Franchise Equipment Acceptance in China: Agree Ownership, Repairs and Downtime Liability Before Signing

When investing in a franchise, coffee machines, refrigerated cabinets, kitchen equipment or dedicated terminals are often bundled into a ‘store-opening package’. But paying for equipment, receiving it and being able to use it to trade are three different things. For franchisees, a clear division of responsibilities between the franchisor, supplier and franchisee offers better protection than a vague promise that ‘head office will handle everything’.

1. Establish who owns the equipment and who is responsible

Do not ask only about the total equipment price. First, request an itemised equipment list from the franchisor, specifying each item’s name, model, quantity, condition, accessories and supplier, and whether it is being sold, leased or lent. Equipment included in a package should also have individual prices that can be used to calculate refunds or adjustments if items need to be returned or replaced.

In particular, check the following:

• When ownership transfers: Does the equipment belong to the franchisee on delivery, or only once payment has been made in full?
• Whether payment and contractual obligations align: If you pay the franchisor but another company supplies the equipment, who is responsible for delivery, refunds and warranty obligations?
• What happens when you leave the franchise: Can you keep or resell the equipment, or must you return it? Who pays for dismantling and transport?
• Whether it can operate independently: Does the equipment depend on a brand account, software licence, proprietary consumables or remote authorisation?

For equipment described as ‘free’, check whether it comes with minimum purchasing commitments, usage fees or compensation payable on early exit. Require these conditions to be set out in a contract schedule. Do not treat a franchise sales representative’s verbal explanation as proof of ownership.

2. Separate receipt of delivery from acceptance of the equipment

Mainland China’s Regulations on the Administration of Commercial Franchising contain specific rules governing franchises. Article 21 requires franchisors to provide the prescribed information and the contract text in writing at least 30 days before the contract is concluded. The disclosures listed in Article 22 include the prices and conditions for products, services and equipment supplied to franchisees. The main commercial terms for equipment should therefore not emerge only after payment.

The Measures for the Administration of Information Disclosure in Commercial Franchising provide further detail on these disclosure requirements. However, disclosure does not replace equipment acceptance clauses. Specific delivery and quality obligations must still be assessed under the Civil Code of the People’s Republic of China and the agreed contract terms.

Consider dividing acceptance into three stages: checking the delivery, installation and commissioning, and testing under trading conditions. On arrival, check the packaging, quantities, models and visible condition. After installation, check safety, functionality and system connections. Final acceptance should then depend on testing methods agreed by both parties in advance.

Testing criteria should reflect the actual needs of the outlet and the equipment’s technical documentation. Avoid wording that says only ‘meets head office requirements’. Where relevant, agree tests for continuous operation, consistency of output, temperature control or terminal connectivity, and specify the test conditions and how results will be recorded.

Also make clear that signing for delivery does not constitute acceptance of the equipment’s functionality. Specify whom to notify of defects, the deadline for doing so and the procedure for retesting. A general statement reserving your rights is not a substitute for complying with contractual inspection deadlines. Check in advance that those deadlines allow enough time to complete the tests.

3. Link payment milestones to verifiable outcomes

Paying the full package price before equipment models have been confirmed or site suitability has been checked weakens the franchisee’s position if delivery problems arise. Consider negotiating staged payments linked to confirmation of the equipment list, delivery, commissioning and final acceptance, with supporting documents specified for each milestone.

If the franchisor merely recommends a supplier, clarify which obligations the supplier undertakes directly and what coordination or support the franchisor must provide. If the franchisor undertakes responsibility for equipment delivery, the contract should state that supplier shortages or repair scheduling do not release it from its contractual obligations. Responsibilities across the different parties are best confirmed in a three-party agreement or in contracts with matching provisions.

For late or non-compliant equipment, agree at least four remedies: repair, replacement, temporary substitute equipment and refunds. Each should have clear triggers and deadlines. Avoid arrangements that promise only ‘active coordination’ without specifying how the problem will ultimately be resolved.

Opening preparations also need to reflect these risks. Until equipment functionality has been confirmed, be cautious about committing to non-cancellable launch activities or buying large quantities of perishable supplies, so that a minor fault does not turn into a larger business loss.

4. Agree the procedure for downtime in advance

A ‘one-year warranty’ does not explain how the outlet will operate while repairs are under way. The contract should also specify how to report faults, response and on-site attendance deadlines, parts and labour charges, transport costs, and the circumstances in which repairs are chargeable. For equipment essential to trading, consider negotiating a backup machine or permission to use a third-party repair service following approval.

For equipment that depends on the franchisor’s systems, separately confirm arrangements for account activation, system maintenance and interruptions to authorisation. Even if the hardware is working, withdrawn software access may make it unusable. Reviewing the hardware warranty alone is not enough.

The franchisor is not automatically liable for every loss caused by downtime. Liability may depend on whether there has been a breach of contract, the causal link between that breach and the loss, whether the loss was foreseeable, and whether the franchisee took reasonable steps to mitigate it. You can agree reasonable liquidated damages or a method for calculating losses when signing, but this should not be treated as a guarantee of full compensation.

After a breakdown, retain the equipment identification number, photographs or video of the fault, the time it was reported, repair records and receipts for substitute equipment costs. Stop using equipment that presents a safety risk. Do not keep operating it dangerously to demonstrate losses, and do not suspend all franchise fee payments without first assessing the implications.

Practical takeaway: Before paying, obtain an equipment schedule agreed by both parties that covers, at a minimum, ‘who owns it, who delivers it, how it is tested and accepted, who repairs it, and what happens during downtime’. This part of your start-up investment is only properly agreed when equipment responsibilities are both verifiable and enforceable.