Franchising in Taiwan: Setting Out Breach Notices, Remedial Action and Dispute Procedures

Turning an existing business in Taiwan into a franchise network means more than teaching franchisees how to get things right. You also need to agree in advance what happens when things go wrong. Missing reports, poor service and serious safety incidents should not all attract the same response. Before recruiting franchisees, the franchisor should establish a complete process for identifying problems, verifying the facts, issuing notices requiring remedial action, reviewing outcomes and resolving disputes, rather than deciding on a penalty only after an incident occurs.

1. Distinguish a breach of contract from poor business performance

Failing to meet an internal sales target does not necessarily mean a franchisee has breached the contract. A failure to fulfil an operating obligation expressly set out in the agreement, however, should be addressed under the relevant provisions. Nor does an outlet inspection score automatically establish a breach in legal terms.

Consider dividing issues into three categories, with specific examples for each:

• Minor shortcomings: For example, failing to submit a non-urgent report or not meeting display standards. Start with a notice requesting correction and provide guidance.
• Persistent or repeated breaches: For example, repeatedly refusing to provide settlement information required by the agreement. Put a formal remedial action and review process in place.
• Serious risk incidents: For example, food safety issues or a breach of customer data. Take the necessary risk-control measures first, then establish responsibility.

The classification should not simply be left to “the franchisor’s discretion”. Set out the factors to be considered, including the extent of the impact, whether the issue can be remedied, whether it has happened before and whether the franchisee has co-operated in addressing it. Measures such as disabling system access or suspending trading require particular care: confirm both the contractual basis and their lawfulness. A franchisor’s authority to manage its brand is not equivalent to a public authority’s enforcement powers.

2. Align contractual provisions with Taiwan’s legal framework

Taiwan does not have a single, comprehensive franchise statute, but franchising is still subject to specific rules. The Taiwan Fair Trade Commission’s principles for handling cases concerning franchisors’ business practices set out requirements for disclosing important transaction information. These include restrictions within the franchise relationship, as well as the conditions and procedures for amending, terminating and rescinding the agreement.

Arrangements for remedial action, suspension of rights and termination should therefore not be tucked away in inspection forms or internal notices after the agreement has been signed. The franchisor should explain them clearly before entering into the contract and ensure that actual practice matches the agreement. Concealing important transaction information in a way that constitutes obviously unfair conduct capable of affecting trading order may engage Article 25 of Taiwan’s Fair Trade Act. The Commission’s principles are not, in themselves, a standalone franchise law.

Liability for breach and rescission of the agreement must also be considered under Taiwan’s Civil Code. For example, whether a formal demand for performance is required first depends on the nature of the breach and the applicable rules. Do not assume that every incident permits immediate termination. A court may reduce an excessively high contractual penalty, while manifestly unfair standard-form terms may also face challenges to their validity.

Before signing, have a lawyer familiar with Taiwanese franchise practice review the agreement. Pay particular attention to sweeping provisions such as “any breach results in immediate termination”, “all payments will be forfeited” and “the franchisor has the final right of interpretation”. Tough-sounding wording is no substitute for an enforceable procedure.

3. Make remedial action notices clear, verifiable working documents

A formal notice should tell the franchisee what happened, the basis for the complaint and how to put matters right. It should include at least the following:

1. Facts of the incident: Identify the outlet, date, conduct involved and confirmed impact, separating facts from assumptions.
2. Applicable provisions: Cite the contractual terms and the relevant version of the operating standards. Avoid relying on requirements introduced after the event.
3. Required remedial action: Specify the work to be completed, who is responsible, the deadline and the support the franchisor will provide.
4. Review method: Explain what evidence must be submitted, who will check it and how closure will be confirmed.
5. Opportunity to respond: Allow the franchisee to provide further information, challenge an incorrect assessment or explain why the deadline cannot be met.

Set deadlines according to the level of risk and the difficulty of the work, rather than imposing the same time limit on every problem. Submitting a missing document, for instance, takes a different amount of time from replacing equipment. If the problem stems from a failure in the franchisor’s systems, the franchisee should not be made to bear full responsibility.

Keeping photographs, inspection records, correspondence and proof of delivery helps establish what happened. However, information gathering must still comply with applicable rules, including Taiwan’s Personal Data Protection Act. Avoid sharing customer data in franchise group chats or using public naming and shaming to press for corrective action.

4. Establish review and escalation procedures rather than leaving decisions to one inspector

Outlet inspectors can record problems and recommend action, but serious sanctions should be reviewed by another manager. That review should assess whether the evidence is sufficient, whether similar cases have been treated consistently, whether the franchisor has fulfilled its own obligations and whether the proposed measures go beyond what is necessary.

If the franchisee objects, start by arranging discussions through a designated point of contact. Mediation or litigation can then be considered in light of the agreement and the circumstances of the case. If arbitration is proposed, a lawyer should confirm the content and validity of the arbitration agreement. Simply stating that a matter will be “referred to a third party” does not amount to a complete clause.

The closure record should document the improvements made and any follow-up monitoring. If the issue remains unresolved and escalation is necessary, check the legal and contractual basis again. Repeated minor shortcomings should not be mechanically added together to justify immediate termination.

Practical takeaway: Before recruiting franchisees, prepare a breach classification table, a remedial action notice template and a procedure for handling objections, then test them against hypothetical cases. The ability to handle disagreements fairly is the foundation of lasting co-operation across a franchise network.