Franchising in Taiwan: Setting Breach Remedy Periods and Contract Termination Procedures

Turning an existing business in Taiwan into a franchise network requires more than a process for opening outlets. You also need to decide in advance what happens when a franchisee fails to meet its obligations: who verifies the problem, what opportunity is given to put it right, and when can the relationship be terminated? A clear procedure helps prevent the franchisor from treating ordinary operational mistakes as grounds for termination, while making the boundaries of the relationship clear to franchisees. This article focuses on the process from identifying a breach to deciding on termination; it does not cover the settlement of assets on exit.

1. Define termination grounds as verifiable events

Taiwan does have rules governing franchising. The Fair Trade Commission’s Disposal Directions (Guidelines) on the Business Practices of Franchisors are administrative guidelines used by the Commission when handling relevant cases, rather than a standalone franchise statute. The material information they require franchisors to disclose includes the conditions and procedures for varying, terminating and rescinding the contract.

Under these guidelines, the franchisor should provide material information ten days before entering into a franchise or preliminary franchise relationship, or within a period considered reasonable in the particular case or agreed by both parties. Failure to provide the required information without justifiable grounds may breach Article 25 of the Fair Trade Act if it is sufficient to affect trading order. Whether a particular termination is valid must still be assessed under the contract, the Civil Code and other relevant provisions. Disclosure is not a substitute for checking legality.

When drafting clauses, avoid wording such as ‘the franchisor may terminate at any time if the brand’s image is affected’. Instead, link each event to a specific obligation: for example, failing to pay overdue fees after a formal demand, using the brand without authorisation, or refusing to carry out necessary improvements expressly required by the agreement.

For each event, answer at least three questions: which contractual obligation has been breached, how can the breach be proved, and can it be remedied? The vaguer the conditions, the more likely frontline staff are to rely on personal judgement when handling similar cases.

2. Distinguish routine shortcomings, continuing breaches and urgent risks

Not every mistake warrants starting the termination process. The franchisor can establish an internal classification system, but it must be consistent with the contract. The operations team must not introduce a separate, undisclosed set of termination criteria.

• Routine shortcomings that can be corrected: For example, failing to submit operating reports as agreed. Before requiring the missing reports, check whether the issue arose from a system failure, unclear instructions or the franchisor’s failure to provide necessary tools.
• Continuing or repeated breaches: For example, failing to meet payment obligations even after formal notice. Keep records of due dates, payment demands and responses rather than relying on recollections of conversations.
• Events that could cause immediate, serious harm: For example, a suspected serious food safety issue. Address the safety risk first, then assess the grounds for temporary measures and contract termination separately.

‘Suspending sales of the affected products’ and ‘terminating the entire franchise agreement’ are different decisions. Even a temporary suspension needs an appropriate basis and scope. Emergency measures must not be used to deprive an outlet indefinitely of its ability to operate.

If the contract allows immediate termination for a serious breach without an opportunity to remedy it, ask a Taiwanese legal adviser to review how the event is defined, whether that approach is necessary and its legal effects. Do not classify every shortcoming as a serious breach, making the remedy procedure meaningless.

3. Give remedy notices a clear starting point and completion criteria

The same number of days should not automatically apply to every remedy period. Submitting missing documents, repairing equipment and retraining staff take different amounts of time. Set deadlines according to the nature of the obligation, the risks and what is practically achievable, and check whether statutory requirements for a formal demand apply.

A formal notice should ideally include:

1. Facts and evidence: The date of the incident, the specific shortcomings and records that can be checked. Avoid simply stating ‘repeated failure to co-operate’.
2. Contractual basis: Cite the relevant obligations and remedy clauses, explaining the scope of what the franchisor requires.
3. Completion requirements: Specify the actions to be taken, information to be submitted and how compliance will be verified.
4. Calculation of the deadline: Clearly state when the period starts, the deadline and how to request an extension.
5. Consequences of non-compliance: Explain the possible next steps under the contract rather than declaring in advance that termination is inevitable.

For example, a requirement to repair equipment should not merely say ‘rectify as soon as possible’. It should specify the required operating condition, how the repair will be checked and the arrangements during the repair period. If repairs depend on a service provider designated by the franchisor, also record bookings and reasons for delays. Delays outside the franchisee’s control should not all be treated as a refusal to remedy the problem.

Serve notices in the manner specified in the contract and retain records. Sending a message to a group chat should not, by itself, be assumed to satisfy every formal notice requirement. Where service is disputed, verify the position before calculating subsequent deadlines.

4. Require a review and a written decision before termination

Expiry of the remedy period does not mean the system should automatically issue a termination notice. Someone who has not been directly involved in handling the day-to-day dispute should review whether the breach persists, whether remedial work has been completed, whether the franchisor has fulfilled its related support obligations and whether the franchisee’s objections are reasonable.

Create a case file with a chronological record of evidence, notices, responses, extension decisions and verification results. If you accept a phased improvement plan, confirm the revised deadlines and their legal effect in writing. Avoid accepting remedial work while continuing to rely on the original deadline as grounds for termination.

Before deciding to terminate, check the contractual basis, decision-making authority, notice requirements and effective date once more. The legal effects of ‘rescission’ and ‘termination’ should not be confused. Nor should actions such as stopping supplies or blocking system access replace the formal procedure. Where there is a dispute, obtain legal advice first and make separate arrangements to address outstanding customer transactions and safety matters.

Practical takeaway: Before offering franchises, test the entire procedure using one overdue-payment case and one operational-shortcoming case. If the team still cannot clearly explain when to issue notice, what counts as a completed remedy and who authorises termination, the clauses are not yet sufficient to support consistent and fair enforcement.