Franchise Liability in Hong Kong: Check Liability Caps and Indemnities Before Signing

When choosing a franchise brand, look beyond franchise fees and promises of support. If the agreement requires you to bear “all losses connected with the outlet” while capping the franchisor’s liability at a low amount, a single incident could leave you facing costs far beyond your budget. Before joining a franchise network, review exclusions, liability caps and indemnities together to understand who causes the problem, who controls the response and who ultimately pays.

1. Understand the Three Types of Clause and Hong Kong Law

Exclusion clauses seek to exclude certain liabilities, for example by stating that the franchisor is not responsible for particular categories of loss. Liability caps limit the amount that can be recovered. Indemnity clauses generally require one party to compensate the other for specified losses, liabilities or claims. Their actual scope depends on the wording and is not necessarily limited to third-party claims.

Hong Kong has no franchise-specific legislation, nor any generally applicable statutory franchise disclosure document, franchise registration scheme or mandatory franchise code. Do not assume that a brand must proactively draw liability clauses to your attention, or that every one-sided term will automatically be invalid.

Franchise agreements are governed by common law contract principles and applicable general legislation. The Control of Exemption Clauses Ordinance (Cap. 71) may restrict certain exclusions and limitations of liability. For example, liability for death or personal injury resulting from negligence cannot be excluded by contract, while exclusions for other losses resulting from negligence must satisfy a reasonableness requirement. Whether the Ordinance applies to a particular commercial term still requires analysis of the transaction and the wording; not every franchise liability cap is subject to the same test.

The Misrepresentation Ordinance (Cap. 284) may also apply to misrepresentations made before signing. A statement in the agreement that “no warranties are given” does not necessarily remove the associated legal liability.

2. Allocate Liability According to Actual Control

Start by listing situations that could give rise to claims, then ask: who supplies the information or products? Who makes the decisions? Who can prevent or remedy the problem? Do not simply accept the argument that “the franchisee runs the outlet, so the franchisee is responsible for everything”.

For example, a franchisee independently departing from operating requirements is a different source of liability from a franchisor providing defective operating instructions. A franchisee making unauthorised changes to promotional content should also be treated differently from one using materials specified by the franchisor without alteration. These are scenarios to explore during negotiations; actual liability will still depend on the facts and the law.

Ask for the agreement to distinguish clearly between:

• Losses caused by the franchisee’s own breach of contract, negligence or unauthorised acts.
• Losses caused by the franchisor’s own breach of contract, negligence or provision of unsuitable materials.
• How losses will be apportioned where both parties are responsible, according to their respective contributions.

Pay particular attention to broad wording such as “directly or indirectly connected with the franchise business”. Discuss with a solicitor whether this can be replaced with a clearer causal link, and whether losses attributable to the indemnified party’s own fault can be excluded.

3. Work Out Whether the Liability Cap Offers Real Protection

Do not merely check whether the agreement contains a cap. First establish whether it protects only the franchisor or applies to both parties. Then check whether it applies per incident, per year or in aggregate over the entire agreement term.

If the cap is calculated by reference to “fees paid”, clarify whether this includes the initial franchise fee, royalties or other payments, and which period is used. When relatively little has been paid in the early stages of trading, the franchisor’s liability cap may be correspondingly low.

Also check the following:

• Do indemnity liabilities count towards the general cap, or do they sit entirely outside it?
• Do legal fees, investigation costs and defence costs count towards the cap?
• Will multiple claims arising from the same cause be treated together?
• Which liabilities are uncapped, and are those categories too broad?

If all the main risks are carved out, an apparent cap may offer little practical protection. Equally, including liabilities that the law does not permit parties to exclude will not make their exclusion valid.

4. Negotiate Indemnities Alongside Claims Procedures

Even where liability is allocated fairly, you may still lose the opportunity to control costs if the franchisor can admit liability or agree a settlement on its own, then pass the bill to you.

Ask the agreement to specify how claims must be notified, who must provide documents, who appoints solicitors and who controls the defence. Settlements that require you to pay, admit fault or change how you operate should be subject to appropriate prior consent arrangements. The procedure should also prevent either party from unreasonably delaying matters and increasing the loss.

On costs, clarify whether only reasonable, documented expenses are covered and whether you must advance defence costs before the claim has been resolved. The agreement should also explain how those advances will be repaid if you are ultimately found not to be responsible.

Insurance is no substitute for this review. Additional indemnity obligations assumed under the agreement may not be fully insured. Ask an insurance adviser to check the relevant clauses against the policy, rather than simply comparing coverage limits.

5. Complete a Liability Checklist Before Paying

Organise each risk into a table with six columns: “triggering event, responsible party, recoverable losses, liability cap, exceptions and claims procedure”. Cross-check each item against the franchise agreement, its schedules and any other documents you must sign at the same time. Look for separate undertakings that could expand your liability again.

When referring the documents to a Hong Kong solicitor, ask not only whether the clauses are enforceable, but also what you could have to pay in a worst-case scenario, whether any liability is uncapped and which amendments should take priority in negotiations. Do not rely solely on a franchise sales representative’s verbal assurance that “we never enforce this”. Important clarifications should be included in the formal documents.

Practical takeaway: Before signing, establish “whose conduct triggers liability, which losses must be paid, the maximum amount payable and who handles the claim”. If you cannot answer those four questions, an affordable franchise fee is not enough reason to proceed.