Franchising a Hong Kong Business: Defining Territorial Protection and Online Order Allocation

When opening an existing Hong Kong business to franchising, promising that ‘this area is yours alone’ may sound straightforward, but it leaves plenty of questions unanswered. Can another outlet open in a different block of the same shopping centre? Can the head office’s online shop deliver into the territory? What happens if a delivery platform routes an order to a neighbouring outlet? To build trust across a franchise network, a brand should define what territorial protection covers before making recruitment promises, rather than waiting until outlets are competing for the same customers.

1. Define what is protected before drawing the territory map

Territorial protection might simply mean that head office promises not to open additional outlets under the same brand within a specified area. It might also include a commitment not to grant other franchisees the right to operate physical outlets there. Neither necessarily gives the franchisee rights to every customer or order within that area. The agreement should spell out each right rather than simply refer to ‘exclusive operating rights’.

Hong Kong has a high concentration of shopping centres, MTR railway stations and commercial buildings, so straight-line distances may not accurately reflect customer catchments. Use a map with a version date, supported by a written description of streets, building numbers, floors or shopping centre boundaries. Specify which takes precedence if the map and wording conflict.

Review existing and planned sales channels and divide them into three categories:

• Protected activities: for example, new conventional street-level shops within the territory.
• Reserved activities: for example, existing company-owned outlets, specified online shops or corporate customer contracts.
• Activities requiring separate approval: for example, pop-up shops, promotional sales stands and shop-in-shop concessions.

Reserved rights should be listed precisely. Avoid promoting ‘exclusivity’ while using sweeping clauses to reserve every possible exception. Territorial protection is not a turnover guarantee either, and those recruiting franchisees must make that distinction clear.

2. Separate online orders into acceptance, fulfilment and settlement

An online order might be paid for through head office, prepared by Outlet A and then refunded through Outlet B. Rather than simply debating who ‘owns’ the order, create a channel responsibilities table showing who accepts and fulfils each type of order, who recognises the revenue and how costs are allocated.

At a minimum, cover the following situations:

• A customer buys through head office’s online shop but chooses collection from a franchised outlet.
• A delivery platform routes an order from within the territory to another outlet because of distance, workload or opening hours.
• A customer uses head office gift vouchers, loyalty points or offers valid across multiple outlets.
• A corporate customer places a single order requiring deliveries across several territories.

The agreement should specify who bears delivery charges, platform commissions, discount subsidies, refunds and the cost of remaking orders. Any management fees calculated on turnover must also be consistent with the definition of revenue allocation. If the platform cannot actually route orders by territory, franchisees should not be promised absolute protection.

Settlement statements can include order numbers, sales channels, fulfilling outlets, refunds and reasons for adjustments, allowing both parties to check the figures. Head office should share only the information needed for verification, rather than disclosing customer names, telephone numbers or full addresses to unrelated outlets for territorial settlement purposes.

3. Test allocation rules using existing outlets first

Before formally granting territorial rights, use order records from existing outlets or pilot operations to model the proposed allocation method. The aim is not to prove that a particular territory will be profitable, but to identify whether the rules create unreasonable burdens.

For example, allocation by delivery address may seem fair, but the outlet within the territory may not have enough staff. Allocating orders to the nearest outlet may overlook shopping centre entrances and actual travel times. During testing, record redirected orders, delays, refunds and additional delivery costs, and check whether the outlet fulfilling each order receives appropriate compensation.

Set out a short procedure for handling exceptions: who can approve an order transfer, when the franchisee must be notified, how the reason is recorded and when settlement must be completed. Territorial disputes should be reviewed by a designated person, rather than leaving outlets to negotiate among themselves or divert one another’s orders.

There should also be a procedure for changing territories. If head office wants to amend boundaries because a new shopping centre opens or service demand changes, the agreement should specify the circumstances in which this is permitted, the notice and consultation required, and any necessary consent. Core rights should not be rewritten simply by updating the operations manual.

4. Review the terms under Hong Kong law rather than copying mainland Chinese provisions

Hong Kong currently has no legislation specifically regulating franchising. Nor does it have a general franchise-specific registration scheme, statutory pre-contract disclosure period or mandatory franchise code. The filing and related disclosure requirements under mainland China’s Regulations on the Administration of Commercial Franchises should not be treated as statutory requirements for a purely Hong Kong franchise arrangement.

This does not mean territorial clauses can be drafted without constraints. The parties’ rights and obligations are governed primarily by common law contract principles. False representations about ‘exclusivity’ during recruitment may also engage the Misrepresentation Ordinance. Trade mark licensing requires attention to the Trade Marks Ordinance (Cap. 559), while the handling of customer order data must comply with the Personal Data (Privacy) Ordinance.

The Competition Ordinance (Cap. 619) is particularly important. Territorial or customer restrictions, restrictions on online sales, and coordination between outlets on prices or customer allocation can all raise competition law concerns. Territorial protection is not automatically unlawful, but it must be assessed in light of the commercial relationship, the nature of the restrictions and market conditions. Franchisees are independent operators: sharing a brand does not mean that coordination between outlets is necessarily exempt.

Practical takeaway: Before recruiting franchisees, prepare a territory map, a channel responsibilities table and an order-transfer and settlement procedure. Then have them reviewed by a lawyer familiar with Hong Kong contract and competition law. Keeping the agreement, recruitment statements and system capabilities aligned does more to support lasting cooperation across the franchise network than a simple promise of ‘territorial exclusivity’.