Franchise Contracts in China: Protecting Your Right to Rescind After Discovering Fraud

When considering joining a franchise network in China, investors often focus on getting their outlet open and overlook another risk: how can they exit if their decision to sign was based on facts fabricated by the franchisor? Chinese law allows franchisees who have been deceived to seek rescission of the contract. However, this is different from negotiating a refund, and not every discrepancy in promotional material will qualify.

1. Establish whether this is poor business performance or fraud at the time of signing

Article 148 of the Civil Code of the People’s Republic of China provides that where one party uses fraud to induce another to perform a civil juristic act contrary to their true intentions, the deceived party may ask a people’s court or an arbitration institution to rescind that act. For franchisees, the key is not simply to prove that the franchisor said something inaccurate. They must also show that the franchisor deliberately provided false information or concealed the truth, and that this influenced their decision to sign.

For example, further investigation may be warranted if a franchisor presents an outlet outside its network as a model outlet, or invents existing partnerships to demonstrate that its business model is established. Losses or low customer footfall after opening, however, will not usually establish fraud at the time of signing on their own.

The representative commercial franchising cases published by China’s Supreme People’s Court include cases in which contracts were rescinded because a franchisor’s false promotional claims misled a franchisee and amounted to fraud. The lesson is not that any inaccurate claim entitles you to a full refund: you must connect the false information to your investment decision.

Before signing, list the key conditions that determine whether you will proceed and ask the franchisor to confirm each one in writing. If it refuses to answer questions about an important fact, do not assume that the relevant condition has been met.

2. Distinguish rescission from termination: do not simply ask for a refund

China has specific rules governing commercial franchising. The Regulations on the Administration of Commercial Franchising and the Measures for the Administration of Information Disclosure in Commercial Franchising require franchisors to disclose relevant information as prescribed by law. Article 23 of the Regulations requires that information be truthful, accurate and complete, and provides that a franchisee may terminate the contract if the franchisor conceals relevant information or provides false information.

However, a defect in disclosure does not necessarily justify termination in every case. In a dispute, the assessment will still depend on the nature and significance of the information and its effect on entering into or performing the contract.

Rescission for fraud and termination are distinct legal routes. The former addresses a decision to enter into a contract that was affected by fraud, with rescission granted by a people’s court or an arbitration institution under the law. The latter ends the contractual relationship under statutory provisions or the terms of the contract. Whether rescission is the appropriate claim depends on the false information involved, the available evidence and the dispute resolution clause.

Simply sending a franchise sales representative a message saying ‘I want a refund’ may not clearly state your legal claim, and it does not replace an application to a court or arbitration institution for rescission. Before bringing court or arbitration proceedings, ask a lawyer experienced in franchise disputes whether alternative claims should also be included, rather than combining every argument into a general allegation that the franchisor broke the rules.

3. Track discovery dates and build a clear chain of evidence

Under Article 152 of the Civil Code, the right to seek rescission for fraud must generally be exercised within one year of the date on which you knew, or ought to have known, of the grounds for rescission. The right also expires if it is not exercised within five years of the civil juristic act taking place. This is not an ordinary payment demand deadline that allows you to wait indefinitely for negotiations to conclude.

The period for exercising the right of rescission is a strict expiry period, not a limitation period subject to the rules on suspension, interruption or extension. Complaints to the franchisor, repeated negotiations or formal payment demands should not be treated as preserving that right.

Once you discover a problem, prioritise three groups of evidence:

• The original representations: What exactly did the franchisor say, who said it and when? Was it before you signed and paid?
• Contrary facts: What verifiable material shows that the statement was false, or that the franchisor concealed important information?
• The link to your decision: Did you ask about the fact as a condition of joining the franchise? Did the franchisor give a clear answer, and did you pay after receiving it?

Also record the dates when you first noticed grounds for suspicion and when you obtained verification. Keep original documents and complete communication records, not just cropped screenshots of chats. Once you know of the grounds for rescission, expressly waiving the right—or demonstrating a waiver through your conduct—may also extinguish it. Take care before signing supplementary agreements or documents confirming that you will continue the relationship.

4. Calculate refunds and losses separately after rescission

Article 157 of the Civil Code provides that, following rescission of a civil juristic act, property obtained as a result of that act must be returned. Where return is impossible or unnecessary, compensation must be paid for its value. A party at fault must compensate the other for losses caused as a result; if both parties are at fault, each bears the corresponding responsibility.

Rescission therefore does not mean that a franchisee can keep all equipment, materials and other benefits received while automatically recovering every payment made. Itemise your claims for return of payments or property, taking account of who received the money, what each payment was for, and what was actually delivered and used. The treatment of services already received will also depend on the particular facts.

Rent, fit-out costs and similar expenditure can be listed separately as losses. Whether they are recoverable depends on causation, fault and evidence: not every cost of starting the business can automatically be passed on to the franchisor. Continuing to increase your investment after discovering fraud may also make the assessment of losses more contentious.

Practical takeaway: If you suspect that facts used to sell you the franchise were fabricated, pause any further investment that has not been assessed, organise evidence linking the false representations to your decision to sign and the date of discovery, and check the deadline for exercising your right of rescission promptly. Separating the legal basis for your exit from your claims for repayment and compensation is more effective than repeatedly asking for a refund.