Franchising | Disputes and Determination of Termination of Commercial Franchise Contracts

According to the Regulations on the Administration of Commercial Franchising, the franchisor and franchisee should agree in the franchise contract that the franchisee can unilaterally terminate the contract within a certain period after the contract is signed. If the agreed "cooling-off period" is too short, it may be deemed invalid.

The unilateral termination right during the "cooling-off period" is a right granted to the franchisee by law. Even if the contract does not stipulate or even excludes this right, the franchisee still enjoys the unilateral termination right, but this right must be exercised within a "reasonable period." There is controversy in judicial practice regarding the definition of "reasonable period"; some believe it should be a specific period, while others believe that the franchisee cannot exercise this right after using the business resources.

If the franchisee requests to exercise the unilateral termination right after exceeding the "reasonable period," judicial practice generally combines whether there are other circumstances leading to contract termination to comprehensively judge whether the contract should be terminated.

The People's Court of Haidian District, Beijing (2019) Jing 0108 Min Chu 48797 Civil Judgment (Haidian Court released ten typical cases of intellectual property contracts) determined that the franchisee's unilateral termination right must be exercised within a reasonable period, and in principle, it should be when neither party has made corresponding investments based on the contract, and terminating the contract has little impact on both parties. In this case, the franchise agreement stipulated a cooling-off period of 5 days, limiting the franchisee's exercise of the unilateral termination right to a very short time, which should be specially reminded at the time of contract signing to obtain the franchisee's consent; otherwise, if the party providing the standard terms increases the other party's liability, that clause is invalid.

The People's Court of Qingpu District, Shanghai (2022) Hu 0118 Min Chu 13707 Civil Judgment (Shanghai Qingpu Court typical cases of intellectual property) determined: "reasonable period" is generally understood as not long after the contract signing, and the business resources have not yet been mastered. Wang signed the contract on February 24, 2022, and did not actually use the defendant's main franchise resources, and the defendant also did not provide evidence to prove that it had fulfilled the obligations stipulated in the contract, so Wang's exercise of the unilateral termination right has legal and factual basis.

The Guangzhou Intellectual Property Court (2020) Yue 73 Min Zhong 4407 Civil Judgment determined: For the reasonable period of unilateral termination right, laws and regulations have not made specific provisions, and it should be determined based on the specific circumstances such as the type of franchising business, the authorization method of business resources, and the performance of the contract by both parties. In this case, Kang Ping claimed the unilateral termination right only two months after operating a single store, and there was a dispute between the parties regarding the exercise of regional agency rights during the contract performance. In this case, Kang Ping's exercise of the unilateral termination right did not exceed the reasonable period.

The Guangzhou Intellectual Property Court (2020) Yue 73 Min Zhong 3116 Civil Judgment determined:

Peng Chenghua signed an agreement with Cavani Company on March 21, 2017, and did not file a lawsuit until more than a year after the contract performance period expired on March 20, 2018, specifically on July 31, 2019. Therefore, the unilateral termination right claimed by Peng Chenghua has exceeded the reasonable period, and he has lost the right to unilaterally terminate the contract according to law. Peng Chenghua claimed that Cavani Company's breach of contract led to the inability to achieve the contract's purpose; however, Cavani Company has already provided evidence in the first instance to prove that it provided site selection services. Peng Chenghua claimed that the trademark used by Cavani Company infringed on others' trademarks but did not provide evidence to prove it. Peng Chenghua appealed, claiming that Cavani Company lacked business resources, but the evidence provided was insufficient to support his appeal.

The People's Court of Baiyun District, Guangzhou (2021) Yue 0111 Min Chu 3913 Civil Judgment determined: The plaintiff filed this lawsuit on January 27, 2021, requesting to terminate the contract in question, which was 30 months after the contract was signed (July 13, 2018). The plaintiff's claim to apply the unilateral termination right is obviously unreasonable. The evidence submitted by the plaintiff is insufficient to prove that the defendant has the circumstances for contract termination as stipulated in the Civil Code of the People's Republic of China. The plaintiff's claim to terminate the contract based on the inability to achieve the contract's purpose lacks factual basis.

According to the Regulations on the Administration of Commercial Franchising, the franchisor has an obligation to disclose information. If the franchisor conceals relevant information or provides false information, the franchisee can terminate the franchise contract. However, there is some controversy in judicial practice regarding the extent to which the franchisor's violation of the information disclosure obligation allows the franchisee to exercise the termination right. It is generally believed that only when the franchisor conceals important information or provides false information that is sufficient to affect the franchisee's initial decision to enter into the contract can the franchisee exercise the termination right. In judicial practice, the court mainly examines whether the franchisor's failure to disclose obligations has a substantial impact on the franchising and whether it affects the realization of the contract's purpose; otherwise, it is difficult to terminate the franchise contract on this basis.

