Territorial Protection and Online Order Allocation: What Businesses in China Should Agree Before Franchising

When an established business prepares to offer franchises, the promise that ‘you will be our only outlet in this area’ can cause more misunderstanding than the fees. The franchisor may simply intend to restrict new franchised outlets, while the franchisee assumes that all sales under the brand in that territory belong to them. Building a stable franchise network means translating territorial protection into specific terms that can be understood, implemented and checked before recruitment begins, rather than relying on verbal explanations from the recruitment team.

1. Define which operating rights are protected

Article 11 of mainland China’s Regulations on the Administration of Commercial Franchising requires a written franchise agreement specifying matters such as the scope of the business, the term, fees and liability for breach. The Regulations do not give every franchised outlet automatic exclusivity within a standard radius. The scope of territorial protection, whom it restricts and any exceptions must be expressly agreed.

The franchisor should first draw up a ‘territorial rights checklist’, addressing each of the following:

• Does protection restrict the franchisor from opening new company-owned outlets in the territory?
• Does it prevent other franchisees from opening outlets, or only outlets of the same format?
• Are shopping centre concessions, pop-up shops and vending locations covered?
• Does protection extend to corporate bulk purchases, e-commerce sales and on-demand delivery?

Do not describe a ‘priority right to negotiate’ as an ‘exclusive right to operate’. The former generally means priority in negotiations when a new opportunity arises; it does not mean the franchisor is prohibited from working with anyone else. If a priority right is granted, the agreement should also specify how notice will be given, the deadline for responding and what happens if no agreement is reached.

These terms should be consistent across recruitment materials, preliminary documents and the contract. A franchisor should not promise ‘exclusivity across all channels’ during recruitment, only to exclude major sales channels through inconspicuous exceptions at the signing stage.

2. Set out territorial boundaries in a contract schedule

Phrases such as ‘nearby’, ‘this trading area’ or ‘within three kilometres’ may seem straightforward, but can leave unanswered questions about the starting point, measurement method and which buildings fall within the territory. Prepare a dated territorial schedule using addresses, road boundaries and clearly marked maps together to define the area. Specify which takes precedence if the wording and map conflict.

If using a radius, state the point within the outlet from which it is measured and whether the distance is measured in a straight line or by another method. If using an administrative area, explain whether changes to administrative boundaries automatically alter the protected territory. For large commercial complexes, specify whether protection covers the whole building, a particular floor or designated units.

Before signing, check whether the proposed territory already contains existing outlets, contracted outlets awaiting opening or territorial commitments that remain in force. Existing outlets and any arrangements allowing them to continue operating should be listed in the schedule, not disclosed only after the franchisee has fitted out their premises.

The size of the territory should be informed by experience from company-owned operations, including where customers come from, how easily they can reach the outlet and delivery capacity. Do not grant an excessively large territory simply to attract franchisees, or treat the area currently displayed by a delivery platform as a permanent contractual boundary.

3. Agree separate rules for online order allocation, fulfilment and revenue

Online orders should not simply be assigned to an outlet solely on the basis of the customer’s address. A customer choosing an outlet, an order automatically allocated by the franchisor’s online shop and a centralised corporate purchase may each require different rules. The contract should distinguish three questions: who receives the order, who fulfils it, and who receives the relevant revenue and bears the costs.

Common scenarios can be set out in a channel rules table:

• Customer-selected outlet: Explain whether the customer’s choice will be honoured and how the order will be reassigned if that outlet cannot fulfil it.
• Orders allocated by the franchisor’s system: Specify the priority given to factors such as address, delivery capacity and opening status, and retain records of reassignments.
• Centralised sales by the franchisor: Agree whether outlets must handle delivery, returns or exchanges, and how they will be paid for that work.
• Bulk purchases spanning multiple territories: Clarify who provides the quotation, who enters into the contract and how fulfilment tasks are allocated, so that outlets do not make overlapping commitments.

Third-party platforms may change their delivery and listing rules. The franchisor should not guarantee that a platform outside its control will never generate cross-territory orders. Instead, it should explain which settings it can control and establish procedures for handling exceptions and consultation. The area in which an outlet is visible online is not necessarily the same as its contractually protected territory.

Before contracts are signed, company-owned outlets should test the proposed rules by simulating cross-territory order allocation, transfers caused by stock shortages and refunds. Check that the system can identify the order source, record who fulfils it and process the financial settlement.

4. Establish clear procedures for exceptions, changes and remedies

The protection period should align with the contract term and opening arrangements. If protection depends on opening on time or continuing to trade, specify the criteria that trigger a change, the evidence used to assess compliance, and the notice and remedy procedures. Protection should not be withdrawn solely on the franchisor’s unilateral judgement.

Reserved channels, such as transport hubs and specialist venues, should be described individually rather than covered by a blanket provision allowing the franchisor to ‘create exceptions at any time’. If a new channel could significantly affect existing franchisees, review their contracts first and then negotiate the arrangements. Updating an operations manual alone should not be used to alter rights already granted.

The Regulations on the Administration of Commercial Franchising require franchisors to provide the statutory disclosure information and the contract text in writing at least 30 days before entering into the agreement. The territorial schedule and channel rules should be supplied alongside the contract text so that applicants can assess the business opportunity fully.

Finally, agree a process for submitting evidence of suspected territorial conflicts, investigation by the franchisor, responses and corrective action. Liability should reflect the nature of the breach and its actual impact. Not every purchase across territorial boundaries should be treated as a violation, and a clause giving the franchisor ‘the final right of interpretation’ is no substitute for specific rules.

Practical takeaway: before recruiting franchisees, prepare the territorial map, channel rules table and list of existing rights granted, then run a simulation using cross-territory orders. Only make territorial promises that the contract can explain and the systems can deliver.