Franchise Territory Protection in Hong Kong: Clarify Exclusivity and Online Order Allocation Before Signing

When you buy a franchise in Hong Kong, you may face competition from the same brand on the same street, on another floor of a shopping centre or even within the same delivery area. A verbal promise that “you’ll be our only outlet in the area” may not be enough to protect your investment. Before joining a franchise network, break territory protection down into four questions: what area is protected, who is restricted, which channels are covered, and what happens if that protection is breached?

1. Establish what “exclusive” actually protects

The right to operate at a particular address does not mean the brand has promised not to open nearby. Even if the contract uses the word “exclusive”, check its definition and exceptions: the restriction may apply only to other franchisees, leaving company-owned outlets, affiliated companies or other types of sales outlet outside its scope.

Before signing, ask the brand to confirm each of the following in writing:

• Who is restricted from opening outlets: Does the restriction cover the brand itself, other franchisees and affiliated companies?
• Which outlet formats are restricted: Are pop-up shops, shopping centre concessions, collection points and delivery-only kitchens included?
• Reserved channels: Does the brand retain the right to sell through online shops, corporate orders, wholesale or events?
• Protection period: Does protection begin when you sign, or only once you open or meet specified performance targets?

Do not rely solely on the franchise sales presentation. Request a list of existing outlets and approved opening plans, and ask the brand to confirm whether any nearby franchises have been authorised but have not yet opened. Treat information the brand will not disclose as an unresolved risk, rather than assuming there is nothing to worry about.

2. Define the territory with maps and order allocation rules

Phrases such as “around this area” or “within walking distance” can easily lead to disputes. Hong Kong has a high concentration of shopping centres, and streets, floors and pedestrian routes all affect footfall. An administrative district name alone may not reflect commercial reality.

A safer approach is to attach a map with clearly marked boundaries to the contract, showing its version date, streets and specified properties. If the territory is defined by a radius, state the starting point and measurement method. Also specify whether the map or the written description takes precedence if they conflict.

Protection for a physical outlet does not automatically cover online transactions. Separately confirm:

1. When a customer orders on the brand’s website, is the order allocated by delivery address, collection outlet or another criterion?
2. Can other outlets deliver into the protected territory through delivery platforms?
3. Do online sales within the territory count towards the franchisee’s performance assessment or revenue share?
4. Can the brand change delivery areas and order allocation rules unilaterally?

For example, you may have exclusive rights to operate an outlet in a particular shopping centre, while the brand’s online shop can still deliver to offices within it. This may not breach the agreement, but it could affect your expected customer base and must be factored into your investment decision.

3. Hong Kong has no statutory franchise territory protection

Hong Kong currently has no legislation specifically regulating franchising. Nor does it have a mandatory pre-contract disclosure regime generally applicable to franchise transactions, a franchise registration system or a statutory franchise code of conduct. Business registration does not mean the government endorses a brand or franchise scheme, and franchisees do not automatically acquire exclusive territorial rights.

Territorial rights depend primarily on the contract and are governed by general law, including common law contract principles. If a brand induces you to sign through false promises about territorial protection, remedies may be available under the Misrepresentation Ordinance (Cap. 284) and common law. Whether you can pursue a claim depends on factors such as what was represented, your reliance on it and the contract terms.

Territorial restrictions must also be considered under the Competition Ordinance (Cap. 619). Its First Conduct Rule prohibits agreements and other arrangements that have the object or effect of preventing, restricting or distorting competition in Hong Kong. Exclusive territories are not unlawful in every case, but restrictions on sales outside a territory, customer allocation or associated pricing restrictions require a case-specific assessment. Do not assume a restriction is valid simply because it appears in a franchise agreement.

A Hong Kong lawyer should therefore check both whether the protection is adequate and whether the restrictions comply with the law. Do not make your own agreements with neighbouring franchisees to divide up customers.

4. Spell out when protection can be lost and what remedies apply

Some contracts link territory protection to minimum turnover, additional outlet openings or renewal. The real risk is often not the absence of protection, but how easily the brand can withdraw it.

When reviewing the contract, ask for clear provisions on the performance measurement period, the treatment of refunds and online orders, and the process for verifying data. If targets are missed, must the brand first give written notice and time to improve? Should targets be adjusted if the brand delays support or changes order allocation? These points should all be negotiated before signing.

Also check whether the brand can use its operations manual to reduce the territory unilaterally. It is advisable to require both parties’ written agreement for significant territorial changes and to specify which takes precedence: the contract or the manual.

If the brand breaches its territorial commitments, the contract should set out how notice must be given, the deadline for remedying the breach and the measures that may be negotiated, such as halting new competing sales outlets, adjusting fees or allowing an exit in specified circumstances. Do not assume you can stop paying all fees once you discover a breach: doing so could put you in breach as well.

Practical takeaway: Before paying, obtain a territory map agreed by both parties, a list of sales channel exceptions, and clear terms covering withdrawal of protection and remedies. Turning “we won’t open another outlet nearby” into a written commitment that can be checked and enforced is what makes territory protection useful to your franchise investment.