The Beijing Intellectual Property Court (2023) Jing 73 Min Zhong 3317 Civil Judgment determined: In this case, the false information claimed by Zhang was published by Xiamen xx Company after the signing of the contract in question, and the relevant promotional content in the brand manual was not stipulated in the contract. Therefore, Zhang's claim that Xiamen xx Company engaged in false advertising and claimed breach of contract and sought termination lacks factual and legal basis. Regarding the behavior of brushing orders, Xiamen xx Company could not enforce it, and Zhang did not prove that the contract's purpose could not be achieved due to the above behavior. Therefore, Zhang's claim that Xiamen xx Company breached the contract and sought termination lacks basis.

The Shanghai Intellectual Property Court (2022) Hu 73 Min Zhong 469 Civil Judgment determined: The franchisor's failure to fulfill the disclosure obligation does not necessarily lead to contract cancellation or termination. It should comprehensively consider the franchisor's concealment, exaggeration, and the impact of the false information provided on the realization of the contract's purpose and the performance of the contract. In this case, Fu Hao has obtained the relevant business resources provided by Lian Suo Company and opened a franchise store, and there is no situation where the store in question cannot operate due to Lian Suo Company's failure to disclose business information, false advertising, or false promises. The appellee did not commit a fundamental breach of contract during the performance of the contract in question, and the appellant's claim for contract termination has no legal basis.

The Guangzhou Intellectual Property Court (2024) Yue 73 Min Zhong 601 Civil Judgment determined:

In the legal relationship of the franchise agreement, the legality, validity, and stability of the licensed trademarks and service marks involve the effectiveness and performance of the contract, as well as the current and foreseeable long-term interests of the franchisee. In this case, the appellant knowingly concealed the important information that the registered trademark No. 2X** was declared invalid in April 2020, and still signed the franchise agreement with the appellee in January 2021. The appellant failed to fulfill the obligation to actively inform as stipulated, disregarding the interests of the franchisee for personal gain, violating the basic principle of good faith, and should bear the corresponding adverse consequences. The appellee's request to terminate the contract is in accordance with legal provisions.

The Beijing Intellectual Property Court (2023) Jing 73 Min Zhong 3614 Civil Judgment states: For the determination of the franchisor concealing information leading to the termination of the contract, it should be assessed whether the concealed information is directly related to the substantive content of the franchise, whether it is sufficient to lead the franchisee to sign the franchise agreement, and whether it has a substantial impact on the franchisee's ability to conduct franchise business and achieve the fundamental purpose of the franchise agreement. When a certain technology development company signed the contract in question, it did not disclose the specific scope of the "regional protection development principle" and informed Zhang that there were no other franchisees in Siping City, which was a significant reason for Zhang to sign the contract. The technology development company concealed information such as the specific scope of the business circle protection, which was sufficient to lead Zhang to sign the franchise agreement, violating Article 23, Paragraph 3 of the Regulations on the Administration of Commercial Franchising, and Zhang has the right to unilaterally terminate the contract.

The People's Court of Binjiang District, Hangzhou City, Zhejiang Province (2024) Zhe 0108 Min Chu 157 Civil Judgment states: After both parties signed the contract, due to the possibility of the defendant infringing on the trademark rights of a third party, when the plaintiff communicated with the defendant, the defendant still did not explain or disclose significant matters such as trademark rights, and even requested to change the name "Youtuyuan" and trademark to another brand as stipulated in the contract. Therefore, this court determined that both parties had actually reached an agreement to terminate the "Youtuyuan" brand franchise contract. The reason for the failure of the contract performance between the plaintiff and the defendant was that the defendant may have infringed on the trademark rights of a third party, and the defendant failed to fulfill the obligation of information disclosure, resulting in the contract not being able to continue.

As mentioned above, the circumstances for contract termination stipulated in Article 563 of the Civil Code apply to commercial franchise contracts. In terms of commercial franchise contracts, other main circumstances for contract termination are:

The People's Court of Baiyun District, Guangzhou City, Guangdong Province (2021) Yue 0111 Min Chu 3913 Civil Judgment states: The evidence submitted by the plaintiff (the franchisee) is insufficient to prove that the defendant has the circumstances stipulated in Article 563, Paragraphs (2), (3), and (4) of the Civil Code of the People's Republic of China. The plaintiff's request to terminate the contract based on the fact that the involved station has not yet opened, and that multiple communications with the defendant to change the business address have been unsuccessful, lacks factual basis. Given that during the trial, the plaintiff clearly expressed a loss of trust in the defendant and was unwilling to continue performing the contract, the basis for the continued performance of the contract no longer exists. This court confirms the termination of the contract, but the defendant is not at fault for the termination of the contract.
 

