Hong Kong Franchise Agreements: A Guide to Dispute Resolution and Jurisdiction Clauses

When buying a franchise, fees and operational support are important. But if the brand stops supplying goods, charges disputed fees or alleges that your outlet has breached the agreement, your ability to afford the cost of pursuing a claim also affects your investment risk. Before joining a franchise network, agree how disputes will be handled rather than simply accepting the standard terms on the final pages of the contract.

1. Understand the protections available under Hong Kong law

Hong Kong currently has no legislation specifically regulating franchising. Nor is there a mandatory pre-sale disclosure regime, franchise registration system or statutory code of conduct that applies generally to franchise arrangements. Ordinary business registration does not mean that the government has vetted the brand or its franchise agreement.

Franchise relationships are governed primarily by the terms of the contract and general law, including common law principles of contract. Where misrepresentation is involved, the Misrepresentation Ordinance (Cap. 284) may apply. Use of a brand involves intellectual property legislation such as the Trade Marks Ordinance (Cap. 559), while arrangements that restrict competition may fall within the Competition Ordinance (Cap. 619). The precise application of these laws depends on the transaction and its terms.

Do not assume that franchisees have a statutory cooling-off period, an unconditional right to a refund or the right to leave at any time. If you need these protections, negotiate for them to be included in the agreement before signing. Keep copies of the brand’s sales promises, emails and fee explanations so that your solicitor can check whether they have been incorporated into the formal agreement.

2. Distinguish between governing law, court jurisdiction and the seat of arbitration

These are three different matters. A contract stating only that it is ‘governed by Hong Kong law’ does not necessarily mean that all disputes will be handled in Hong Kong.

• Governing law: The law used to interpret the contract and determine breaches and remedies.
• Court jurisdiction clause: Which courts will hear disputes, and whether their jurisdiction is exclusive or non-exclusive. A non-exclusive clause may allow a party to bring proceedings in another appropriate jurisdiction.
• Seat of arbitration: The legal seat determines the legal framework for the arbitration and the courts that supervise it. It is not necessarily the physical location of meetings or hearings.

A relevant case study in the Trade and Industry Department’s ‘Ask the Experts’ series highlights that, when bringing an overseas brand into Hong Kong, litigation abroad may add costs for local lawyers, translation, travel and accommodation. One starting point is therefore to negotiate for Hong Kong law to govern the agreement and for disputes to be resolved in Hong Kong.

However, Hong Kong’s courts are not necessarily the best choice for every transaction. If the brand’s main assets are overseas, you must also consider whether a Hong Kong judgment can be recognised and enforced there. Before signing, ask your solicitor to assess both where to pursue a claim and how to recover the money if you succeed.

3. Choose a clear and affordable route to resolution

Consider a process involving written notice, management-level negotiations, mediation and a final binding decision. Each stage should have a clear deadline so that the other party cannot delay matters by claiming that negotiations are still incomplete.

The negotiation clause should specify who must receive the notice, which postal or email address to use, and when notice is deemed to have been served. In mediation, a neutral third party helps the parties reach a settlement rather than deciding who wins or loses, as a court or arbitral tribunal would. Any settlement reached should be recorded in a binding document.

If you choose litigation, specify the courts and whether their jurisdiction is exclusive or non-exclusive. If you choose arbitration, specify the seat, the arbitral institution or applicable rules, the number of arbitrators and the language of the proceedings. Arbitration in Hong Kong is governed principally by the Arbitration Ordinance (Cap. 609), while the Mediation Ordinance (Cap. 620) provides a legal framework for mediation.

Arbitration is not necessarily cheaper than litigation. In addition to legal fees, there may be arbitrators’ fees and institutional charges. Ask your solicitor to assess whether a sole arbitrator or a streamlined procedure would be appropriate for the likely value of a dispute. Do not simply combine contradictory court and arbitration clauses.

4. Test the clauses against real-world risks

Before signing, discuss each of the following scenarios with the brand:

• Supplies suddenly stop: Must the parties continue performing obligations unaffected by the dispute while negotiations are under way? In an emergency, can you seek interim relief under the applicable law without first completing every negotiation stage?
• Overseas headquarters demands payment: What language will the proceedings use? Who must pay upfront for document translation, lawyers and attendance at hearings? Do not assume that winning means recovering all your costs.
• A notice receives no response: How will notice be served if the contact named in the agreement has left? Once the negotiation deadline expires, can you move straight to the next stage?
• The other party refuses to comply with a judgment or award: Does the company signing the agreement actually hold assets? Is a guarantee from a financially sound parent company needed? A well-known brand name does not mean that the contracting entity can meet its financial obligations.

Also check that the dispute clauses in the franchise agreement, supply agreement, personal guarantee and other related documents are consistent. This helps avoid the same incident being dealt with in different jurisdictions. Do not assume that negotiations or mediation automatically suspend statutory time limits for bringing claims.

Practical summary: Before paying, prepare a one-page checklist covering governing law, where disputes will be handled, the language of proceedings, costs and enforcement arrangements, and have it reviewed by a Hong Kong solicitor. A good dispute clause should do more than explain how to take legal action: it should give both parties a workable way to resolve problems early.