How Businesses in China Can Design Contract Dispute and Escalation Procedures Before Franchising

Turning an existing business into a franchise network means learning to manage disagreements with independent operators. Whether training has been delivered, who is responsible for a system failure or whether a particular payment is due can all escalate from everyday issues into contract disputes. Establishing a dispute-handling procedure before recruiting franchisees does not mean assuming the relationship will fail. It gives both parties a way to communicate constructively, preserve evidence and maintain essential operations when disagreements arise.

1. Distinguish service issues from contract disputes

Article 11 of China’s Regulations on the Administration of Commercial Franchises requires the parties to enter into a written franchise agreement. It also lists liability for breach and dispute resolution methods among the main provisions the agreement must contain. A promise to “discuss any problems as they arise” is therefore no substitute for workable contractual terms.

Franchisors can start by reviewing common issues in their company-owned operations, then reclassifying them for the franchise relationship:

• Service issues: Inability to log into a system, missing training materials or unanswered enquiries should be handled by the relevant operational staff.
• Disagreements over performance: The franchisor considers a service delivered, but the franchisee believes it falls short of the agreed standard. These cases require a review of the contract and delivery records.
• Formal disputes: One party seeks compensation, termination or remedies for breach of contract. These should be referred to an authorised manager and legal advisers.

The purpose of classification is not to discourage franchisees from complaining. It is to prevent routine support tickets from being left unresolved until they become grounds for terminating the agreement. Urgent matters involving personal safety, food safety or similar risks must be addressed immediately under applicable law and emergency procedures, rather than waiting for the ordinary dispute process to run its course.

2. Establish an escalation route with named responsibilities and deadlines

The agreement or its schedules should specify the postal address, designated email address and contact person for dispute notices, along with the procedure for notifying changes to those details. Day-to-day messaging can continue, but payment objections, allegations of breach and termination notices should not rely solely on a franchise recruitment manager’s personal messaging account.

Consider three internal handling stages, with response times matched to the franchisor’s actual capacity:

1. Receipt and acknowledgement: Record the issue, the outcome sought and the materials available. Assign responsibility and determine whether immediate steps are needed to mitigate losses.
2. Operational review: Have the relevant departments check contractual performance and propose solutions, such as providing outstanding services, reconciling accounts or taking other remedial action.
3. Authorised negotiation: If operational staff cannot resolve the issue, involve a manager with authority to agree a settlement. Where necessary, invite a mediator acceptable to both parties.

Each stage should have a deadline and clear escalation criteria, rather than a vague promise to “deal with the matter promptly”. These deadlines are management arrangements agreed between the parties and should not be presented as statutory time limits.

Nor should negotiation become a barrier that indefinitely prevents either party from seeking legal remedies. Urgent needs, such as preserving evidence or applying for an asset preservation order, should be assessed by legal advisers without mechanically waiting for the internal process to finish. Making a complaint should not itself be defined as a breach of contract.

3. Keep evidence tied to specific obligations

Effective dispute handling depends on facts, not just competing accounts of events. Franchisors should ensure that each key contractual obligation is supported by delivery records, such as training notices, attendance records and assessment results, technical support tickets, service reports, bills and proof of payment.

Take a training dispute as an example. An attendance record may show that someone attended, but it does not necessarily establish that the course content met the contract’s requirements. A fuller record should show what training was agreed, what was actually provided, who attended, whether any objections were raised and whether the franchisor subsequently provided additional training to address any shortfall.

A dispute register can use standard fields covering:

• The relevant contract clauses and document versions;
• Key events, dates and each party’s position;
• Materials received and matters still requiring verification;
• Interim measures, the person responsible and response deadlines;
• The final resolution, implementation status and records of confirmation by both parties.

When retaining electronic records, preserve original files and the necessary context rather than extracting only the passages favourable to your position. Access to materials containing personal information or confidential business information should be restricted. Such matters should not be argued publicly in franchisee group chats.

If negotiations produce a resolution, put in writing each party’s commitments, completion dates, payment arrangements and the scope of the settlement. Do not use vague wording such as “the parties have no further disputes” to obscure matters that have not yet been checked or obligations that remain outstanding.

4. Make the final dispute resolution clause workable

Internal escalation procedures cannot replace a final legal route for resolving disputes. Franchising in China is specifically governed by the Regulations on the Administration of Commercial Franchises. Contract disputes also engage the Civil Code of the People’s Republic of China, while litigation and arbitration are subject to their respective procedural laws.

If choosing litigation, ask legal advisers to check that the designated court complies with jurisdictional rules. A court cannot be selected arbitrarily simply because it is convenient for the franchisor. If choosing arbitration, clearly specify the matters to be arbitrated and the arbitration institution, checking the institution’s name carefully. Avoid casually combining wording such as “either arbitration or litigation may be used”, which can lead to disputes over the clause’s validity or the correct procedure.

When reviewing the clause, check that it is consistent with provisions on service of notices, liability for breach and termination. For pre-drafted terms that materially affect franchisees’ interests, take care to meet any applicable legal duties to draw attention to and explain those terms. Bold type alone does not automatically relieve the franchisor of liability.

Article 21 of the Regulations on the Administration of Commercial Franchises requires franchisors to provide the prescribed disclosure information and the contract text in writing at least 30 days before the agreement is concluded. Dispute resolution arrangements should therefore be available for prospective franchisees to review before signing, rather than appearing as a new schedule only after payment.

Practical takeaway: Before formally recruiting franchisees, test the procedure with a simulated dispute in which a franchisee claims that training has not been delivered. Check whether you can identify the person responsible, retrieve the records, produce a written proposal and clearly explain the next legal step. If any of these proves impossible, fix the procedure first.