Resolving Franchise Disputes in Hong Kong: Clarify Governing Law, Courts and Arbitration Before Signing

When buying the Hong Kong franchise rights for an overseas brand, prospective franchisees often focus first on franchise fees and operational support, leaving dispute clauses until last. Yet if the franchisor stops providing support or a disagreement arises over charges, where you can pursue a claim and which language you must use may directly affect whether you can afford to enforce your rights. The franchise community values co-operation, but a workable dispute resolution process is just as important to that relationship.

1. Distinguish Between Governing Law and Where Disputes Are Handled

Three types of contractual clause serve different purposes. Simply seeing the words ‘Hong Kong’ should not put your mind at rest:

• Governing law: Determines how the contract is interpreted and the parties’ contractual rights and obligations.
• Court jurisdiction: Specifies which jurisdictions’ courts may hear disputes. ‘Exclusive’ and ‘non-exclusive’ jurisdiction have different effects: the latter does not necessarily prevent proceedings elsewhere.
• Arbitration arrangements: If disputes are to be resolved through arbitration, you must also check the seat of arbitration, the rules, the language and the number of arbitrators.

Choosing Hong Kong law does not mean a claim must be brought in the Hong Kong courts. Equally, choosing the Hong Kong courts does not necessarily mean the contract is governed by Hong Kong law. The seat of arbitration is its legal home and may differ from the physical location of meetings or hearings.

Before signing, ask a lawyer to summarise these arrangements on one page and check that the franchise agreement, any guarantee and other ancillary agreements are consistent. Otherwise, disputes arising from the same business relationship may have to be handled in different places through different procedures.

2. Hong Kong Has No Dedicated Franchise Dispute Regime

Hong Kong currently has no legislation specifically regulating franchising, nor a generally applicable statutory franchise disclosure document regime, franchise registration scheme or mandatory franchise code of conduct. Franchisees should not assume that a brand must provide dispute-related information in a prescribed format, or that the law automatically gives them the right to bring proceedings locally.

Contract validity, performance and remedies for breach primarily involve common law principles of contract. False statements made during franchise recruitment may also engage the Misrepresentation Ordinance (Cap. 284). Whether you can claim compensation or rescind the contract depends on the statements, the evidence and the contractual terms.

Arbitration seated in Hong Kong is generally governed by the Arbitration Ordinance (Cap. 609). A valid arbitration agreement may result in court proceedings being stayed in favour of arbitration, so do not assume you remain free to choose court proceedings after signing. The Mediation Ordinance (Cap. 620) provides a legal framework for mediation, including confidentiality protections for mediation communications and exceptions to those protections. A mediator helps the parties negotiate; unlike a judge or arbitrator, they do not decide who wins or loses.

These general laws do not automatically supply a procedure best suited to a small business. You still need to assess before signing whether the available means of enforcing your rights are practical.

3. Assess Procedural Costs Against the Amount in Dispute

Legal guidance on franchising published by the Trade and Industry Department’s Support and Consultation Centre for SMEs advises local businesses contracting with overseas brands to seek arrangements for litigation in Hong Kong. This can reduce expenses such as overseas lawyers’ fees, translation, travel and accommodation. However, local proceedings are not necessarily inexpensive either: compare the arrangements as a whole.

Test them against a realistic scenario. Suppose the franchisor overcharges you, but the amount is too small to justify prolonged litigation. How would you recover it? Ask your legal adviser to set out the costs of initial advice, document translation and proceedings, as well as the risk of having to pay the other party’s legal costs. Do not assume that winning means you will recover all your expenses.

If arbitration is proposed, clarify the following:

• Which arbitral institution and rules will apply, rather than simply stating that disputes will be ‘referred to arbitration’?
• Would a sole arbitrator be appropriate to avoid unnecessary costs?
• Will the procedural language require extensive translation of shop records and witness evidence?
• Do the applicable rules allow expedited procedures, decisions based on written submissions alone or remote hearings?

You should also establish where the contracting company’s main assets are located. Obtaining a Hong Kong judgment or arbitral award does not mean payment will automatically follow. Cross-border recognition and enforcement involve separate requirements, procedures and costs, which should be assessed by a lawyer familiar with the relevant jurisdictions.

4. Set Out an Escalation Process While Preserving Urgent Remedies

A practical approach is to begin with written negotiations between designated representatives, then consider mediation, and move to litigation or arbitration only if the dispute remains unresolved. Each stage should have a clear trigger, deadline and next step, so that ‘amicable negotiations between the parties’ do not become an indefinite wait.

Ask your lawyer to check whether negotiation or mediation is a precondition to starting formal proceedings. What happens if the other party does not respond? Where an urgent injunction or protective measure is needed, can you seek immediate relief under the applicable law and contract? Do not assume that negotiations automatically suspend statutory limitation periods.

The notice clause also deserves a word-by-word review. A general customer service email address may not be a valid channel for legal notices. Confirm the postal address, designated email address, when notices are deemed received and the procedure for updating contact details. Once a disagreement arises, retain contract versions, payment records, requests for support and written responses. Avoid withholding all fees as a negotiating tactic before taking legal advice, as this could create a separate risk of breach.

Practical takeaway: Before signing, use a small fee dispute you might realistically encounter to test four questions: where will it be handled, how do you start the process, what will it cost and how will you enforce the outcome? Ask a lawyer to reflect those answers in the contract. Only then will you have a workable arrangement for enforcing your rights.