The People's Court of Jinshan District, Shanghai (2024) Hu 0116 Min Chu 5301 Civil Judgment states: The plaintiff claims to terminate the contract on the grounds that the defendant concealed relevant information or provided false information. However, based on the existing evidence submitted by the plaintiff, it is still insufficient to prove that the defendant concealed relevant information or provided false information, so this court finds it difficult to support the plaintiff's claim. If the subject matter of the debt is unsuitable for compulsory performance, making it impossible to achieve the purpose of the contract, the people's court may terminate the rights and obligations of the contract at the request of the parties. The plaintiff (the franchisee) has already closed the store, and the "Zhu Chun Brand Regional Franchise Contract" signed between the plaintiff and the defendant can no longer be performed, and the contract is unsuitable for compulsory performance. Therefore, this court, based on the plaintiff's request, terminates the "Zhu Chun Brand Regional Franchise Contract" between the plaintiff and the defendant.
 

The People's Court of Fengxian District, Shanghai (2023) Hu 0120 Min Chu 5143 Civil Judgment states: The plaintiff (the franchisee) also claims that the defendant has fundamentally breached the contract by failing to perform contractual obligations as agreed. This court believes that based on WeChat chat records and other evidence, the defendant has not failed to perform contractual obligations. In the absence of evidence proving that the defendant constitutes a fundamental breach of contract, the plaintiff's request to terminate the contract cannot be established. However, the performance of the franchise contract has a characteristic of continuous dependence on the actions of both parties. Since the plaintiff's store has actually stopped operating, the contract can no longer be performed. Therefore, this court supports the plaintiff's request to terminate the contract.

The Shanghai Intellectual Property Court (2022) Hu 73 Min Zhong 448 Civil Judgment states: In this case, based on the WeChat chat records between both parties from March 4 to 6, 2020, the "Walmart Store Return Details," and the objective fact that both parties have not performed the contract thereafter, it can be determined that both parties have mutually agreed to terminate the "Franchise Authorization Contract" in question, and that both parties have settled part of the fees related to the contract, and both have accepted the objective fact that the contract will no longer be performed. Weiwei Company denied in court that both parties had terminated the contract, but there was insufficient evidence to prove that both parties had continued to perform the contract, and there was no evidence that Weiwei Company was still performing according to the original contract. The defense of Weiwei Company lacks factual basis and is not accepted. Lu Ruiyong's request to confirm that the contract was terminated on March 4, 2020, is consistent with the objective facts, and the first-instance court confirmed it.
 

The People's Court of Nansha District, Guangdong Free Trade Zone (2023) Yue 0191 Min Chu 600 Civil Judgment states: In this case, Pingguan Company, as the franchisor, licensed its operating resources to Fang Qiang and should fully guarantee the normal use of the licensed operating resources during the contract period. After receiving the contract payment from Fang Qiang, Pingguan Company fulfilled its obligation to deliver the cabinet, but there were no records of collection or delivery for the involved express cabinet. Combined with the fact that Pingguan Company could not be contacted later and did not continuously provide services, this court determined that Pingguan Company failed to fully perform its contractual obligations as agreed, resulting in Fang Qiang's inability to achieve the purpose of the contract, constituting a fundamental breach. Fang Qiang proposed to terminate the contract before the expiration of the contract period, which is legally justified, and this court supports it.
 

The Beijing Intellectual Property Court (2023) Jing 73 Min Zhong 3655 Civil Judgment states: The franchise resources authorized by Company A to Company B, namely trademark No. 42151776, have been confirmed invalid. As a result, Company B, as the franchisee, can no longer achieve the purpose of the contract in question. Therefore, the court supports Company B's request to terminate the contract based on Company A's loss of operational resources and inability to continue performance.
 

The Ningbo Yinzhou District People's Court of Zhejiang Province (2024) Zhe 0212 Min Chu 2771 Civil Judgment states: Franchising is when the franchisor licenses its operational resources for use by others. The franchisee operates under a unified business model as agreed in the contract. The defendant (franchisor) is in an abnormal operational state. In December 2023, only one person, Cao, was in contact with the plaintiff regarding the supply of milk and other materials. The defendant is no longer able to continuously provide operational resources to the plaintiff, maintain the scale of the Weika brand, and conduct unified management and supervision. The plaintiff's contractual purpose cannot be achieved and has the right to request the termination of the contract.
 

The Shanghai Qingpu District People's Court (2022) Hu 0118 Min Chu 23784 Civil Judgment states: After the contract in question was signed, the plaintiff has paid the operational guidance service fee and brand authorization fee as agreed, but there is no evidence showing that the defendant (franchisor) has provided site selection, operational guidance, business training, and other services as stipulated in the contract. Considering the circumstances of this case, the court finds that the defendant has not fulfilled the contractual obligations, constituting a fundamental breach of contract. Due to the defendant's breach, the plaintiff has lost trust in the defendant and thus exercises the unilateral right to terminate the contract, which the court should support.