Non-Compete Clauses in Chinese Franchise Agreements: Agree the Scope, Duration and Exceptions Before Signing

When investing in a franchise, ask not only ‘What can I do once I join?’ but also ‘What can I do after I leave?’ Some agreements prohibit franchisees from running similar businesses during the relationship or after it ends, with restrictions sometimes extending to family members and other investments. Protecting business assets and preserving reasonable scope for franchisees to pursue other ventures are equally important to the franchise sector. Non-compete clauses deserve a separate review before you pay.

1. Understand the distinction: franchise non-competes are not employment non-competes

Commercial franchising in mainland China is specifically governed by the Regulations on the Administration of Commercial Franchises. Contractual rights and obligations are also subject to the Civil Code of the People’s Republic of China. However, the Regulations do not set uniform standards for the duration, geographical scope or compensation arrangements of franchisee non-compete clauses.

You should therefore not simply apply employment rules and assume that franchise non-competes ‘must never exceed two years’, or that ‘the clause automatically lapses if the franchisor does not pay monthly compensation’. Franchisees and franchisors are usually independent businesses. Their agreements need to be assessed in light of the contract’s terms, the need to protect business assets and know-how, and the practical effects of the restrictions.

It is also important to distinguish three separate obligations: stopping the use of trade marks, keeping trade secrets confidential, and refraining from competing business activities. The first two do not automatically imply the third. Having to stop using the brand after removing its signage does not necessarily mean you cannot run any similar business. Equally, the expiry of a non-compete restriction does not give you permission to disclose the franchisor’s trade secrets.

2. Break ‘no competition’ down into four questions you can check

Do not accept a clause that merely says you must not ‘engage in the same or similar business as the franchisor’. Ask the franchisor to clarify each of the following points and record the details in a schedule to the agreement:

• Which business activities are restricted? Does the clause cover particular products, a specific operating model, or the entire catering or retail sector? What objective criteria determine whether a business is ‘similar’?
• Where does the restriction apply? Is it a clearly defined area around the original premises, a particular city, or every location the brand already operates in or might enter in future? The geographical scope should be ascertainable when you sign.
• How long does it last? How long do the restrictions apply during the agreement and after it ends? Does the post-termination period start when the outlet closes, when the agreement expires, or when notice of termination takes effect?
• Which forms of involvement are covered? Does the clause include opening your own outlet, helping to run a business, acting as an adviser and holding a small passive investment? Different forms of involvement should not be lumped together ambiguously.

You can ask the franchisor to explain the specific interests each restriction is intended to protect, such as undisclosed processes or operational materials, and why confidentiality obligations alone would not provide sufficient protection. A large brand or an extensive outlet network does not, in itself, justify a trading restriction of any scope.

When calculating costs, consider alternative income sources and uses for the premises during the restricted period. If you cannot switch to a related business after leaving, whether you can still use your existing equipment, lease and experience will affect the investment’s true risk.

3. Check the boundaries for existing businesses, family members and related companies

Before signing, list your existing outlets, shareholdings, part-time roles and projects in preparation, and identify which need to be excluded from the restrictions. Do not rely solely on verbal assurances from franchise sales staff. Have the contracting party confirm the exceptions in writing through an authorised representative.

Be particularly wary of wording such as ‘the franchisee, their relatives and related parties must not operate competing businesses’. In principle, a contract binds its parties; a single clause cannot automatically impose obligations on family members who have not signed it. However, if you promise to ensure that others do not compete, or agree to accept liability for their business activities, you may still expose yourself to disputes.

During negotiations, distinguish between actually running a competing outlet in someone else’s name and a family member operating an independent business without using the franchisor’s resources. Terms such as ‘related party’, ‘control’ and ‘participation in management’ should also have clear, workable definitions, so that ordinary investments are not later treated as breaches.

4. Set out exit scenarios and remedies together

A non-compete clause should specify more than its duration. It should also address the consequences of different reasons for leaving. Will the same restrictions apply on normal expiry, termination by mutual agreement, a breach by the franchisee, and termination resulting from the franchisor’s breach? You can seek a provision stating that post-termination restrictions will not apply if you lawfully terminate because of the franchisor’s serious breach, while preserving any legal obligations to maintain confidentiality and stop using the brand.

The Regulations on the Administration of Commercial Franchises require franchisors to disclose specified information in writing and provide the contract text at least 30 days before the agreement is concluded. Request the complete non-compete schedule at this stage. Do not wait until after payment to discover that you must sign an additional undertaking.

If the non-compete clause is a standard term, the Civil Code’s rules on drawing attention to and explaining such terms, and on their validity, may apply. However, the fact that ‘the franchisor did not specifically explain it’ does not mean every restriction is necessarily invalid. Whether a term forms part of the contract and whether it is valid still depend on the circumstances. If you are unsure, ask a lawyer familiar with franchising to review it rather than signing first and hoping to overturn it later.

Practical takeaway: Before signing, draw up a ‘post-exit business checklist’ setting out the activities, locations, timing and people involved in your intended plans. Ask the franchisor to confirm in writing, item by item, whether any restrictions apply. A non-compete clause with unclear boundaries is not small print you can afford to ignore.