf does not, in itself, change the contracting party.
• Another company takes over the entire franchise agreement: This involves transferring rights and obligations, not merely updating payment details.
• A company merges or splits: Check the registration documents and arrangements for succession to rights and liabilities. This should not be confused with an ordinary handover of business between affiliated companies.

Be particularly wary of the explanation that “they all have the same owner”. Different companies are, in principle, separately responsible for their own obligations. Sharing a franchise recruitment team, office address or brand does not automatically make them jointly liable for refunds or compensation.

2. Understand the legal baseline: transferring obligations is not merely an internal arrangement

The Civil Code of the People’s Republic of China provides an important basis for assessing changes to contracting parties. Article 551 requires a creditor’s consent where a debtor transfers all or part of a debt to a third party. Article 555 requires the other contracting party’s consent where contractual rights and obligations are transferred together to a third party.

Franchise agreements usually combine rights to collect fees with ongoing obligations to provide services. If the franchisor wants a new company to replace it under the entire agreement, it cannot automatically release the original company from liability simply by describing the change as an “internal group restructuring”. Whether consent has already been given will, however, depend on any advance authorisation clauses in the original contract, subsequent agreements and how the parties have performed the contract in practice.

Equally, not every change requires a new agreement. The rules for assigning a right to payment differ from those for transferring service obligations. Nor does appointing another company to carry out some services necessarily amount to a transfer of the contract.

China also has specific franchise regulation. The Regulations on the Administration of Commercial Franchises require franchisors to possess the relevant business resources, an established business model and the capacity to provide ongoing guidance, technical support and training. Membership of the same corporate group does not automatically give a new company the original company’s authorisations or ability to perform the agreement. Franchise filing records are not a substitute for the franchisee’s consent to a contract transfer either.

3. Before signing, make any right to replace the company conditional

If the contract allows the franchisor to appoint an affiliated company at any time to take over all rights and obligations, ask for a clear procedure covering notice, checks and written consent. Simply deleting the words “affiliated company” is not enough.

Negotiate the following points individually:

Contents of the notice. Require the franchisor to provide the incoming company’s registration details, the reason for the change, the proposed effective date, evidence of its authority to use the brand and a service transition plan in advance. Specify the notice period in the contract: do not assume that the law sets a uniform period for every change of contracting entity.

How consent is given. Agree that a material change of contracting entity must be confirmed in writing. Avoid provisions that treat continued trading, receipt of routine notices or logging into a system as consent to release the original company from liability.

Conditions for the takeover. Require that service standards, fees, the scope of the franchise rights and the remaining contract term cannot be changed unilaterally because a new company takes over. The incoming company cannot use the takeover as an opportunity to charge another initial franchise fee unless the parties have otherwise validly agreed.

What happens if no agreement is reached. Specify whether the original company must continue to perform, or whether the agreement may be terminated and accounts settled when agreed conditions are met. Refusing a replacement contracting entity does not automatically give a franchisee an unconditional right to exit. The conditions for exit and the method of calculating any refund still need to be clear.

4. When a change takes place, use a three-party agreement to resolve outstanding matters

Rather than signing only a new contract with the incoming company, an agreement signed by the original company, the incoming company and the franchisee will usually make the allocation of responsibilities clearer. Do not first sign a statement declaring that “all matters under the original contract have been settled” and then wait for head office to explain how earlier payments will be handled.

The agreement should include at least four schedules:

1. Payments already made: List franchise fees, security deposits, advance payments and the entity that received each payment. Confirm the amounts relating to outstanding performance or awaiting repayment.
2. Outstanding services: List remaining training, opening support, system services and other commitments, identifying who will deliver them and by when.
3. Existing disputes: Expressly reserve rights to bring claims concerning delays, deductions, subsidies and refunds, so that a blanket waiver of claims does not sweep away unresolved issues.
4. Handover arrangements: Confirm the transition dates for bank accounts, invoicing, system access, contact persons and brand authorisation to avoid gaps in service.

If you want the original company to remain liable for a specified period, negotiate express terms setting out the nature, scope and duration of that liability, and ensure the company validly signs them. A unilateral promise by the incoming company that “the original head office will stand behind it” is no substitute for a commitment from the original company itself. Clauses involving guarantees or joint responsibility for debts should be reviewed by a lawyer in light of the specific arrangement.

Practical takeaway: Before signing, ask: “If head office replaces the contracting company later, who will remain responsible for my money and services?” Put the answer in the contract. When a change occurs, verify the entities first, clarify outstanding matters next, and only then confirm the takeover. Do not surrender existing rights to claim by rushing into a new agreement.