Franchising a Hong Kong Business: How to Set Up Dispute Resolution and Mediation Procedures

When an established business prepares to offer franchises, the brand often focuses first on support and fees, leaving dispute resolution to the final pages of the agreement. Yet when training falls short of promises, store inspection scores are challenged or support fails to arrive, even a minor disagreement can bring cooperation to a halt if there is no clear procedure. A resilient franchise network needs a process that both parties can use, with predictable costs and no barriers to urgent relief.

1. Distinguish between the roles of Hong Kong law and the agreement

Hong Kong currently has no legislation specifically regulating franchising, nor any generally applicable statutory regime for franchise disclosure, franchise registration or mandatory cooling-off periods. The filing and disclosure requirements under mainland China’s Regulations on the Administration of Commercial Franchises should not be treated as local rules for a franchise arrangement operating solely in Hong Kong. Any planned expansion into mainland China requires a separate assessment.

Franchise disputes in Hong Kong are dealt with primarily under the agreement’s terms and common law principles of contract. Depending on the facts, general legislation such as the Misrepresentation Ordinance, the Competition Ordinance and the Trade Marks Ordinance may also apply. The absence of franchise-specific legislation does not mean that a brand can contract out of all legal liability.

If mediation is used, the Mediation Ordinance (Cap. 620) provides rules on matters including the confidentiality of mediation communications. However, statutory exceptions apply: it is not a blanket rule that no information may ever be disclosed. If arbitration is chosen, the framework under the Arbitration Ordinance (Cap. 609) should be considered. Before the agreement is signed, a Hong Kong lawyer should check that the dispute resolution clauses are consistent with the other provisions governing liability.

2. Establish a written notice and escalation process with clear deadlines

Do not simply state that “the parties will resolve matters amicably”. The brand should first distinguish routine service complaints from formal contractual disputes. The operations support team can handle the former; allegations of breach, claims for compensation or recurring unresolved issues should trigger the formal process.

A formal notice should include, at a minimum:

• The events concerned, their dates and the relevant agreement clauses;
• Any remedial action already taken and the impact on operations;
• Supporting documents that can be checked, such as training records, support tickets or email correspondence;
• The action requested from the other party and the matters requiring a response.

The agreement should specify the address, email address and recipient for service of notices, and when service takes effect. It should also set deadlines for acknowledging receipt, providing a substantive response and holding a management meeting. These deadlines should reflect the complexity of the issue; there is no single statutory timeframe that should be presented as universally applicable.

Those handling an escalated dispute should have authority to agree a settlement. The person originally complained about should not decide the outcome alone. Once discussions conclude, record the points agreed, the outstanding issues and the next steps. Avoid relying on a group-chat message saying only “we will deal with this later”.

3. Make the mediation arrangements workable in practice

In mediation, a neutral third party helps the parties find a solution. Unlike a judge or arbitrator, the mediator does not decide who wins or loses. For a franchisor and franchisee that still wish to work together, solutions can go beyond financial compensation: they might include additional training, a different support team or a fresh assessment of whether agreed requirements have been met.

The clause should explain how mediation is initiated, how the mediator is selected and what happens if the parties cannot agree on an appointment. It should also specify the location, language and principles for sharing costs. Set out how long negotiations or mediation may continue without a resolution before either party can move to the next stage, so that the process does not drag on indefinitely.

Do not assume that taking part in mediation automatically suspends the time limit for bringing a claim, or that proposing mediation amounts to admitting a breach. Seek legal advice early where limitation periods or the preservation of rights are at issue. If a settlement is reached, put it in writing, specifying deadlines for performance, how compliance will be assessed, payment arrangements and which claims the settlement covers. Participation in mediation alone does not guarantee a binding outcome.

4. Make a clear choice between court proceedings and arbitration

“Governed by Hong Kong law”, “subject to the jurisdiction of the Hong Kong courts” and “arbitration in Hong Kong” are different concepts. The first determines the law governing the agreement; the second concerns which courts will hear disputes; the third selects arbitration as the procedure. A clause stating only that Hong Kong law applies does not fully determine where disputes will be resolved.

If court proceedings are chosen, a lawyer should clarify the jurisdiction clause and whether jurisdiction is to be exclusive. If arbitration is chosen, specify the seat of arbitration, the applicable rules, the number of arbitrators and the language of the proceedings. For institutional arbitration, identify the institution accurately. The seat of arbitration is a legal concept and is not necessarily the physical location of meetings or hearings.

When comparing the options, consider the value of potential claims, the language of the documents, where each party’s assets are located and any enforcement needs. Arbitration cannot be assumed to be faster or cheaper in every case. Avoid including conflicting court and arbitration clauses that force the parties to spend money arguing about where the dispute should be heard before addressing its substance.

5. Preserve exceptions for urgent action and test the process in a pilot operation

A staged process should not become a tool for delaying urgent action. Where there is suspected disclosure of trade secrets, unauthorised use of trade marks or a safety risk, the agreement should preserve the ability to seek urgent relief under the law, notify the relevant authorities and meet statutory obligations. Whether an injunction or other relief is granted remains a matter for the relevant court or arbitral tribunal to determine under the law.

Also specify which day-to-day obligations must continue during a dispute and how disputed payments will be handled. Neither party should be left with the impression that raising a complaint entitles it to stop all payments or withdraw all support unilaterally.

Before formally recruiting franchisees, test the process at a company-operated pilot outlet using a hypothetical case in which the brand fails to provide training as promised. Can the store manager find the correct channel for giving notice? Does management have authority to offer a remedy? Are the documents sufficient to establish what happened? Then include the contact details and forms in the operations manual, but do not use unilateral updates to the manual to alter core contractual rights relating to disputes.

Practical takeaway: Start with a one-page process map covering notice, responses, escalation, mediation and formal proceedings. Then ask a lawyer to translate it into consistent contractual clauses. A good dispute resolution process does not guarantee that disagreements will never arise; it ensures that both franchisor and franchisee know what to do next.