Franchising a Hong Kong Business: Setting Out Dispute Resolution, Mediation and Jurisdiction

When opening an existing business to franchising, franchisors often tackle brand standards and fees first, leaving dispute resolution to a contract template. Franchisees are independent business operators, not employees of the franchisor. If disagreements arise over promised support, fees or contractual performance, both sides need an enforceable procedure. Clear arrangements protect the interests of those in the franchise network and help parties who still have scope to work together avoid going to court prematurely.

1. Distinguish between governing law and where disputes will be resolved

Hong Kong currently has no legislation specifically regulating franchising, nor any generally applicable franchise registration scheme or statutory pre-contract disclosure regime. This does not mean franchise agreements fall outside the law: contract formation, performance and liability for breach are primarily governed by common law contract principles. Statements made when recruiting franchisees may also fall within the Misrepresentation Ordinance. Depending on the business and the nature of the dispute, other general legislation, such as the Trade Marks Ordinance and the Competition Ordinance, may also apply.

The filing and disclosure requirements under mainland China’s Regulations on the Administration of Commercial Franchises should not be treated as local requirements for a franchise arrangement confined to Hong Kong. Brands planning cross-border expansion should review the regulations in each relevant jurisdiction separately.

The agreement should address at least two distinct issues:

• Governing law: which jurisdiction’s laws will be used to interpret the agreement and determine liability.
• Dispute resolution forum and mechanism: which courts will hear disputes, or whether disputes will be referred to arbitration.

Choosing Hong Kong law does not, by itself, mean choosing the Hong Kong courts. A franchise case featured in the Trade and Industry Department’s “Ask the Experts” service highlighted that overseas litigation can add costs for lawyers abroad, translation, travel and accommodation. Hong Kong-based franchisors should also consider the practical burden on franchisees rather than simply adopting an overseas template.

2. Give negotiations a clear starting point and deadlines

A promise to “negotiate amicably in the event of a dispute” is not enough. Franchisors should establish a formal notification channel and require the party raising a dispute to identify the relevant clauses, key facts, remedy sought and supporting documents, such as service records, invoices or email correspondence. Notices should be served at the address or email address specified in the agreement, which should also set out how contact details are updated and how service takes effect.

The procedure can begin with the usual points of contact checking the facts, before escalating the matter to managers authorised to agree a settlement. Each stage should have deadlines for responding and completing the process, together with a route to the next stage if the other party does not respond. Time limits should be agreed according to business needs; negotiations should not become a means of delaying matters indefinitely.

Records of negotiations should distinguish between agreed facts, matters still in dispute and interim measures. Where formal settlement offers are involved, seek a lawyer’s guidance on confidentiality and the relevant legal protections. Do not assume that all internal meeting records are protected from use in litigation.

The agreement must also preserve access to urgent relief. If trade secrets are being disclosed or a brand is being misused on an ongoing basis, the affected party should not have to complete every negotiation stage before applying for an interim injunction. Negotiation or mediation will generally not automatically pause statutory limitation periods either.

3. Choose the final resolution mechanism if mediation fails

Mediation involves a neutral third party helping both sides find an acceptable solution; the mediator does not decide who is right or wrong. Hong Kong’s Mediation Ordinance (Cap. 620) provides a legal framework, including rules on the confidentiality and disclosure of mediation communications. However, statutory exceptions apply, so it is not appropriate to promise that everything said or shared can never be disclosed.

If the agreement requires the parties to attempt mediation first, it should specify how the mediator will be appointed, what happens if the parties cannot agree on an appointment, and how costs will be paid in advance. It should also define when the mediation stage is considered complete, so that one party’s refusal to participate cannot bring the entire process to a standstill. Any settlement should be recorded in a written agreement setting out payments, performance deadlines and the consequences of breaching the settlement.

If mediation fails, litigation or arbitration will usually need to have been selected in advance as the final resolution mechanism:

• Litigation: the parties can agree that disputes will be handled by the Hong Kong courts. A lawyer should advise on whether to use an exclusive jurisdiction clause, and on its effect and limitations.
• Arbitration: Hong Kong’s Arbitration Ordinance (Cap. 609) provides the relevant framework. The clause should clearly specify the seat of arbitration, applicable rules, number of arbitrators and language of the proceedings. The seat of arbitration is not merely the venue for meetings or hearings.

Arbitration is not necessarily cheaper than litigation. Franchisors should weigh up the amount in dispute, confidentiality needs, cross-border enforcement and both parties’ ability to bear the costs. Avoid assigning ordinary contractual disputes to both the courts and arbitration without a clear division of responsibility.

4. Plan how operations will continue during a dispute

Raising a dispute should not automatically mean ending the relationship. The agreement can require both parties, where legally permissible and safe, to continue performing obligations unaffected by the dispute. It should also set out interim arrangements for payments, supplies, system access and customer service. The treatment of disputed and undisputed sums must be clear: simply stating “business as usual” is not enough.

Franchisors should avoid treating system shutdowns or the withdrawal of all support as default pressure tactics. Any suspension must have a contractual and legal basis, with consideration given to its impact on customers and staff. Both parties should also preserve the relevant versions of agreements, operating manuals, notices and service records, rather than deleting or overwriting information once a dispute arises.

Before formally recruiting franchisees, test the clauses using a hypothetical case: a franchisee believes the franchisor has failed to provide agreed support and requests a fee reduction or waiver. Ask the team to work through who receives the notice, who has authority to settle, when mediation ends, where the dispute will ultimately be resolved and which services continue in the meantime. Any question they cannot answer points to a gap in the procedure.

Practical takeaway: First map out the sequence of “notice, negotiation, mediation, final resolution”, then ask a Hong Kong lawyer to review the governing law, jurisdiction and urgent relief clauses. Good dispute arrangements do not guarantee that disagreements will never arise; they ensure both parties know what happens next.