Franchising in Hong Kong: Limiting the Franchisor’s Authority to Sign Contracts on Your Behalf

When you buy a franchise, an offer from the franchisor to ‘handle opening arrangements’ or ‘manage supplier contracts centrally’ can certainly ease the set-up workload. But helping with arrangements and entering into contracts on your behalf are two different things. Prospective franchisees in Hong Kong should look beyond service fees and ask: can the franchisor place orders, accept quotations or renew contracts in your company’s name? Once a commitment has been made to a third party, the obligation to pay may not disappear simply because you did not personally sign the document.

1. Distinguish between introductions, administrative support and contracting as an agent

The phrase ‘arranged by the franchisor’ can cover several different legal relationships. The franchisor might introduce a supplier and leave the franchisee to sign the contract; purchase services itself and then charge the franchisee; or enter into a contract directly as the franchisee’s agent. Each arrangement allocates responsibility differently.

Before signing, ask the brand to specify who will enter into each contract for fitting out the premises, purchasing, marketing and IT systems, and request copies of the proposed order forms and contract templates. Do not review only the franchise agreement: also check authorisation letters, outlet-opening application forms and the terms you are asked to accept on online platforms.

Check the following points in particular:

• Contracting parties: Is the customer named in the document the franchisor, the franchisee company or the individual franchisee?
• Capacity in which the contract is signed: Is the franchisor signing in its own name or on behalf of the franchisee company?
• Payment and claims: Who must pay the supplier, and who can bring a claim if something goes wrong with the service?
• Ongoing authority: After placing the first order, can the franchisor still place additional orders, change services or agree to automatic renewals?

A service recommendation from the franchisor does not, by itself, give it authority to sign on your behalf. Conversely, a broadly worded authorisation may go far beyond what you understood to mean ‘help with opening the outlet’.

2. Understand the legal risks of agency relationships in Hong Kong

Hong Kong has no franchise-specific legislation, nor any generally applicable statutory franchise disclosure document, franchise registration scheme or mandatory franchising code. Arrangements for signing on another party’s behalf are primarily assessed under contract law and common-law principles of agency. The Misrepresentation Ordinance may also apply where false representations are made before a contract is signed.

As a general rule, a contract entered into by an agent on behalf of a principal within the scope of valid authority can bind the principal. For example, if the franchisee company authorises the franchisor to arrange cleaning services on its behalf, the franchisee company may be liable to the supplier for the service fees, rather than the franchisor that actually signed the paperwork.

Internal restrictions may not be enough to prevent liability to third parties. Even if you privately require the franchisor to obtain approval first, apparent authority may still arise if your words or conduct towards a supplier reasonably lead it to believe that the franchisor has the relevant authority. Whether this applies depends on the facts; a statement such as ‘not valid without my personal signature’ is not enough on its own to determine the outcome.

You should therefore have a Hong Kong lawyer review both the franchise agreement and the authorisation documents intended for third parties, and arrange for the limits of authority to be clearly communicated to suppliers. Company incorporation and business registration are merely statutory registration procedures. They do not mean that the franchisor has government approval to commit franchisees to any transaction.

3. Turn the authorisation into a workable approval system

Avoid wording that simply says ‘the franchisor may handle all operational matters on behalf of the franchisee’. A safer approach is to create an authority schedule specifying the activities, amounts, time limits and designated approvers, with a separate list of matters for which the franchisor cannot sign on your behalf.

For example, routine consumables might be ordered within an approved budget, while new long-term services, equipment finance, borrowing, guarantees and settlement arrangements would require separate, express written approval. These are negotiable safeguards, not statutory terms that franchisees automatically receive.

Each authorisation should address at least the following:

• Spending limits: Whether the cap includes delivery, installation and other additional charges, and how successive orders will be aggregated to prevent orders being split to bypass approval requirements.
• Limits on duration: Restrictions on minimum contract terms, automatic renewals and early cancellation charges, as well as monthly fees.
• Approval methods: Named approvers and designated communication channels, so that general discussions or silence are not treated as consent.
• Conflicts of interest: Disclosure before a transaction is approved if the franchisor recommends an affiliated supplier or receives commission.
• Emergency exceptions: Where genuinely necessary, clearly defined emergency situations, spending caps and procedures for reporting afterwards.

For instance, a service with a seemingly modest monthly fee may carry a long-term commitment, so approval should not be based solely on the first month’s cost. Requiring each approval document to show the cost over the full commitment period and the exit terms makes spending easier to control.

4. Keep transaction records and define how authority can be revoked

Authority to sign on your behalf needs an end point, not just a start date. The agreement should specify when the authority expires, how the franchisee can reduce or revoke it, and the deadline for the franchisor to hand over orders, service contracts, invoices and correspondence.

During operations, require the franchisor to provide complete documents after entering into a contract, rather than merely sending a payment notice. The franchisee company should also retain authorisation and approval records, and regularly reconcile supplier invoices against approved transactions to identify unapproved additional orders or renewals early.

When revoking authority, do not assume that an email to the franchisor completes the process. Following your lawyer’s advice, notify the relevant suppliers, update purchasing-platform permissions, remove authorised contacts and keep records of the notices. Revoking authority will not usually cancel contracts that have already been validly entered into. Outstanding debts, existing service terms and cancellation charges still need to be dealt with separately.

If you discover a transaction that may exceed the franchisor’s authority, preserve the documents and seek legal advice promptly. Before the position has been assessed, avoid confirming orders, accepting renewals or taking other steps that could be interpreted as ratification. The franchise agreement should also set out in advance how losses will be allocated between you and the franchisor, rather than assuming that the supplier must bear the consequences.

Practical takeaway: Before paying or signing, obtain templates of the documents authorising the franchisor to sign on your behalf, finalise the authority schedule and approval process, and check that the explanation of authority given to suppliers is consistent with them. You can delegate the work to the franchisor, but do not leave its contracting authority undefined.