Franchise Territory Protection in China: Put Exclusivity and Online Order Allocation in the Contract
A promise of an “exclusive trading area” does not automatically give you territorial protection. Before signing, define the boundaries, the outlets covered, how online orders are allocated and what happens if the franchisor opens additional outlets in breach of the agreement.
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When entering China’s franchise market, a salesperson’s promise that “you’ll be our only outlet in this area” can directly affect the rent you can afford and how quickly you expect to recoup your investment. But if the contract merely authorises one business address without restricting the franchisor from opening more outlets nearby, a verbal promise offers little reliable protection. The key to territorial protection is not securing the word “exclusive”, but clearly documenting the scope, exceptions and consequences of a breach.
1. Know the difference: permission to open does not mean exclusivity
In mainland China, the Regulations on the Administration of Commercial Franchising specifically govern franchise relationships. Article 11 requires franchise agreements to be made in writing and to cover matters including the scope and term of the franchise, liability for breach and dispute resolution. However, the regulations do not automatically give every franchisee a fixed protected radius, nor do they impose a general rule allowing only one outlet of the same brand in each trading area.
Territorial protection therefore generally needs to be expressly agreed between the parties, with their rights and obligations also determined by the contract rules in the Civil Code of the People’s Republic of China. When reviewing a contract, distinguish between three arrangements:
- Authorisation for a business location: permission to trade at a specified address, which does not necessarily prevent additional outlets from opening nearby.
- Exclusive territorial rights: within an agreed area, the franchisor may not carry out the specified business activities itself or authorise others to do so.
- Priority rights to open new outlets: the franchisor must invite you first when planning an additional outlet, but this does not give you a right to veto it.
In particular, ask whether “exclusivity” covers company-owned outlets, other franchisees and businesses controlled by the franchisor. If the contract only says that the franchisor “must not recruit further franchisees”, it may not expressly rule out a new company-owned outlet nearby.
Do not base revenue projections solely on sales claims that are absent from the contract. If the franchisor will not offer territorial protection, assess the investment as a non-exclusive outlet rather than treating a promise as an established right.
2. Define the protected area in a verifiable contract schedule
Terms such as “nearby”, “this trading area” or “within three kilometres” may seem clear but can leave room for disputes over measurement. Use boundaries that can be checked, and attach a map to the contract for both parties to confirm.
If using a radius, specify the centre point and measurement method. Is the centre the shop’s main entrance, the centre of the building or a specified set of coordinates? Is distance measured in a straight line or by road? Will the area be redrawn if the outlet relocates? All of this should be recorded.
If using roads or administrative boundaries, explain how the boundary itself is treated. Are both sides of a road included? Do shopping complexes, underground retail spaces and transport hubs fall within the protected area? Will the original territory remain valid if administrative boundaries change?
Attach a separate list of existing and approved outlets. Ask the franchisor to list outlets within the area that are already trading, contracted but not yet open, or approved for development. For any necessary exceptions, specify each address, operating format and whether relocation or expansion is allowed. This prevents a clause excluding “existing projects” from becoming a loophole for unlimited expansion.
The protection period also needs to be clear. Does it begin on signing, handover of the premises or opening day? Does it cover the fit-out and preparation period? Will the same territory continue on renewal? If you must start paying rent and fit-out costs before protection takes effect, assess that gap separately.
3. Do not let online orders and alternative outlet formats bypass protection
Geographical exclusivity for a physical outlet does not automatically cover takeaway delivery, e-commerce, corporate group orders or livestream sales. A brand may divert orders through a nearby delivery hub or online channel without opening a new shop next door.
During negotiations, set out rules by channel, permitted activity and payment arrangements:
| Scenario | Points to specify |
|---|---|
| Takeaway and on-demand delivery | Whether other outlets of the same brand are restricted from actively serving the protected area; how to address platforms automatically expanding delivery zones |
| Brand-operated online sales | Whether sales to customers within the area are permitted; who fulfils orders and whether the outlet receives a service fee |
| Corporate group orders and centralised purchasing | Who may approach customers within the area; how orders from customers spanning several territories are allocated |
| Pop-up shops, kiosks and local fulfilment warehouses | Whether these count as restricted outlets; how the duration and frequency of temporary activities are set |
These order-allocation rights are not generally granted by law: they need to be established through clear contractual arrangements. Nor will third-party platforms or independent operators automatically be bound simply because you have signed an agreement with the franchisor.
Ask the franchisor to commit to matters within its control, such as new authorisations, company-owned outlets and payments through its own sales channels. For matters it cannot directly control, such as how a platform displays outlets, agree a coordination process, response deadlines and responsibility for costs. Avoid accepting promises such as “guaranteed zero online competition”, which may be impossible to deliver.
4. Agree when protection can be lost and what remedies apply
Some contracts make territorial protection conditional on turnover, outlet numbers or opening on schedule. This is not necessarily unreasonable, but the conditions must be measurable and give the franchisee a reasonable opportunity to remedy any shortfall.
If there are sales targets, define how sales are calculated, the assessment period, the treatment of refunded orders and whether circumstances such as closure for refurbishment or supply interruptions caused by the franchisor are excluded. If a target is missed, will the protected area shrink or will exclusivity be removed entirely? Must the franchisor first give written notice and a period to put matters right? Do not allow a short-term fluctuation to trigger a permanent loss of rights automatically.
Also watch for standard terms allowing the franchisor to “adjust the protected area at any time without liability”. The Civil Code sets rules on drawing attention to and explaining standard terms, as well as their validity. Whether a particular term forms part of the contract and is enforceable depends on the circumstances. Amending it before signing is generally safer than trying to enforce your rights after a dispute arises.
If the franchisor adds an outlet in breach of the agreement, you can negotiate provisions covering:
- Deadlines for investigating an objection and providing a written response;
- Measures to suspend approval or change the location of an outlet that has not yet opened;
- Fee reductions or waivers, compensation for losses or agreed damages once competing operations have begun;
- Termination and financial settlement arrangements for a serious breach that remains unremedied after the agreed period.
A higher agreed damages figure is not necessarily better: it may be adjusted under the law during a dispute. Nor should you assume that you can directly require another outlet to close. You would generally first pursue the franchisor’s liability under your contract; nearby competition does not, by itself, necessarily amount to a breach.
Practical takeaway: Before paying non-refundable fees or signing a long-term lease, complete at least three contract schedules: a map of the protected area, a list of existing and approved outlets, and rules for sales channels and exceptions. Have the franchisor confirm that they form part of the contract, then decide whether to invest based on the protection you have actually secured.
