Hong Kong Franchise Exclusion Clauses: Check Liability Caps and Excluded Losses Before Signing

When buying a franchise in Hong Kong, prospective franchisees usually start by comparing franchise fees and support packages. Yet it is easy to overlook the exclusion clauses towards the end of the agreement. Even where the franchisor promises help with opening, systems or services, the amount you can recover if it fails to deliver may be limited. Building a lasting franchise relationship means asking not only “What will the franchisor do?” but also “Who bears the loss if it fails to deliver?”

1. Hong Kong has no franchise-specific legislation, but exclusion clauses remain subject to the law

Hong Kong has no dedicated franchise legislation governing franchise sales or the parties’ rights and obligations. Nor does it have a statutory franchise registration scheme or mandatory pre-sale disclosure regime. General business registration and applicable licensing requirements must still be met. Franchisees should not assume that a franchisor’s standard agreement has been vetted by the government, or that the law necessarily provides a minimum level of compensation.

Franchise relationships are primarily governed by common law contractual principles and applicable legislation. When reviewing exclusion clauses, pay particular attention to the Control of Exemption Clauses Ordinance. Liability for death or personal injury resulting from negligence cannot be excluded or restricted by a contractual term. Clauses excluding or restricting liability for other losses caused by negligence must satisfy the requirement of reasonableness. Certain restrictions on liability for breach of contract may also be subject to a reasonableness test, including where one party contracts on the other’s written standard terms of business.

This does not mean that all franchise exclusion clauses are invalid, or that a court will necessarily overturn arrangements unfavourable to the franchisee. Whether the Ordinance applies, and whether a term is reasonable, depends on the particular transaction. If a clause seeks to exclude liability or remedies for pre-contractual misrepresentation, the Misrepresentation Ordinance must also be considered. Negotiate acceptable wording before signing, rather than hoping a court will rewrite the deal afterwards.

2. Translate the liability cap into an actual figure

If you see wording stating that “the franchisor’s aggregate liability shall not exceed the fees paid by the franchisee”, do not immediately assume that the protection is adequate. Break down the calculation and ask the franchisor to confirm the following in writing:

• Which payments count? Does the cap include the initial franchise fee, ongoing royalties and service fees, or only one category of charge?
• What period does it cover? Is it the entire contract term, or a specified period before the event giving rise to the claim?
• How does the cap apply? Is it per incident, per contract year, or a single aggregate cap for the entire relationship?
• Which liabilities share the cap? Are liabilities relating to systems, opening support and other obligations all counted together?

If the cap is based only on ongoing fees paid recently, it may be very low during the early stages of trading, even though the franchisee has already incurred fit-out, staffing and other costs. Equally, a cap based on all payments made may still be insufficient to cover losses caused by a serious breach.

A practical approach is to ask an accountant to work through several realistic scenarios. For example, the franchisor might fail to provide an essential service it has promised, delaying the opening or forcing the franchisee to make alternative arrangements. List the direct expenditure and compare it with the contractual cap. This is not a prediction of how much you would recover: it is a way to understand how much risk you are preparing to bear yourself.

3. Look beyond the cap: which losses are excluded?

Even a seemingly substantial liability cap may offer limited protection if it sits alongside broad exclusions of loss. Common wording excludes loss of profit, business interruption, loss of data, indirect loss or consequential loss. The legal effect of each term must be assessed in the context of the full clause, rather than by relying on its everyday meaning.

For example, if a clause separately excludes “any loss of profit”, its effect may extend beyond indirect losses. Conversely, you should not assume that all additional expenditure will automatically qualify as recoverable direct loss. Requirements relating to causation, remoteness, evidence and mitigation will still affect a claim.

When reviewing the agreement, put each key promise and the corresponding remedies in the same table:

Franchisor’s contractual promise	Potential expenditure following a breach	Protection to clarify
Provide essential operating systems	Costs of temporary workarounds and restoring service	Whether these costs fall within exclusions for data or systems losses
Provide support services for which fees have been paid	Reasonable costs of appointing another service provider	Whether a refund or reimbursement of replacement costs can be claimed
Complete work within a specified time	Additional co-ordination costs and the cost of making arrangements again	Whether recovery is restricted by clauses excluding liability for delay

These are points for negotiation and review, not automatic statutory entitlements to compensation. If the agreement provides for service credits or refunds, check whether they are described as the “sole remedy”. If so, other avenues of recovery may be restricted.

4. Focus negotiations on clear responsibilities, not a promise to “accept full liability”

For prospective franchisees, demanding the removal of every limitation of liability may not be realistic. A more useful approach is to propose specific amendments based on the work within the franchisor’s control, the foreseeable consequences of a breach and the risks each party can bear.

First, discuss adding a fixed minimum amount to the liability cap, or setting separate caps for different liabilities. This can prevent protection from being too low during the opening period simply because few fees have been paid. The figures should be negotiated according to the scale of the transaction and potential expenditure. There is no statutory percentage that applies to all Hong Kong franchise agreements.

Second, clearly identify matters that fall outside the general cap or exclusions. These might include liabilities that cannot legally be excluded, and liability for fraud or deliberate breach that the parties agree to treat separately. Also clarify whether amounts the franchisor is obliged to refund count towards the liability cap, so that a refund does not exhaust the amount available for other remedies.

Third, treat “putting the problem right” and “compensating for loss” separately. The agreement should contain enforceable wording on when the franchisor must respond, how quickly it must propose a remedy and whether reasonable alternative arrangements can be required if it fails to resolve the problem. A vague promise to provide assistance is not enough.

Finally, ask a Hong Kong lawyer to review the main agreement, its schedules and any separately signed service agreements together. Check for conflicting liability caps, excessively short claim deadlines, or another broad exclusion clause that undermines the negotiated changes. Do not stop making payments simply because a clause appears unfair: doing so could create a separate dispute over breach of contract.

Practical takeaway: Before paying, choose the franchisor’s three most important promises. For each one, write down: “What would I lose if this promise were broken? Which losses could I recover? What is the maximum I could recover?” If the answers remain unclear, amend the terms before deciding whether to join.