Franchise Risks in China: When Can You Suspend Payments or Terminate if the Franchisor Is in Trouble?

When considering a franchise, look beyond whether the brand can help you open your outlet. Ask what happens if head office runs into financial or operational difficulties: can you suspend outstanding payments, and can you exit the contract? For franchisees in mainland China, adverse records are leads to investigate, not automatic grounds for a refund. Agreeing a response mechanism before signing is more reliable than stopping payments on instinct once trouble arises.

1. Assess risk records and contractual performance separately

If the franchisor appears on the official list of enterprises with abnormal business operations, first check why it was listed, when this happened and whether it has since been removed. Failure to publish an annual report as required, or being unreachable at its registered address, is not the same as a serious deterioration in its business. Nor does being subject to court enforcement, or having high-spending restrictions imposed on its legal representative, prove on its own that the company can no longer fulfil its franchise contract.

Focus your checks on the franchisor named in the contract, rather than searching only for the brand name. Verify the legal entity through official sources such as the National Enterprise Credit Information Publicity System and the China Enforcement Information Disclosure Network. Then ask the franchisor in writing whether the issues affect supplies, system access, staff support or the right to use the brand, and who will ensure these services continue.

Prioritise evidence directly relevant to your outlet, such as records of persistent stock shortages, notices withdrawing system access, the withdrawal of support staff and replies in which head office acknowledges that it cannot deliver. Litigation involving an associated company does not mean the company you contracted with is in breach. However, if that associated company provides essential services, ask what alternative arrangements are in place.

2. Agree verifiable risk-trigger clauses before signing

Commercial franchising in mainland China is specifically governed by the Regulations on the Administration of Commercial Franchises. Article 14 requires franchisors to provide ongoing operational guidance, technical support, business training and other services as agreed in the contract. Assessing head-office risk therefore means looking not just at whether the company still exists, but also at whether it can continue providing the principal services promised.

A schedule to the contract can set out a three-stage response mechanism:

• Explanation and verification: If events occur such as the seizure of assets affecting essential resources or disruption to a principal supply channel, head office must notify the franchisee and submit a response plan within an agreed period.
• Remedy and safeguards: Following an interruption to an essential service, it must restore that service within a clearly defined period, or provide mutually agreed alternatives and safeguards for contractual performance.
• Exit and settlement: Specify the serious circumstances that permit termination, how long they must persist, which procedures must be followed and how fees relating to unperformed services will be settled.

Triggers should be objective, specific and linked to contractual performance. A clause referring to ‘continuous unavailability of the core ordering system, not remedied following a written demand’ is easier to verify than one promising a refund whenever head office receives negative press. Negotiate time limits to suit the business; do not present a privately agreed number of days as a statutory standard.

Payments can also be linked to verifiable delivery milestones, but this must be written into the contract. After signing, you cannot unilaterally change fees already due into payments conditional on your satisfaction with the service.

3. Suspending payments requires strict conditions to be met

Article 527 of the Civil Code of the People’s Republic of China allows a party required to perform its obligations first to suspend performance if it has definite evidence that the other party’s business has seriously deteriorated; that it is transferring assets or withdrawing funds to evade debts; that it has lost its commercial creditworthiness; or that other circumstances show it has lost, or may lose, the ability to perform. This is a statutory right to suspend performance where the other party’s ability to perform is in doubt, not a right that arises whenever a risk alert appears.

Before acting, establish three things: whether you are required to perform first; which payments remain outstanding; and whether the evidence establishes a statutory risk to the other party’s ability to perform. If you have already paid the relevant fees in full, you cannot ‘suspend performance’ of that completed payment, still less demand a refund directly on that basis.

Under Article 528, you must notify the other party promptly after suspending performance. If it provides adequate security, you must resume performance. Only if it neither restores its ability to perform nor provides adequate security within a reasonable period may there be grounds to proceed to lawful termination and seek remedies for breach. Stopping payments without definite evidence may put the franchisee in breach instead. Before issuing a payment-suspension notice, it is advisable to have a lawyer review the order of performance and the evidence.

4. Base termination on principal obligations, not the tone of an argument

Article 563 of the Civil Code provides that, before performance falls due, one party may terminate if the other expressly states, or demonstrates through its conduct, that it will not perform its principal obligations. Delay in performing a principal obligation, followed by continued non-performance within a reasonable period after a formal demand, may also provide statutory grounds for termination. So may a breach that defeats the purpose of the contract. Each requires an assessment of the specific facts.

A member of head-office staff saying ‘Go ahead and sue’ does not necessarily amount to an express refusal to perform. If head office subsequently puts forward a concrete delivery plan, that remark alone may be insufficient evidence of anticipatory breach. By contrast, a formal notice permanently discontinuing a core system required under the contract warrants careful assessment of its effect on the contract’s purpose.

Franchisees must also continue providing necessary contractual co-operation. Where this involves linking accounts to a platform, submitting documents or providing on-site assistance, first check access permissions and security boundaries, then co-operate reasonably and keep records. You cannot refuse necessary assistance while seeking termination because head office has not completed the service that depends on it.

5. Keep a case file to control the cost of disputes

Once a risk emerges, organise the contract, payment receipts, delivery records, evidence of service failures and correspondence chronologically. For each issue, record the agreed obligation, its actual impact, the remedy requested and the deadline for a response. Avoid keeping only screenshots of heated exchanges.

A formal demand for performance and a termination notice serve different purposes; make their respective purposes clear. Follow the contract’s notice provisions when sending them, and retain proof of delivery. When seeking a refund, distinguish between fees for services not provided, services already performed and losses claimed separately. Termination does not necessarily mean that every payment must be refunded in full. Reporting regulatory breaches to the authorities does not, by itself, replace the procedures for contractual termination and civil recovery.

Practical takeaway: Before signing, clearly set out risk triggers, remedy periods and exit settlement terms. If trouble arises, assess the franchisor’s ability to perform before deciding whether to issue a formal demand, suspend payments or terminate. Do not treat a single abnormal-business record as a free pass to exit without evidence or notice.