Allocating Responsibility for Consumer Complaints and Compensation Before Franchising in China

In company-owned outlets, the owner often decides directly whether to issue a refund. Once a business begins franchising, the entity taking payment, the service provider and the brand manager may be different parties. If consumers are repeatedly passed between headquarters and an outlet, even a minor dispute can undermine trust across the franchise network. Businesses should design their consumer complaints and compensation arrangements before recruiting franchisees, rather than waiting until a dispute arises to discuss who is responsible.

1. Distinguish liability to consumers from recovery between the parties

Article 11 of mainland China’s Regulations on the Administration of Commercial Franchising expressly requires written franchise agreements to cover “consumer rights protection and the allocation of liability for compensation”. This is therefore not an optional customer service appendix, but a contractual matter that needs to be settled before signing.

Other legislation, including the PRC Law on the Protection of Consumer Rights and Interests and the PRC Civil Code, also applies. An allocation of responsibility between headquarters and a franchisee cannot exclude consumers’ statutory rights. A clause stating that an outlet “operates independently and bears its own liabilities” does not, by itself, mean that headquarters is free from liability in every situation. Equally, the fact that consumers see a single brand does not necessarily make headquarters liable for everything. The position must be assessed by reference to the parties to the transaction, their actual conduct and the applicable law.

Start by mapping the trading relationships in the existing company-owned business, identifying:

• Who accepts orders, collects payments and issues invoices;
• Who supplies the goods, delivers the services and makes after-sales commitments;
• Whether headquarters participates directly in transactions through a mini-program or other channels;
• What losses might arise from product defects, outlet operations or instructions from headquarters.

Rules on recovery between headquarters and franchisees should reflect these facts. Avoid a blanket rule that whichever outlet receives a complaint must bear all the costs.

2. Turn the complaints process into a handling matrix with clear authority

A single complaints channel does not mean that one party bears all compensation liability. Headquarters can coordinate the response, but consumers should be clearly told who actually operates the business and which channels they can use, so that ambiguous descriptions do not mislead them.

Create a handling matrix setting out, at a minimum, complaint categories, the initial contact person, decision-making authority, escalation triggers, evidence requirements and closure criteria. Routine order errors, quality disputes and risks of personal injury should not follow exactly the same process.

For example, outlet managers could be authorised to issue refunds within agreed limits where the facts are clear. Suspected food safety, product safety or personal injury incidents, however, should trigger immediate and necessary risk-control measures, preservation of relevant records and notification of the designated person in charge, alongside any legally required reporting or other duties. Internal approval procedures must not delay necessary assistance or compliance with statutory obligations.

Businesses can set their own deadlines for acknowledging complaints, providing an initial response and escalating cases. These should be labelled as internal service standards, not nationwide statutory time limits. Communications with consumers should also distinguish between “received”, “under investigation” and “a resolution has been agreed”, so that an automated acknowledgement is not mistaken for confirmation that the problem has been resolved.

3. Set out compensation, advance payments and dispute handling in the contract

Compensation clauses should answer at least three questions: who deals with the consumer’s request first, who ultimately bears the cost and what happens if the parties disagree. Include the following in a schedule to the agreement, ensuring that it is consistent with the main contract:

• Basis of liability: Distinguish between improper outlet operations, defects in standard arrangements designed by headquarters, supply problems and cases involving several contributing parties. Allocate liability according to the facts, fault and other applicable rules.
• Conditions for advance payments: Specify when headquarters or a franchisee may pay first, what authorisation is required and how those payments will be verified and settled between the parties.
• Scope of costs: Distinguish refunds, compensation required by law, testing costs and voluntary goodwill payments, rather than grouping them all together afterwards as “losses”.
• Review procedure: Set out procedures for submitting evidence, providing written explanations and raising objections, rather than automatically deducting money on the basis of a complaint alone.

For disputed amounts, avoid relying solely on clauses allowing headquarters to make a unilateral determination and deduct the sum directly from a security deposit. Standard terms materially affecting a party’s interests must also be brought to that party’s attention and explained as required by law, and reviewed for fairness and enforceability.

The Regulations on the Administration of Commercial Franchising require franchisors to provide the prescribed information and the contract text in writing at least 30 days before the agreement is signed. Any proposed complaints liability schedule should be supplied with the draft agreement. Do not introduce important provisions affecting franchisee liability unexpectedly just before opening.

4. Test the process in company-owned outlets before rolling it out to franchisees

Use genuine historical complaints, with unnecessary personal information removed, to test three scenarios: a consumer requesting a refund at a different outlet, a disagreement between an outlet and headquarters over responsibility, and a suspected product safety issue. Check whether staff taking complaints can identify the responsible person, whether outlet managers understand their authority and whether the finance team can reconcile advance payments.

The exercise should assess more than speed. Check whether consumers are repeatedly asked to explain their situation and whether the facts, handling decisions and payment records remain traceable after a case is closed. Complaint information shared between headquarters and franchisees must be handled in accordance with the PRC Personal Information Protection Law. Define the purposes and lawful basis for processing, access permissions and retention periods. Do not casually forward customers’ identity documents, medical records or similar material to franchisee group chats.

Each review should distinguish isolated implementation errors from weaknesses in the shared process. The former require targeted corrective action; the latter require procedures to be updated across all relevant outlets. Recovering costs from franchisees is not a substitute for improvement.

Practical takeaway: Before formally recruiting franchisees, complete a complaints handling matrix, a compensation liability schedule and a trial run in company-owned outlets. Give consumers a clear point of contact, ensure franchisees understand their authority and make headquarters’ commitment to coordination workable in practice.